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Corporate Law and the Limits of Private Ordering

Publication Title

Washington University Law Review

Abstract

The Delaware legislature in 2015 amended the Delaware General Corporation Law to authorize forum-selection bylaws and to prohibit charter or bylaw provisions that would shift to the plaintiff defense costs incurred in connection with shareholder suits that were not successfully concluded. In so acting, the legislature gave managers something they wanted, a way to deal with the scourge of multi-forum litigation, while pacifying the local bar that feared lucrative shareholder suits would disappear because of the chilling effect of a loser-pays rule for shareholder suits.

The legislature acted after the Delaware Court of Chancery held in Boilermakers Local 154 Retirement Fund v. Chevron Corp. that the board could, without the concurrence of the shareholders, adopt bylaw provisions that permitted the corporation to choose the forum in which a shareholder-initiated suit would be maintained. Subsequently, in ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court upheld a board-adopted bylaw that abandoned the long-maintained American Rule (whereby litigants bear their own litigation costs) to instead assign the suit’s defendant’s expenses (which in a derivative suit would include the corporation’s costs) to the plaintiff if the suit proved unsuccessful.

Boilermakers and ATP Tour each reasoned from the perspective that the shareholders’ relationship with the corporation, and in turn their relationship with the board of directors, are contractual so that much of the shareholders’ rights can be understood to flow from certain organic documents, and most significantly and pervasively from the company’s bylaws. The Article develops two broad points: (1) that the shareholder’s relationship is more than just a contract, and, (2) even if the relationship were contractual, bedrock contract law does not support the results reached in Boilermakers and ATP Tour.

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