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Washington Law Review

Abstract

We consider the emergent practice of including clauses in corporate certificates of incorporation or bylaws that specify an exclusive judicial forum for lawsuits. According to their proponents and most courts that have considered the question, such forum-terms are, and should be, enforceable as contractual choice-of-forum provisions. We argue that treating corporate charter and bylaw forum-terms as a matter of ordinary contract doctrine is neither logical nor justified. Because charters and bylaws involve the state in ways that are at odds with private-ordering principles and because they entail only a limited form of “consent,” an analysis of enforceability must account for the hybrid nature—public and private—of such terms. Specifically, the state’s role should render forum-terms invalid that oust federal courts of diversity jurisdiction. Likewise, because of a lack of any meaningful consent, a forum-term that applies to a claim that is neither derivative nor brought by a shareholder should not be enforced. In other situations, courts should consider, before enforcing a corporate forum-term, whether adjudicating the entire dispute in the designated forum would be efficient (e.g., whether the court has subject-matter jurisdiction over all claims) or fair (e.g., whether the procedural rules, including the limitations period, of the designated forum are substantially more advantageous to the parties who decided to adopt the forum-term than those of the state that supplies the substantive law). In some cases, efficiency and fairness factors will argue against the forum-term’s enforcement. On the other hand, several factors in other corporate settings and, in particular, in merger-related representative suits, may tip the balance towards enforcement. First, the fact that “consent” by class members to these suits is also limited counter-balances concerns about the limited consent shareholders may have given to the forum-term. Second, a forum-term reduces the ability to avoid the crack-down on “disclosure-only” settlements—that provide broad releases, but entail minimal recovery—that Delaware courts have embarked on. Finally, we consider the implications of corporate forum-terms to debates about interstate competition for incorporation and for corporate litigation. A state may adopt forum-term legislation to enhance its attractiveness as a corporate domicile or to protect shareholders in domestic corporations. However, legislation that discriminates against out-of-state courts and seeks to centralize corporate litigation in the state’s own courts for the benefit of its local bar may be vulnerable to non-enforcement in the courts of sister states.

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