Document Type

Article

Abstract

We consider the emergent practice of including clauses in corporate certificates of incorporation or bylaws that specify an exclusive legal forum for lawsuits. According to their proponents and most courts that have considered the question, such forum-terms are, and should be, enforceable as contractual choice-of-forum provisions. We argue that treating corporate charter and bylaw forum-terms as a matter of ordinary contact doctrine is neither logical nor justified. Because charters and bylaws involve the state in ways that are at odds with private-ordering principles and because they entail only a limited form of “consent,” an analysis of enforceability must account for the hybrid nature—public and private—of such terms. Specifically, the state’s role should render forum-terms invalid that oust federal courts of diversity jurisdiction. Likewise, because of a lack of any meaningful consent, a forum-term that applies to a claim that neither is derivative nor brought by a shareholder should not be enforced. In other situations, courts should consider, before enforcing a corporate forum-term, whether adjudicating the entire dispute in the designated forum would be efficient (e.g., whether the court has subject matter jurisdiction over all claims) or fair (e.g., whether the procedural rules, including the limitations period, of the designated forum are substantially more advantageous to the defendants than those of the state that supplies the substantive law. On the other hand, several factors may tip the balance towards enforcement in other corporate settings and, in particular, in merger-related representative suits. First, the fact that “consent” by class members to these suits is also limited counter-balances concerns about the limited consent shareholders may have given to the forum-term. Second, a forum-term reduces the ability to avoid the crack-down on “disclosure-only” settlements—that provide broad releases, but entail minimal recovery—that Delaware courts have embarked on. Finally, we consider the implications of corporate forum-terms for interstate competition for incorporation and for corporate litigation. We raise questions whether Delaware in adopting legislation that discriminates against out-of-state courts, sought to centralize corporate litigation in its own courts for the benefit of its local bar rather than enhance its attractiveness as corporate domicile, and thereby have provided grounds for sister states to refuse to enforce forum-terms.

Date of Authorship for this Version

Summer 8-2017

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