Shareholder Litigation by Contract

INTRODUCTIONThis Article proposes that shareholders and managers be enabled to use provisions in the corporation's organizational documents to tailor the procedure governing shareholder litigation based in state corporate law. The proposal would enable corporate contract procedure, with both justification and limits rooted in substantive state corporate law.Private parties often may decide what procedural rules to apply to their disputes through ex ante contracts.1 Many have suggested that the emergence of such "contract procedure"2 or "party rulemaking"3 fundamentally changes how adjudication and court procedure should be understood. The literature considers whether this change is for good or for bad, and outlines competing concerns with freedom of contract and the role of consent, court access and relief, and the continuing role and legitimacy of public courts.4 Often driven by a view of these competing values, scholars have proposed various limits on private procedural ordering.5This Article is concerned specifically with corporate contract procedure, a category that this literature has generally overlooked. Despite use of these provisions in commercial and consumer contracts, for a long time contract procedure appeared to have little relevance to agreements between corporate shareholders and the corporation itself. These intracorporate deals, captured in corporate charters and bylaws, rarely, if ever, included terms that shaped the procedure in litigation among the corporate actors. More recently, however, provisions that control the procedure in intracorporate litigation have begun to work their way into corporations' organizational documents. The use of these terms to govern disputes among internal corporate actors is what this Article terms "corporate contract procedure."Corporate contract procedure has emerged as a distinctive-and controversial-phenomenon. Special features of corporate law, especially the internal affairs doctrine, made choice-of-law and choice-of-forum clauses unnecessary historically.6 This perceived irrelevance changed in response to litigation patterns. With the early 2000s came an explosion of litigation challenging corporate deals on state-law grounds. By the end of that decade, almost every corporate deal was challenged, often in multiple states' courts simultaneously. Corporations responded to the proliferation of multijurisdictional deal litigation by adopting exclusive forum clauses in corporate charters and bylaws. The clauses provided that shareholder litigation must be brought in a particular court, mostly the Delaware Chancery Court.Court opinions holding these provisions valid opened the door to broader judicial acceptance and attention to litigation charter provisions and bylaws, particularly in Delaware.7 The first test of a bylaw that changed a particular procedural rule rather than selecting a forum came in Delaware in 2014. The Delaware Supreme Court approved a fee-shifting clause in the bylaws of a Delaware non-stock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund8 ("ATP Tour"). This decision prompted litigation, lobbying, and proposed legislation.9 Advocates characterized intracorporate fee-shifting provisions as the cure for an "inefficient epidemic of questionable shareholder lawsuits"10 and a response to a "serious litigation crisis in American corporate law."11 Critics denounced such fee-shifting provisions as a tool for "render[ing] boards unaccountable for their actions"12 and one that would "effectively close the courthouse doors to investors."13The controversy was provoked in part by aspects of these particular litigation provisions. Boards adopted many of these provisions unilaterally, without shareholder approval.14 The bylaws themselves were one-sided, with only the plaintiff having to pay.15 Instead of "loser pays" they were "losingplaintiff pays." Moreover, many of the fee-shifting bylaws that emerged after ATP Tour had features that would effectively shut down shareholder litigation. …