Feb 132012

Congratulations, you’ve formed a Delaware corporation. As I’ve documented elsewhere, you’re probably paying more for a Delaware corporation than you would have if you incorporated in your home state. So, what are doing to make sure you get full benefit of that choice?

Recall that many corporations incorporate in Delaware partially because of the Delaware Court of Chancery, which handles matters related to its corporate law. The Court’s judges (called “Chancellors” in Delaware) are well known for their expertise in corporate law. ¬†Further, because the Court of Chancery is considered to be a “court of equity,” juries are rarely involved — the Court’s decisions are made by its Chancellors. And, unlike in many other states, the Delaware General Assembly considers its courts to be assets and funds them better than many other states. The end result is that Delaware provides a fast and fair forum to resolve disputes.

That’s all fine and good, but how do you know that your dispute will end up in the Court of Chancery? After all, most states (including North Carolina) take the view that their courts should be open to hearing about disputes between corporations and their shareholders, even if the corporation is organized in a different state. Sure those courts should still use Delaware’s corporate law to decide the case, but non-Delaware courts are not as expert as the Court of Chancery, they’re probably not as well funded and they probably use juries. As a result, plaintiff’s attorneys will try to maximize settlement values by suing anywhere but Delaware, frustrating one of the reasons that companies incorporate in Delaware to begin with.

Now, getting into Delaware is pretty easy if there’s a contract involved since many contracts between corporations and shareholders require disputes arising from the contract to be resolved there. But, what about disputes that don’t arise from contracts, like suits against directors for a claimed breach of fiduciary duty or derivative suits?

Recently, corporations have been solving this problem by putting similar language in their bylaws or certificates of incorporation — at last count, 195 corporations have done this. ¬† Netsuite, Inc. has a very typical clause:

Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or to the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL [the Delaware General Corporation Law], (iv) or any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VI, Section 8.

Of course, this type of provision may not always be a good idea — litigating in Delaware can be expensive and inconvenient when all the evidence is in a different state. So, the cost/benefit analysis doesn’t always favor this sort of provision. That makes this a good thing to talk with your lawyer about.

One caveat: in early 2011, a Federal Court in California refused to uphold this sort of provision when Oracle’s board of directors had injected it into the company’s bylaws without a stockholder vote. (Interestingly, nearly a third of the companies with these provisions are based in California.) Further, there are a bunch of class-action suits pending in Delaware seeking to void these bylaw provisions when the company’s board placed them in the bylaws without a stockholder vote. So, right now, the best practice appears to be to place the restriction directly in a corporate charter, with stockholder approval.