Delaware Bylaws Challenge

Delaware Bylaws may generally be amended by the Board if the Certificate of Incorporation says so.  But now shareholders have brought nine lawsuits against companies incorporated in Delaware seeking to invalidate Bylaws provisions that say that litigation has to be brought in Delaware.  The rush toward Bylaws provisions requiring exclusive venue for shareholder litigation finds its roots in a 2010 idea from Stanford Law School professor Joseph Grundfest that corporations create such restrictions to make M&A litigation across several venues more difficult.  There are many costs, risks and problems associated with such multi-jurisdictional litigation, and many plaintiffs seek to create these sorts of problems to encourage settlement.  Some of the companies sued for their Bylaws are Navistar International Corp., Chevron Corp., and Franklin Resources, Inc.  And dicta in a footnote in In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010) gave such provisions some weight.  The new litigants argue that such provisions should only be adopted following a shareholder vote, like an amendment to a company’s Certificate of Incorporation.  They also argue that the challenged provisions require shareholders, but not companies, to sue in Delaware.   We think these new provisions will withstand this scrutiny, in part, because this multi-jurisdictional litigation is a problem in need of a solution and no better solution seems available at this time.