Kessler, Topaz, Meltzer & Check and Prickett, Jones & Elliott set a record in the Delaware Court of Chancery less than two months ago when they won a whopping $305 million attorney fee award in the Grupo Mexico shareholder derivative litigation. But that doesn’t mean the firms are willing to let companies limit them from bringing M&A shareholder suits in other courts.
The firms, along with Klausner, Kaufman, Jensen & Levinson, unleashed a volley of shareholder class action complaints on Monday and Tuesday challenging bylaw provisions adopted by nine companies that require certain shareholder suits to be filed exclusively in the Delaware Chancery Court. Boards of directors at an increasing number of companies have introduced such provisions in corporate bylaws and charters recently in an effort to avoid the pitfalls of multijurisdictional shareholder litigation. The news suits claim that the companies can’t put such rules in place without allowing shareholders to vote on them first.
“More and more companies are adopting them,” said Lee Rudy of Kessler Topaz. “And we think it’s important for the Delaware Chancery to rule on it before they become ubiquitous.”
The complaints target Chevron; Priceline.com; AutoNation; Curtiss-Wright; Danaher Corporation; Franklin Resources; Navistar International; SPX Corporation; and Superior Energy Services. A spokesman for AutoNation said the company was “aware of the suit and evaluating it.” Spokespeople for Priceline and SPX declined comment; the other companies did not respond to requests for comment.
The Delaware court’s status as the primary arbiter of corporate shareholder disputes has been eroding somewhat, as plaintiffs lawyers choose both Delaware (where so many companies are incorporated) and the companies’ home states as venues for litigation. From 2005 to 2010, the percentage of corporate transactions facing suits in multiple jurisdictions jumped from 8.6 percent to 46.5 percent, according to a study released last month by Ohio State University law professor Steven Davidoff and Notre Dame finance professor Matthew Cain.
Amid that boom in out-of-town suits, some lawyers and academics such as former SEC Commissioner Joseph Grundfest of Stanford Law School and Theodore Mirvis of Wachtell, Lipton, Rosen & Katz began pushing for companies to adopt bylaws or charter provisions that grant Delaware exclusive jurisdiction over merger disputes. Between April 2011 and the end of the year, the number of companies that adopted exclusive forum provisions more than doubled, from 82 to 195, according to a study conducted by Claudia Allen of Neal, Gerber & Eisenberg released last month. Companies planning initial public offerings have also included those provisions in their charters, including Facebook Inc.
Whether such provisions can necessarily be enforced isn’t yet clear, however. In March 2010, Delaware Vice Chancellor Travis Laster suggested in a decision involving Revlon that “corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.” No judge on the Chancery ruled squarely on the issue. The only decision to address the issue directly so far was issued in California, where San Francisco federal district court judge Richard Seeborg declined to dismiss a shareholder suit against Oracle on the basis of a similar provision in its bylaws.
Some lawyers outside of the cases questioned whether Chancellor Leo Strine Jr., who is assigned to the lawsuits, will rule on the issue or dodge it by determining that no active controversy exists outside, say, a lawsuit over a merger. The suits could also backfire if Strine endorses the bylaw provisions. “I think these cases provide a fine opportunity for the Delaware Chancery to determine that exclusive forum provisions are kosher,” said Wachtell’s Mirvis.
Or, as Grundfest put it: “My view is, bring it on and make my day.”
When Chancellor Leonard Strine awarded Kessler Topaz their $305 million fee for securing a $2 billion judgment against Grupo Mexico in December, some suggested that the award might encourage plaintiffs to return to the Chancery Court. “The irony has not been unnoticed by people I’ve dealt with,” said Lawrence Hamermesh, a professor at Widener University School of Law in Delaware.
Kessler’s Lee rejected the notion that by filing Monday’s suits, he was suggesting that the Delaware court wasn’t an appropriate venue for shareholder litigation. After all, he said, “we could have filed the cases in other courts.”
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