Delaware law helps corporations avoid multiforum litigation headaches

Of all the strategies used by firms to diminish the number of stockholder derivative lawsuits, forum selection is likely to be most successful and effective, experts say.

Legislation approved by Delaware lawmakers last year validates that Delaware corporations can adopt bylaws designating the state's courts as the exclusive forum for shareholder litigation.

The same law prohibits publicly traded corporations from adopting bylaws that require plaintiff shareholders who lose derivative litigation to pay defense costs.

Other corporate efforts to discourage shareholder derivative litigation include so-called minimum-stake-to-sue bylaws, which require that shareholders comprise a specified portion of the company's outstanding shares, typically 1% to 2%, to sue.

Others have required shareholders to turn first to mediation or arbitration.

Experts generally believe, however, that the forum-selection provisions, which help corporations avoid litigation in multiple states, have gained the most traction.

These bylaws, which have been affirmed by the Delaware courts, have become “mainstream,” said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio. They ensure that if there is litigation, it is filed in one court, and companies “don't have to worry about multiforum litigation.”

Meanwhile, the Delaware judiciary has sent the message that judges will not approve settlements for cases that are not substantive, said Rob Yellen, New York-based executive vice president of Willis Towers Watson P.L.C.'s FINEX North America.