Forum-Selection Bylaws Refracted Through an Agency Lens

Both praise and controversy surround director-adopted bylaws that affect shareholders’ litigation rights. Recent bylaws specify an exclusive forum for litigation of corporate governance claims, limit shareholder claims to resolution through arbitration, and (most controversially) impose a one-way regime of fee shifting on shareholder litigants. To one degree or another, courts have legitimated each development, while commentators differ in their assessments. This Article brings into clear focus issues so far blurred in debates surrounding these types of bylaws. Focusing on forum-selection bylaws, and on Delaware precedents, I argue that beginning from the standpoint of common law agency reveals the attenuated and incoherent concept of consent underlying forum-selection bylaws when they are unilaterally adopted by directors once shareholders have invested in a firm.

In particular, the concept of a “flexible contract”–deployed by Delaware’s Court of Chancery to legitimate forum-selection bylaws–relies on an attenuated understanding of consent and is singular even within contract law. Scrutinizing these bylaws from the standpoint of agency doctrine reveals the analytic and explanatory weakness of the “flexible contract.” This Article examines potential amendments to the Delaware General Corporation Law that would ground consent more firmly and could cabin the scope and content of litigation-related bylaws. Absent such an amendment, shareholders are subject to the risk that, through a generic governance provision, directors may impose limitations on shareholders’ rights that stem from sources external to the corporation itself, including generally applicable rules of civil procedure. Imposing this risk on shareholders charges them with notice of a fact not in existence at the time they invest and, more generally, serves to undermine a central mechanism of fiduciary accountability.