Mandatory Venue Provisions and Empirical Proof of the Management Friendly Nature of Delaware (Part 3)

As the student post notes, Galaviz declined to enforce a bylaw that mandated venue for derivative actions in Delaware. While only an isolated case, the reasoning of the court's decision is persuasive.  Without any type of consent on the part of shareholders, there is no basis for applying traditional contract law and concluding that these provisions bind shareholders.  Management adopted venue bylaws are, therefore, not likely to be enforced. 

The court, however, noted that a venue provision in the articles of incorporation might be on a different footing.  As the court described:

• Plaintiffs contend that the effect on shareholders' rights (were the bylaw enforced) is such that only a charter amendment, approved by a majority of the shareholders, could properly limit venue in derivative actions against the corporation. Certainly were a majority of shareholders to approve such a charter amendment, the arguments for treating the venue provision like those in commercial contracts would be much stronger, even in the case of a plaintiff shareholder who had personally voted against the amendment.

Moroever, in what the court described as a "passing comment," at least one Delaware court suggested in passing that this was an appropriate place for a venue provision.  See In re Revelon Inc. Shareholders Litigation, 990 A.2d 940, 960 (Del. Ch. 2010) ("if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes."). 

The result has been a shift in focus.  A number of companies have opted to insert venue provisions in their articles of incorporation. These include DirecTV, Allstate and Life Technologies.  The provisions apply to derivative actions, claims for breach of fiduciary duties, and claims under the internal affairs doctrine and provide that they may only be brought in the Delaware Chancery Court.  The provisions also provide, however, that the board may consent in writing to the selection of an alternative forum.  As the provision in the DirecTV proxy provides:

• Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or other agent of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.

What is the justification for these proposals?  The DirecTV proxy statement states that this will require all actions to be brought in a single forum and that this will:  

• "help assure consistent consderation of the issues the application of a relatively known body of case law and level of expertise, and should promote efficiency and costs-savings in the resolution of such claims. The Board believes that Delaware courts are best suited to address disputes involving such matters given that the Company is incorporated in Delaware and that the Delaware courts have a reputation for expertise in corporate law matters. The Board also believes that the Delaware courts have more experience and expertise in dealing with complex corporate issues than many other jurisdictions."

While it is true that the Delaware courts have expertise, it is hard to argue that other courts are lacking in this area.  Certainly, Judge Posner in CDX would probably take issue with any assertion that he lacked the necessary expertise. 

Moreover, the expertise of the courts ought to be attractive to all parties, including shareholders.  Yet this is increasingly not the case.  Thus, while the Delaware courts may have considerable expertise, an important factor in opting for the Chancery Court is likely to be the consistency with which this expertise benefits one side over the other.

Comments

[Cathie Leimbach]

The question of insider trading at Berkshire points out the need for boards to take their leadership role seriously; not to succumb to the temptation to actively or passively ratify senior management actions or decisions without considering their impact. J. Robert Brown Jr.’s comments highlight the importance of boards having appropriate policies, routinely enforcing them, considering the implications of potential policy or ethical violations before speaking publicly on the matter, and modifying decisions when new information or the lack of effectiveness of the current approach suggest different actions would serve the organization better. Sometimes being an effective board member demands difficult conversations around the board table so that key issues are adequately explored, even if it involves questioning the opinion of a trusted leader. After all, boards exist to provide diverse perspectives on big picture matters so that critical decisions are made with information and judgment beyond the limited insights of one person.