A recent spike in the use of exclusive forum provisions in M&A deals has made the task of evaluating whether such a provision could be beneficial a vital step on any dealmaker’s checklist.
The recent surge in the use of provisions can be attributed to its general enforcement under judicial review, whether in Delaware or other jurisdictions.
This article explains that these provisions can typically be implemented without stockholder approval, and boards tend to consider such provisions in the face of anticipated litigation.
Exclusive forum provisions help manage litigation more efficiently, eliminating the usual practice of challenging stockholders filing nearly identical claims in multiple jurisdictions.
Such practice increases the costs of litigating the claims for both the buyer and seller. By focusing the litigation, parties to a deal not only save costs but also benefit from the fact that the litigation will be tried before a judge experienced in applying the law of that jurisdiction.
The litigation subject to exclusive forum provisions is generally limited to breach of fiduciary duty claims and other matters relating to the incorporating jurisdiction’s corporate law and other intra-company disputes.
In some circumstances, the use of an exclusive forum provision may not be advantageous to a company. Such circumstances arise where the company perceives a ‘home court’ advantage in their state of headquarters based on goodwill or other advantages.
These authors also urge boards to consider the timing when choosing to adopt an exclusive forum provision. While generally the provision is found enforceable by courts, several courts have noted that further potential inquiry would be necessary if it appears the provision was adopted after ‘wrongdoing’ that may be the subject of litigation.
In the M&A context, this means ‘the earlier, the better’ with regard to adopting the exclusive forum provision.
Companies anticipating substantial litigation, such as those contemplating a sale or facing aggressive activist involvement, may want to implement such provisions sooner rather than later, to minimize the potential challenges to the provisions based on the timing of any alleged misconduct.