Exclusive forum rules take effect in Delaware

Significant changes to the Delaware General Corporate Law, which became effective on August 1, 2015, will not only impact Canadian companies dealing with or targeting Delaware corporations, but could – if history is any indication – ultimately make their way into Canada.
Exclusive forum rules take effect in Delaware
Jeremy Fraiberg

Significant changes to the Delaware General Corporate Law, which became effective on August 1, 2015, will not only impact Canadian companies dealing with or targeting Delaware corporations, but could – if history is any indication – ultimately make their way into Canada.

“Delaware is a leading corporate jurisdiction, and what they do there, could be instructive about the way we end up doing things here,” says Jeremy Fraiberg of Osler, Hoskin & Harcourt LLP in Toronto.

The changes relate to exclusive forum provisions and to fee-shifting. They authorize the inclusion of a forum selection clause in the certificate of incorporate or bylaws. That clause may designate the Delaware courts as the exclusive forum in which to bring “internal” corporate claims. Although companies may not exclude the jurisdiction of the Delaware courts, it’s not clear whether they can stipulate an additional forum.

“It remains to be seen whether a forum selection provision that selects a forum in addition to the Delaware court may be valid,” write the authors of a recent article in Paul, Weiss, Rifkind, Wharton & Garrison LLP’s M&A Quarterly.

An important exception to the exclusive forum prohibition applies to stockholder arrangements or agreements signed by the stockholder against whom the provision is to be enforced.

In Canada, exclusive forum clauses have popped up in some of the Special Purpose Acquisition Corporations that emerged on the Toronto Stock Exchange this year. SPACS are an alternative vehicle for getting a TSX listing. They can be used to make specific acquisitions known as “qualifying transactions” within a prescribed period of time. The acquisition must be approved by shareholders. While SPAC rules have been around for more than six years, the first SPAC, Dundee Acquisition Ltd., only came along in March.

Fraiberg says exclusive forum clauses could in time spread beyond SPACs.

“The new Delaware rules came about as a reaction to runaway jury verdicts against Delaware corporation in places like Texas,” Fraiberg explains. “Legislators wanted to make sure expert courts dealt with the disputes.”

Given the acknowledged excellence and efficiency of Toronto’s Commercial List, then, Canadian companies could see some merit in resorting to clauses limiting litigation against them to Ontario.

“I don’t know if any Canadian companies other than SPACs have used exclusive forum clauses, but they may very well have done so,” Fraiberg says. “There could certainly be benefits in terms of knowing what courts will be dealing with internal corporate matters.”

It’s not as likely, however, that exclusive forum clauses will make their way into Canada’s laws as opposed to our jurisprudence.

“In the US, just about any deal over $500 million becomes subject to a strike suit or a lawsuit,” Fraiberg says. “We’re not in the same situation here."

Indeed, a Cornerstone Research study of US litigation found that 93 per cent of M&A transactions over $100 million ended up in the courts.

Ironically, with its fee-shifting amendments, Delaware corporate law now prohibits corporations from including “loser pays” costs provisions with respect to internal corporate claims, including claims for breach of directors’ fiduciary duties.

Critics of fee-shifting cite a chilling effect on legitimate shareholder litigation. Supporters say it’s a legitimate response to the flood of shareholder litigation in the US.

The fee-shifting amendment came about following the Delaware Supreme Court’s 2014 ruling in ATP Tour, Inc. v. Deutscher Tennis Bund. The court held that a loser pays provision can be valid and enforceable. A Thomson Reuters survey has revealed that, since then, from June 2015 through May 2015, 32 Delaware companies adopted such bylaws requiring shareholders to reimburse the corporation for costs incurred as a result of unsuccessful lawsuits.

As is the case with exclusive forum clauses, the fee-shifting amendments do not restrict separate shareholders’ agreements with regard to costs.

Canada, of course, for the most part already has a loser pays regime. Still, as time has told, it’s worth keeping an eye on US developments, especially in Delaware.

“Take advance notice by-laws,” Fraiberg says. “They were in the US for years and only made their way to Canada when shareholder activism ramped up here.”