Public companies in the energy industry are increasingly designating Delaware as the exclusive venue for stockholder lawsuits, according to a new report from Orrick on corporate governance in the energy sector.
“Public Company Corporate Governance Features in the Energy Sector,” released last week, outlines boardroom structure trends based on 54 companies in the Dow Jones Energy Sector Index and the S&P Energy Index, Including Chevron, Halliburton and World Fuel Services Corp.
The report said the vast majority of public energy sector companies are incorporated in Delaware and that more and more of them are adopting bylaws that require stockholder litigation to be filed in the state.
“Almost one half of companies have adopted exclusive forum bylaws, which restrict stockholder litigation to a single litigation forum/venue—almost always Delaware, as the favorite state of incorporation,” the report said, adding, “Although slightly more than one half of companies thus have not adopted the provisions, the incidence rate still represents the feature spreading like wildfire, since the provisions have only gained significant attention in the past few years.”
The report also noted that companies are permitted to waive those provisions if they believe it would be more favorable to resolve the case outside of Delaware, “so the ‘exclusive’ nature is really an option in the company’s favor.”
Other findings in the report included companies’ growing adoption of proxy access, which usually allows certain shareholders to nominate director candidates during an election. More than 60 percent of the companies surveyed have adopted such provisions.
Orrick partner Ed Batts, who led the report, said in an email that he was surprised by the rapid adoption of proxy access over the past five years. And he said it’s likely the trend will grow even more.
“I expect to continue to see proxy access spread like wildfire. Many boards, particularly of midsize or small public companies, tend to want to move ‘with the herd’ and be in the middle of the pack,” Batts said.
“It is clear that governance activists have the support of major institutions in pressing for proxy access. And it has become so widely adopted in such a relatively short period that, like majority voting … it is becoming the accepted standard. Companies would do well to seriously consider adopting the provisions before being approached by governance activists,” he continued.
He said the trend also could lead to the actual nomination of and voting on director nominees using proxy access provisions.
Other emerging trends identified in the report are the adoption of majority voting provisions for uncontested director elections—which 90 percent of industry companies now have—and the use of ”intent to serve” language in amendments to company bylaws now found in nearly 15 percent of surveyed companies.
“There is no drawback—it closes an avenue that otherwise could jeopardize stockholders having adequate time to fully evaluate and listen to the merits of arguments in favor or against specific candidates,” Batts said.
“While not having it still allows for a ‘throw the bums out’ type of vote—allowing full scale substitutions, even if they are named by the time a competing proxy is sent, defeats the purpose of advance notice bylaws in any event,” he added. “This is something all public companies should seriously consider.”
Orrick previously has published a similar report with tech sector companies, where more public companies have dual class stock structures than their energy sector counterparts.