To prevent forum-shopping by plaintiffs in shareholder derivative suits, some Delaware corporations in the last couple of years have amended their bylaws to lock in the Delaware Court of Chancery as the exclusive forum for derivative suits. One study showed that as of the end of 2011, 195 Delaware corporations have adopted or proposed exclusive forum provisions in their bylaws or articles.
At least nine lawsuits have been filed this month by shareholders challenging the new bylaw provisions. The lawsuits seek to have the bylaw provisions declared invalid on grounds that (a) the forum of a derivative suit is an external matter and not a matter of internal corporate governance, (b) there was no mutual shareholder consent to the new forum rule, and (c) the new bylaws are overly broad and violate due process. The corporations have apparently threatened to sue any shareholders daring to bring a derivative suit outside of Delaware in violation of the new bylaw provisions.
Francis Pileggi and Professor Stephen Bainbridge have commented on these lawsuits, and I refer you to their reports for more details and commentary. Alison Frankel has also written about the lawsuits and includes links to some of the complaints, here.
What about limited liability companies? LLC managers observing the forum restrictions that many corporations have adopted might well consider implementing similar restrictions.
The concern would not be unfounded – derivative suits are available to members of LLCs. Delaware allows a member or an assignee of an LLC interest to bring a derivative action in the right of an LLC. DLLCA, § 18-1001. Washington has a similar provision in its statute, except that Washington only allows members, and not assignees, to bring the action. RCW 25.15.370.
Forum restrictions are contemplated by the Delaware LLC Act. A written LLC agreement can provide that its members consent to the exclusive jurisdiction of the Delaware courts. DLLCA § 18-109(d). (This is one of the few sections in the Delaware LLC Act where a provision of an LLC agreement must be in writing to be enforceable.)
Changing the rules for an existing LLC is not as easy as a corporate board’s amendment of the corporation’s bylaws. An LLC agreement is a contract between the members and can only be changed with their consent, so member consents would be required for an LLC to add a forum-limiting provision to its LLC agreement.
Whether or not the consent of all the members would be required depends on the terms of the LLC agreement, which may or may not allow amendments on the approval of less than all members. The Delaware LLC Act authorizes an LLC agreement to limit the voting or approval rights of any member or group of members. DLLCA, § 18-302(a). For example, an LLC could have two classes of members, voting and non-voting. The non-voting members would be presumed to have known their rights when they became parties to the LLC agreement, and under the policy in the Delaware statute of giving maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements, a forum-limiting amendment to the LLC agreement, approved by only the voting members, should be enforceable. DLLCA, § 18-1101(b).
If the LLC agreement is silent on the subject of its amendment, unanimous approval of the members will be required for any change to the agreement, as with any other multi-party contract.