In October 2010, Stanford Law School Prof. Joseph Grundfest delivered a rousing lecture that left a lasting impression on corporate lawyers.

Speaking at the Delaware Journal of Corporate Law’s annual Pileggi Lecture, which focuses on corporate law issues, Prof. Grundfest suggested a solution to the growing problem of forum shopping—a litigation tactic in which plaintiffs law firms file lawsuits against Delaware corporations in forums outside of Delaware. Their goal: to force companies to fight complex, multifront wars and to seek out courts with less experience in corporate law that may award them larger attorneys’ fees.

To thwart this troubling trend, Grundfest proposed that Delaware corporations adopt bylaws stating that all shareholder litigation must take place in the state of incorporation. The provision would apply to state law claims alleging offenses such as breach of fiduciary duty, he said, but not federal claims, including federal securities fraud charges.

The concept appealed to corporate lawyers for two main reasons.

First, exclusive-forum provisions direct litigation to one forum: the Delaware Court of Chancery, which is widely recognized as the authority in business law. “The Delaware courts have a long tradition of being fair in adjudicating corporate disputes,” says Steven Haas, a partner at Hunton & Williams. “They don’t lean toward management or toward the shareholders. They can be counted on to reach the right result in these cases.”

One of the Chancery Court’s Vice Chancellors, J. Travis Laster, acknowledged the usefulness of exclusive-forum bylaws and alluded to his court’s expertise in the March 2010 opinion in In re Revlon Shareholders Litigation. In a footnote, he wrote that “if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, the corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.”

According to Grundfest, before Vice Chancellor Laster’s famous Revlon remark, only 16 companies had adopted exclusive-forum bylaws. By the end of 2011, about 200 Delaware corporations had enacted them.

The second and particularly contentious reason corporate lawyers like the idea of exclusive-forum bylaws: Corporate boards of directors can adopt them without shareholder approval.

Left Out

In February, a group of plaintiffs firms sued nine corporations—Autonation Inc., Chevron Corp., Curtis Wright Corp., Danaher Corp., Franklin Resources Inc., Navistar International Corp., Inc., SPX Corp. and Superior Energy Services Inc.—on behalf of shareholders who claim the companies’ exclusive-forum provisions are unfair. The plaintiffs take issue with the fact that they are bound to the bylaws without their consent. They also say the provisions shield the companies’ directors.

However, defense lawyers say the plaintiffs’ concerns are invalid.

“The tables are not totally stacked against shareholders in Delaware,” says Waller Lansden Dortch & Davis Partner Larry Childs. “If a shareholder is able to sue anywhere in the country, and the courts in the other states don’t apply the Delaware law the way the Delaware courts would, it creates uncertainty and extra costs.”

Haas says shareholders also benefit from exclusive-forum bylaws because they discourage forum shopping. “The plaintiffs lawyers bring a lawsuit in a particular jurisdiction not necessarily because it’s the friendliest to shareholders, but because it’s the best jurisdiction in terms of awarding them a large fee award,” he says. “As a shareholder, I would be in favor of [an exclusive-forum provision] because it reduces litigation costs and opportunistic forum shopping.”

Chevron’s Stand

Many of the companies that were sued in February have repealed their challenged bylaws, making the plaintiffs’ claims moot. Chevron, on the other hand, responded to the shareholders’ complaint and revised its bylaws to specify that certain litigation can occur outside of Delaware if the Court of Chancery were to lack subject-matter jurisdiction.

In its 55-page response, Chevron noted that “the bylaw does not take any rights away from any shareholder. Instead, like all bylaws at all Delaware corporations, the forum selection bylaw merely regulates the way in which certain rights are exercised. … The board’s actions were well informed and taken with the shareholders’ best interests in mind. … Defendants intend to defend themselves and the forum-selection bylaw vigorously.”

Wait and See

Most experts predict that the Chancery Court will uphold the challenged companies’ bylaws. At most, they say, the court may make some technical revisions to the bylaw-approval process.

“There may be some narrowing—the court could say that there has to be some shareholder consent,” says Prof. Logan Robinson of the University of Detroit Mercy School of Law.

If for some reason the Chancery Court were to invalidate the bylaws, Haas says the question then becomes whether companies will still be able to adopt exclusive-forum provisions in their certificates of incorporation with shareholder approval. According to Drinker Biddle Partner Troy Calkins and lawyer Adam Weinstock, there haven’t yet been any lawsuits challenging provisions included in companies’ certificates of incorporation. There also haven’t yet been any lawsuits challenging the legality of exclusive-forum provisions that shareholders approved to be included in companies’ bylaws.

Haas says companies that don’t currently have exclusive-forum bylaws should take a wait-and-see approach before adopting them. “We need to see how this plays out in the Delaware courts, and we also need to see how shareholders’ views adjust and evolve on this issue,” he says.

On the other hand, private companies looking to go public should follow Facebook Inc.’s lead. The social network adopted exclusive-forum provisions before its initial public offering, which means no shareholder approval was required. “That’s the smart way to go,” Robinson says. “I think that will become a routine provision for companies preparing for an IPO now.”