Buzz

NOW HEAR THIS

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP



See excerpts from a Mayer Brown legal update. "Will Recent Decisions of the Delaware Chancery Court Finally Curb Excessive M&A Litigation?" [1] (http://www.mayerbrown.com/publications/detailprint.aspx?publication=9539)

"On June 25, 2013, Chancellor Leo Strine, Jr., issued his opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corporation and its consolidated companion case, IClub Investment Partnership v. FedEx Corporation, holding that bylaws that specified the forum for litigation related to the internal affairs of the defendant Delaware corporations and that were adopted by their boards of directors were valid under Delaware statutory law and were facially valid contractual forum selection clauses. Specifically, the bylaw adopted by the FedEx board of directors provided that the Delaware Chancery Court would be the sole and exclusive forum for derivative suits brought on behalf of the corporation, actions asserting a breach of fiduciary duty owed to the corporation or its stockholders by the directors, officers or employees of the corporation and actions asserting a claim arising under Delaware's corporate statute or governed by the internal affairs doctrine.

"In its analysis, the court stated that the forum selection bylaws regulate a proper subject matter under Delaware's corporate statute and that, as a contractual matter, the stockholders assented to the forum selection bylaws because the boards of directors had the authority under the corporations' respective certificates of incorporation to unilaterally adopt bylaws.

"Notwithstanding the issues resolved by the Delaware Chancery Court's holding in the Chevron case, the key factor in determining whether forum selection bylaws will be effective in reducing multi-jurisdictional litigation will be whether judges in states other than Delaware enforce such bylaws. For example, in 2011, a California federal court refused to enforce a Delaware corporation's board-adopted forum selection bylaw on the grounds that the board's adoption of the bylaw amounted to an attempted unilateral amendment of the corporation's bylaws and, as a matter of contract law, was not valid because there was no mutual consent of the plaintiff stockholders to such amendment. "[2]

What are the lessons to be gleaned from the Mayer Brown article for counsel representing a startup?

Lesson One. Every time a Delaware corporation (or a corporation organized under the law of any jurisdiction) is organized, please explicitly insert in the charter and the by-laws the language Chancellor Strine has upheld … all disputes brought by one or more shareholders may be heard only in the Delaware Chancery Court. Cover as many possible complaints and counterclaim (and cross complaint, etc.) intricacies as experienced litigators can think of. Make a list of illustrative instances to be added to the general rules but continue with: "including but not limited to" the list.

Lesson Two. Put the language to a vote of the founding shareholders. Obtain unanimous consent.

Lesson Three. Every time a share is issued (sold or granted) or a right to acquire a share, add a clause to the subscription agreement and the stock purchase agreement (or convertible note or option grant) summarizing such terms and expressly conditioning the acquisition on full agreement with the letter, substance and spirit thereof. No exceptions; add a link to a URL on the home page with a full explanation thereof.

Lesson Four. When the issuer goes public, place in the prospectus and registration statement a legend in bold that all shares are being issued subject to the aforementioned terms, plus the link. Include a feature on the issuer's web site announcing and explaining the assent that is inherent in each share. "If you don't like it, don't buy the shares!!"

Lesson Five. At each meeting of shareholders, gloat over the annual savings (roughly estimated) to the Company.

Lesson Six. Insert in the charter a provision that actions involving the shareholders as plaintiffs vs the company and/or its board, individually or collectively, will be subject to individual or class arbitration. Some shareholder approval as in Lesson One and, upon an IPO, same notice as in Lesson Four. For more on the subject, see selected excerpts from a 2008 [3] article by yours truly.

"In today's legal climate, such a provision … if adopted by the company's shareholders [prior to an IPO] would be an effective bar to shareholder class actions of the sort that subvert the defendants' opportunities to defend themselves on the merits."

"The idea is to facilitate real cases - a plaintiff with enough confidence in the case (as in any other area of the law) that it is ready and willing to retain and pay counsel (a dirty little secret; most of the celebrated plaintiffs' counsel in today's environment have never actually tried a case - or wanted to)."

Lesson Seven. Establish two classes of shares, a la the New York Times, one voting (the founders, management and the investors which own shares issued in all the private rounds, excepting only a bridge round to the IPO) and the rest non-voting. Put an explanation on the site, quoting verbatim Marty Lipton's published views quoted in my article [4] on the subject, from which I excerpt the following:

"Shareholder advisory organizations like ISS and CII, as well as politically motivated institutional investors like public pension funds and labor union pension funds, justify their existence and satisfy political motivations by finding new governance practices to propose each year. Once poison pills have been eliminated, classified boards must go; once classified boards are gone, majority voting becomes a requirement, and so on. Most recently ISS and Moody's have introduced the idea of a board secretary, a lawyer whose sole client is the independent directors of the company. The never-ending cycle creates a moving target for what these organizations consider 'good' corporate governance, and every year places additional unproductive non-business burdens on boards."

"…[h]aving in mind that ISS was sold for a half a billion dollars and good governance consultants have become an industry unto themselves, let me close with an old but evergreen joke: You are on a subway platform and you are jostled. You reach back and find your wallet gone. You wheel around and see someone racing up the steps to the street. Do you chase him? Nope. He hasn't got your wallet. It's the guy standing behind you yelling, 'Stop Thief! Stop Thief!'"

I rest my case.

Joseph W. Bartlett

jbartleltt@mccarter.com

September 2013

[1] 9 September 2013 Mayer Brown Legal Update.

[2] Galaviz v. Berg, 763 F.Supp.2d 1170 (N.D.Cal.2011). m

[3] Bartlett, "Tort Reform in the Securities Sector," The Journal of Private Equity, Winter 2008.

[4] Bartlett, "Public or Private? A Review of the Eclipse of the Public Company in the current Environment," The Journal of Private Equity," 2011.

Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com

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