Thursday, August 27, 2015

The Value of Venue in Corporate Litigation: Evidence from Exclusive Forum Provisions

Today's guest post comes from Jared Wilson, a Ph.D. candidate working with me at Drexel University.  Jared concentrates in the area of corporate governance and had recently completed revision on research that examines corporate litigation.

The Value of Venue in Corporate Litigation: Evidence from Exclusive Forum Provisions

Past blog posts have highlighted the growing trend of merger-related shareholder litigation (Doing a (Large) Deal? Expect to Get Sued).  A recent study by Matthew Cain and Steven Davidoff entitled “Takeover Litigation in 2013” reports that while only 40% of large mergers (>$100 million transaction value) involved litigation in 2005, over 90% of deals were litigated in 2012.  Furthermore, the authors document that of the deals litigated in 2012, more than 70% incurred multiple lawsuits and over 50% involved lawsuits filed in multiple states.  For example, target shareholders may file lawsuits in both the state of incorporation and state of headquarters claiming that the board breached its fiduciary duty by agreeing to sell the firm for too low a price.

Many boards of directors have responded to this increased threat of shareholder lawsuits filed in multiple states by adopting exclusive forum provisions to corporate charters or bylaws.  These provisions require that shareholder lawsuits brought against the firm, executives and/or directors must be filed in a single state of the board’s choice.  On the on hand, opponents of these provisions argue that the board’s selection of a state such as Delaware as the exclusive forum insulates managers and directors from the threat and discipline of litigation.  On the other hand, firms suggest that exclusive forum provisions benefit shareholders by eliminating duplicative lawsuits, which saves the firm time and money. 

On June 25, 2013, the Delaware Chancery Court upheld the adoption of exclusive forum provisions confirming that these provisions are here to stay.  In a paper recently made available on SSRN, I find that the impact of exclusive forum provisions on shareholders depends on whether the firm is likely to receive shareholder litigation in future.  Firms that are likely to be takeover targets appear to benefit from these provisions, since targets are likely to be subject to multiple lawsuits in multiple states when a takeover is announced.  Firms that are not likely to receive shareholder litigation in the future, however, appear to incur increased costs to discipline managers and directors through litigation in a state that the board selects, such as Delaware. 

Jared I. Wilson


In response to the increased threat of shareholder litigation filed in multiple states, firms have adopted exclusive forum provisions which limit lawsuits to a single venue of the board of director’s choice.  It is unclear whether these provisions impose increased costs on shareholders’ ability to discipline managers and directors or provide benefits to shareholders by eliminating duplicative lawsuits.  I use the Delaware Chancery Court’s announcement upholding the adoption of these provisions as a natural experiment to evaluate their wealth implications.  Overall, my findings suggest that exclusive forum provisions create value for shareholders by specifying a required venue for corporate litigation. 

Jared Wilson is a Ph.D. candidate in the finance department at Drexel University. Jared’s main research interests include corporate governance, boards of directors, mergers & acquisitions, and executive turnover.

In particular, Jared’s research focuses on the director and executive labor markets and the governance mechanisms which incentivize managers and the board to act in the best interests of shareholders.  Jared completed his undergraduate degrees at the University of Pittsburgh and currently resides in Philadelphia, PA.  His homepage can be found here.  

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