United States: Kentucky Law Allows Business Corporations To Choose Where They Are Sued In Derivative Litigation Or Litigation To Compel Production Of Company Records

Last Updated: February 22 2016
Article by Michael T. Leigh

Changes last year to Kentucky’s Business Corporation statute permit Kentucky corporations to choose where they are sued in a derivative litigation or a litigation seeking to compel the company to produce its books and records.1 Following last year’s statutory amendment, corporations in Kentucky can amend their articles of incorporation to state that the proper venue—or court, in lay terms—for any derivative or books and records litigation is the Kentucky Circuit Court of the county either in which the corporation maintains its principal office, or if it has no principal office in Kentucky, the Circuit Court of the county in which the corporation’s registered agent is located.2

This change to Kentucky law is a positive step toward bringing Kentucky into accord with states that permit corporations to select the courts in which the companies can face certain kinds of litigation that concerns the company’s internal affairs. Perhaps most notable among the states to have done this is Delaware, where most U.S. corporations are incorporated.3 Delaware permits corporations to select the state and federal courts of Delaware as the only place in which the company can be sued in shareholder or derivative cases.4 The use of provisions in corporate governance documents to set the venue or forum in which a corporation can be sued on these types of claims have been met with widespread success in a variety of courts, and there is little reason to doubt that Kentucky’s statutory provision will be treated by Kentucky and non-Kentucky courts alike with similar deference.5

Selecting the court in which a corporation can be sued in derivative or books-and-records claims can be an effective way for companies to reduce litigation costs and increase the predictability of litigation outcomes by setting venue in a jurisdiction close to its principal operations or in a court with relatively more experience in deciding such actions, or both. Corporations that do not want to be sued just anywhere in the state would be well-served to consider adding to their articles of incorporation a provision stating the exclusive county in which they can be sued for derivative or books-and-records claims. For corporations with a principal place of business in the state, this choice is easy and straightforward: the county in which that principal place of business is located.6 For corporations that do not have a principal place of business in Kentucky, venue can be set in the county in which the company’s registered agent is located.7 This provides even greater flexibility in that the company can select a registered agent in any county. A process service company or law firm in Louisville or Lexington is a good option. For example, establishing a Louisville-based registered agent would permit a corporation to designate Jefferson County Circuit Court as the exclusive venue in which it could be sued on derivative and books-and-records claims. Because Jefferson Circuit Court routinely handles derivative and books-and-records claims, that choice affords the company an added level of consistency and experience in how such cases might be treated by the court, as well as reducing litigation costs by not having to pay counsel to educate a potentially unfamiliar court with the procedure and law involved in these suits.

Footnotes

1 2015 Ky. Acts 34 §§ 6 & 7 (amending KRS § 271B.1-400(1) and KRS § 271B.7-400).
2 Id. KRS § 271B.7-400(7) states "The articles of incorporation of the corporation may provide that proper venue for a derivative action or an action to compel the production of books and records is in or only is in the appropriate court." KRS § 271B.1-400(1) defines "appropriate court" as "the Circuit Court for the county within the Commonwealth in which the corporation maintains its principal office, or, if none, the county in which the registered agent is located."
3 L. Herzel & L. Richman, Foreword to R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations & Business Organizations, F-1 (3rd ed. Supp. 2001).
4 8 Del. Code § 115.
5 See, e.g., Roberts v. TriQuint Semiconductor, Inc. et al., 358 Ore. 413 (Ore. Dec. 10, 2015); Petit-Frere v. Office Depot Inc., No. 502015CA001577XXXXMB (Fla. Cir. Ct. May 15, 2015); Brewerton v. Oplink Commc'ns Inc., No. RG14-750111 (Cal. Super. Ct. Dec. 12, 2014); Collins v. Santoro, No. 15140/2014 (N.Y. Super. Ct. Nov. 10, 2014); Edelman v. Protective Life Corporation et al., No. 01-Civ-2014-90247400 (Ala. Cir. Ct. Jeff. Co. Sept. 19, 2014); Miller v. Beam, Inc., No. 2014-CH-000932 (Ill. Ch. Ct. Mar. 5, 2014); Groen v. Safeway, Inc., No. RG14716641 (Cal. Super. Ct. May 14, 2014); Golovoy v. MetroPCS Comm'ns Inc., No. CC-12-06144-A (Tex. Cnty. Ct. Apr. 18, 2014); Genoud v. Edgen Group Inc., No. 625,244 (19th Jud. Dist. Ct., East Baton Rouge, La. Jan. 17, 2014); Hemg Inc. v. Aspen Univ., 2013 WL 5958388 (N.Y. Super. Ct. Nov. 4, 2013); Polu v. MetroPCS Comm'ns Inc., No. CC-12-06170 (Tex. Cnty. Ct. Sept. 16, 2013); Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013); Daughtry v. Furmanite Corp., No. CC-11-06211-C (Tex. Cnty. Ct. Feb. 15, 2013). These cases largely approved forum-selection clauses in corporate bylaws, which require approval of only a company's board of directors. Since amendments to a corporation's certificate of incorporation require approval by its board of directors and stockholders, venue-selection provisions under Kentucky law are arguably in a stronger position. Note that legislation currently pending in the Kentucky House of Representatives would permit a corporation the ability to select venue for derivative litigation via the corporation's bylaws, in addition to via the corporation's articles of incorporation. 2016 H.B. 50 § 6.
6 KRS § 271B.7-400 & § 271B.1-400.
7 Id.

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