Designating Courts for Shareholder Lawsuits is on the Rise: Exclusive forum provisions, however, are under growing scrutiny.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

Requirements adopted to force suits against companies be filed only in certain courts, while a growing trend, face legal scrutiny depending on whether the case involves internal or external issues.

Two recent examples should be on the board's radar.

Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc.--all recently going public--adopted provisions as part of their IPOs to require that claims brought under the Securities Act of 1933 be handled in federal court. But those provisions were deemed "ineffective and invalid" by the Delaware Court of Chancery in December.

On the other hand, similar provisions adopted by other companies and focused on "internal corporate" claims, including matters like board misconduct, have survived legal scrutiny.

For example, a suit by a shareholder against 1st Century Bancshares involved a challenge in the California Court of Appeals to the company's bylaw provision that designated Delaware as the exclusive forum in which to litigate the company's internal corporate affairs.

In keeping with the courts of other states that have considered similar provisions (including Oregon, New York, and Illinois), the California court in December affirmed that the bylaw would be enforced by California courts, and acknowledged that such provisions can have the beneficial effect of consolidating "litigation into a single forum, thereby reducing litigation expenses and avoiding duplication of effort (not to mention promoting efficient use of judicial resources), which is beneficial to corporations and their shareholders alike."

There has been a significant increase in shareholder class actions alleging misdoings by corporate boards in recent years. And many of these lawsuits have been filed in jurisdictions often regarded as less sympathetic to corporate defendants, including California.

In response, corporate lawyers began recommending that their clients adopt bylaw (or charter) provisions that would require such suits to be filed only in certain courts chosen by the corporation, thereby limiting the ability of plaintiffs' lawyers to seek out more hospitable courtrooms. This effort was equally aimed at reducing the need for corporations to defend similar lawsuits across multiple jurisdictions.

Such provisions, known as "exclusive forum provisions," have been validated by the Delaware Courts as well as by an amendment to the Delaware General Corporation Law, which confirmed that a corporation may adopt a provision in...