Drafting Effective Delaware Forum-Selection Clauses in the Shadow of Enforcement Uncertainty

• Author: John C. Jorgenson
• Position: J.D. Candidate, The University of Iowa College of Law, 2017; M.A., The Johns Hopkins University, 2009; B.A., The Johns Hopkins University, 2009
• Pages: 353-381

Drafting Effective Delaware Forum-Selection Clauses in the Shadow of Enforcement Uncertainty John C. Jorgenson  ABSTRACT: Beginning as dicta tucked away in an inconspicuous footnote, Delaware forum-selection clauses have become widely favored by corporations across the United States. Catapulted by corporations’ desire to funnel expensive multijurisdictional litigation into a single forum, the clauses, which were nearly non-existent five years ago, have become ubiquitous. A revision to the General Corporation Law of the State of Delaware officially blessed forum-selection clauses in the summer of 2015, and there is little doubt that the clauses will enjoy even greater popularity in the future. Against this backdrop of success within Delaware, however, it is easy to lose sight of the national landscape. While courts outside of Delaware generally have enforced these clauses, there have been notable exceptions. This Note argues that companies crafting Delaware forum-selection clauses under DGCL § 115 should consider their enforceability outside of Delaware. This Note surveys the relevant federal and state litigation pertaining to Delaware forum-selection clauses and makes recommendations for drafting these clauses with an eye toward enforcement. It concludes with a proposed model Delaware forum-selection clause. I. INTRODUCTION ............................................................................. 354 II. OVERVIEW OF DELAWARE FORUM-SELECTION CLAUSES ............... 355 A. D ELAWARE C OMMON L AW G ROUNDING FOR F ORUM -S ELECTION C LAUSES ................................................................................. 357 B. D ELAWARE S TATUTORY G ROUNDING FOR F ORUM -S ELECTION C LAUSES ................................................................................. 362  J.D. Candidate, The University of Iowa College of Law, 2017; M.A., The Johns Hopkins University, 2009; B.A., The Johns Hopkins University, 2009. Thank you to Bryn R. Vaaler at Dorsey & Whitney LLP for sparking the idea for this Note. Thank you also to my loving wife for her support and my friends at the Iowa Law Review for their valuable feedback. 354 IOWA LAW REVIEW [Vol. 102:353 III. LAY OF THE LAND: HOW DELAWARE FORUM-SELECTION CLAUSES HAVE FARED OUTSIDE OF DELAWARE ........................................... 362 A. E NFORCEMENT IN F EDERAL C OURTS .......................................... 362 1. Are International Forum-Selection Clauses Enforceable? .................................................................. 363 2. Are Domestic Forum-Selection Clauses Enforceable? .................................................................. 364 3. What Is the Proper Enforcement Mechanism? ........... 365 4. Are Forum-Selection Clauses at Risk of Challenges Under Contract Theories? ............................................ 368 B. E NFORCEMENT IN S TATE C OURTS ............................................. 371 IV. PROPOSAL FOR ENFORCEABLE DELAWARE FORUM-SELECTION CLAUSES ........................................................................................ 373 A. S TRATEGIC C ONSIDERATIONS IN V IEW OF R ECENT E NFORCEMENT T RENDS .................................................................................. 373 1. Placement in Certificate of Incorporation versus Bylaws Depends on Company’s Risk Tolerance .......... 373 2. Adopt Your Bylaw on a “Clear Day” ............................. 373 3. Expect Criticism from Proxy Advisory Firms and Provide a Rationale for Adoption ................................ 374 B. I DEAL P ROVISIONS TO I NCORPORATE IN L IGHT OF R ECENT E NFORCEMENT T RENDS ........................................................... 374 1. Give Yourself an Out—Include a Waiver Provision .... 375 2. Establish Personal Jurisdiction over Defendants and Plaintiffs ......................................................................... 376 3. Tailor Scope of Claims Covered to New § 115 ........... 377 4. Herd Plaintiffs into Delaware ....................................... 378 5. Allow Proceedings in Federal Court—on Your Terms ............................................................................. 378 C. P ROPOSED M ODEL F ORUM -S ELECTION C LAUSE ......................... 379 V. CONCLUSION ................................................................................ 381 I. INTRODUCTION On Wednesday, June 24, 2015, Delaware Governor Jack Markell signed an amendment to section 115 (“New § 115”) of the General Corporation Law of the State of Delaware (“DGCL”) into law authorizing corporations to include forum-selection clauses in their bylaws and certificates of incorporation. 1 The amendment became effective on August 1, 2015. 2 The 1. DEL. CODE ANN. tit. 8, § 115 (West 2015). 2. Id . 2016] EFFECTIVE DELAWARE FORUM-SELECTION CLAUSES 355 recent move is the latest development in Delaware’s longstanding effort to provide Delaware corporations a means to consolidate intra-corporate disputes into their state of incorporation. While New § 115 appears to be a creature of statute, it is actually rooted in common law. In an opinion related to the challenge of a proposed merger transaction, Vice Chancellor Laster included dicta suggesting that the court was open to exclusive-forum charter provisions. 3 Within a few years, the Court of Chancery also blessed the facial validity of unilaterally adopted forum-selection bylaws. 4 Although the State of Delaware has, in its common law and now by statutory decree, declared its fondness for Delaware forum-selection clauses, this policy has had a mixed reception outside the state. 5 Even though the majority of states that have addressed the issue have enforced the facial validity of such clauses, forum-selection clauses are nonetheless subject to as-applied challenges in both federal and state actions. 6 In the recent past, there have been noteworthy and successful challenges to Delaware forum-selection clauses. 7 In light of the recent case law and legislation on this topic, this Note argues that Delaware-incorporated companies looking to take advantage of New § 115 should draft their forum-selection clauses with an eye toward enforceability outside of Delaware. Specifically, this Note: (1) provides background on the rise of Delaware forum-selection clauses; 8 (2) surveys the relevant federal and state case law regarding enforcement of such clauses; 9 and (3) enumerates strategic considerations that companies should bear in mind before adopting their own Delaware forum-selection clause, concluding with a proposed model clause. 10 II. OVERVIEW OF DELAWARE FORUM-SELECTION CLAUSES A forum-selection clause is a provision in which the parties to a contract establish the forum or fora for specified types of litigation that may occur between them. 11 While forum-selection clauses have long been a common provision in individual contracts, 12 their popularity in certificates of 3. In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 960 (Del. Ch. 2010). 4. Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 958 (Del. Ch. 2013). 5. See infra Part III. 6. See infra Part III. 7. See infra Part III. 8. See infra Part II. 9. See infra Part III. 10. See infra Part IV. 11. Forum-Selection Clause , BLACK’S LAW DICTIONARY (10th ed. 2014). 12. See Theodore Eisenberg & Geoffrey P. Miller, The Flight to New York: An Empirical Study of Choice of Law and Choice of Forum Clauses in Publicly-Held Companies’ Contracts , 30 CARDOZO L. REV. 1475, 1506 tbl. 13 (2009) (observing that forum-selection clauses appear in approximately 40% of material contracts of public companies). 356 IOWA LAW REVIEW [Vol. 102:353 incorporation and corporate bylaws is of a more recent vintage. Whereas only 16 U.S. public companies had adopted such provisions in 2010, 13 more than 250 U.S. public companies had adopted the same by the middle of 2013. 14 In 2013 and 2014 alone, more than 300 public companies adopted such provisions. 15 Although no single source is the likely cause, recent scholarship has generally characterized the growth in popularity of governance-document forum-selection clauses as a response to the growth in multijurisdictional litigation. 16 Prior to the recent multijurisdictional shift, it was “conventional wisdom that most corporate law cases involving Delaware public companies flow to Delaware.” 17 Recently, however, the trend away from Delaware has been especially pronounced in the area of mergers and acquisitions (“M&A”) litigation, where multijurisdictional litigation has risen dramatically in recent years. Between 1999 and 2000, for instance, shareholders challenged only about 12% of all M&A deals over $80 million. 18 Every year during the four-year period from 2010 to 2014, by contrast, shareholders challenged over 90% of all M&A deals valued over $100 million. 19 Over the same period, the average number of lawsuits per deal has fluctuated between four and five. 20 In 2014, when 93% of all M&A deals valued over $100 million were litigated, approximately 40% of those lawsuits were filed in more than one jurisdiction. 21 Even though the prevalence of multijurisdictional litigation is still high relative to pre-2000 levels, there are signs that forum-selection clauses are actually reducing the number of jurisdictions in which shareholders are filing claims. 22 13. Joseph A. Grundfest, The History and Evolution of Intra-Corporate Forum-Selection Clauses: An Empirical Analysis , 37 DEL. J. CORP. L. 333, 336 (2012). 14. Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 944 (Del. Ch. 2013) (observing that “in the last three years, over 250 publicly traded corporations have adopted such provisions”). 15. CORNERSTONE RESEARCH, SHAREHOLDER LITIGATION INVOLVING ACQUISITIONS OF PUBLIC COMPANIES: REVIEW OF 2014 M&A LITIGATION 3 (2015), https://www.cornerstone.com/Get Attachment/897c61ef-bfde-46e6-a2b8-5f94906c6ee2/Shareholder-Litigation-Involving-Acquisitions-2014-Review.pdf. 16. See Gideon...