March 23 Navistar International Corp has become the latest company to abandon plans to require its shareholders to bring any legal action against it exclusively in Delaware, after legal challenges and opposition from investor advisory groups.
At least four other companies also have deleted similar requirements from their corporate bylaws since they were among the dozen companies sued over the provision in February.
The bylaw change had called for Delaware's Chancery Court, one of the country's top venues for corporate disputes, to be the exclusive forum for most shareholder lawsuits the companies might face.
Companies have written so-called "forum selection" clauses into their bylaws as a way to try to curb costly and time-consuming shareholder litigation from spilling into multiple courts simultaneously around the country.
But shareholders at a dozen companies have challenged the provisions, arguing that the rules allow companies to choose where to sue while denying that right to investors. The shareholders also argue forum selection clauses must be put to a shareholder vote.
Some investors may also want an alternative to suing in Delaware. Critics have also accused the Chancery Court of being too protective of corporate directors at the expense of investors.
Navistar corporate secretary Curt Kramer said on Friday that the truck and engine maker's board of directors deleted the bylaw on Thursday after discussions with institutional investors and proxy advisers such as Institutional Shareholders Services.
Kramer said Navistar had not ruled out putting the provision to a shareholder vote, which another proxy adviser, Glass Lewis & Co, has said is the preferred way to adopt such clauses.
Of the dozen companies that have been sued, five have since dropped the bylaw. In addition to Navistar, they are Air Products and Chemicals Inc, Franklin Resources Inc , Superior Energy Services Inc and Danaher Corp .
Investor lawsuits, such as legal challenges to mergers, are increasingly filed in two or more courts simultaneously, usually Delaware's Chancery Court and in the state where the company has its headquarters.
Companies complain the parallel lawsuits drive up legal costs. Stanford Law School professor Joseph Grundfest, a prominent specialist in securities litigation, has argued the duplicate lawsuits also dilute plaintiffs leverage, hurting shareholders.
The dozen lawsuits challenging the bylaws were filed last month in the Chancery Court by both individual and institutional investors.
The clauses were given credence by Chancery judge Travis Laster in a 2010 court opinion. Since then, the number of companies adopting the bylaw has risen from a handful to 195 by the end of 2011, according to a study by Claudia Allen, an attorney with of Neal, Gerber & Eisenberg LLP in Chicago.
Allen's study shows that the vast majority of companies adopting such provisions have done so in connection with initial public offerings.
This approach allows companies including Facebook Inc and Yelp Inc to argue they have shareholder consent for the forum selection clause because it was disclosed before investors bought the stock.
Brent Siler, a securities lawyer with Cooley LLP, said the trend is toward forum selection clauses becoming standard with all IPOs.
But there has been pushback even when adopted prior to IPOs. Proxy advisor Glass Lewis has said it will recommend shareholders vote against a company's board chairman or chairman of the governance committee if they served when the bylaw was adopted.
Attorneys for the plaintiffs suing over the bylaws as well as Air Products, Danaher, Franklin Resources and Superior Energy Services did not immediately return calls for comment.