The History and Evolution of Intra-Corporate Forum Selection Clauses: An Empirical Analysis
June 13, 2012
Bibliography: Joseph Grundfest, The History and Evolution of Intra-Corporate Forum Selection Clauses: An Empirical Analysis, 37 Delaware Journal of Corporate Law (2012 forthcoming).
Also Rock Center for Corporate Governance at Stanford University Working Paper no. 115 and Stanford Law and Economics Working Paper no. 427.
Forum selection provisions are commonly found in the material contracts of publicly traded corporations. But they are exceedingly rare in the organic documents of the same publicly traded entities. Why?
This article documents that, as of June 30, 2011, only 133, or 1.49 percent, of publicly traded entities had forum selection provisions in their charters or bylaws. The vast majority of these provisions, 117 (88.0 percent), were adopted after Delaware Chancery’s March 15, 2010, decision in Revlon observing that corporations could avoid forum disputes by adopting forum selection provisions in corporate charters. Of the forum selection provisions adopted by corporations, 58.6 percent appear in corporate charters and 41.4 percent appear in bylaws adopted without prior shareholder consent. More than 91 percent of these provisions follow the form introduced by Netsuite in conjunction with its 2006 IPO, and approximately 16.06 percent of all IPOs declared effective since Revlon are of corporations whose charters contain forum selection provisions. Corporations headquartered in California are over-represented in the population of corporations that have adopted these provisions.
The historic scarcity of forum selection provisions in the organic documents of publicly traded entities is consistent with the observation that, prior to the early part of this century, intra-corporate litigation was almost always brought in the state of incorporation. In such an environment, the selection of a state of incorporation acted as a de facto forum selection clause, and these clauses could reasonably have been viewed as surplusage. But as plaintiff counsel began to litigate intra-corporate claims with vastly greater frequency in courts away from the state of incorporation, a demand emerged for a contractual provision that could restore the pre-existing jurisdictional equilibrium in which each state’s courts specialized in the interpretation of that state’s corporate law. Viewed from this perspective, the intra-corporate forum selection clause is not an innovation that seeks to disrupt traditional litigation processes: it is, instead, better viewed as an effort to restore an equilibrium that had prevailed for decades and that reflected the natural expectation of corporations and shareholders alike that courts would “stay in their lane” as they specialized in the interpretation of their own state’s corporation laws.