Richards Layton & Finger
 

Impact of Delaware Forum-Selection Ruling on Investment Companies

July 17, 2013

A recent Delaware Court of Chancery opinion upholding forum-selection provisions in corporate by-laws against facial challenges should be of interest to registered investment companies organized in Delaware or considering relocating to Delaware.  Forum-selection provisions in organizational documents (referred to herein as exclusive jurisdiction clauses) have become popular in recent years for public companies that are attempting to mitigate the risk of stockholder litigation in multiple forums and the risk that a court in a jurisdiction other than Delaware will resolve significant issues affecting the internal affairs of Delaware companies in a manner inconsistent with current Delaware law and policy.

Many registered investment companies organized under Delaware law have either adopted or considered adopting exclusive jurisdiction clauses.  Exclusive jurisdiction clauses typically mandate that internal affairs matters, including state law-based fiduciary duty claims and other intra-corporate disputes, must be litigated in Delaware.  Exclusive jurisdiction clauses provide companies and their shareholders many benefits, including:

  • having the Delaware Court of Chancery (generally regarded as the nation’s preeminent business court) resolve internal affairs disputes;
  • having a Delaware court apply Delaware law, which provides both a company and its shareholders greater certainty against the risk of the misapplication of Delaware law (particularly fiduciary duty law);
  • discouraging forum shopping by plaintiffs’ attorneys; and
  • helping to promote efficiency and the reduction of litigation costs by precluding duplicative litigation in multiple forums.

While the popularity of exclusive jurisdiction clauses has increased in recent years, until now their enforceability has been somewhat uncertain, particularly in the case of Delaware corporations where there is no express authorization for exclusive jurisdiction clauses in the Delaware General Corporation Law.  There has been much less uncertainty, however, with respect to the enforceability of such a provision in the case of a Delaware statutory trust (the entity of choice for the formation of registered investment companies), given that there is express authority for an exclusive jurisdiction clause in the Delaware Statutory Trust Act.  Though the recent Delaware Court of Chancery opinion was limited to analyzing the Delaware General Corporation Law, it is nonetheless significant for registered investment companies organized as statutory trusts because it increases the likelihood that non-Delaware courts will uphold exclusive jurisdiction clauses based on principles of comity.  

Because many companies’ organizational documents would permit the adoption of exclusive jurisdiction clauses without the expense of a shareholder vote, registered investment companies organized in Delaware should consider the benefits of adopting exclusive jurisdiction clauses.  

For a summary of the holding of the Delaware Chancery Court opinion deciding motions for partial judgment on the pleadings in Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp., et al., C.A. No. 7220-CS, and Iclub Inv. P’ship v. FedEx Corp., et al., C.A. No. 7238-CS, please click here.