The Private Ordering Solution to Multiforum Shareholder Litigation

This paper analyzes a private ordering solution to multiforum shareholder litigation: exclusive forum provisions in corporate charters and bylaws. We examine what drives the growth in these provisions and whether, as some critics contend, their adoption reflects managerial opportunism. We find that nearly all new Delaware corporations adopt the provision at the IPO stage, and that the transition from zero to near-universal IPO adoption over 2007-14 is driven by law firms. Characteristics of individual companies appear to play little or no role in adoption decisions. Instead, the pattern of adoption follows what can be described as a light switch model, in which law firms suddenly switch from never adopting to always adopting the provision in the IPOs they advise. For midstream adoptions, we compare corporate governance features of adopters to a matched sample of non-adopters to test the hypothesis that midstream bylaw adoption reflects managerial opportunism. If the hypothesis were correct, then we would expect to find that adopters exhibit poor corporate governance compared to non-adopters (using the metrics of good governance practices as identified by critics of the provisions). We find, however, that there are either no significant differences in governance or that it is adopters that have higher quality governance features. We also find no significant differences in governance and ownership structures between firms whose boards adopt the provisions as bylaws and those who obtain shareholder approval.