With increasing frequency, the boards of directors of many corporations have adopted bylaws mandating a particular jurisdiction as the exclusive forum for resolution of intra-company litigation (“forum-selection bylaws”). Such bylaws, if enforced, ensure that litigation involving derivative claims, alleged breaches of fiduciary duties, and other internal affairs of the corporation will be resolved in a forum of the corporation’s preference. Litigation in a single jurisdiction can also reduce the costs and uncertainty associated with multi-forum litigation.
The Delaware Court of Chancery’s benchmark ruling inBoilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) is often cited in support of the enforceability of forum-selection bylaws, even when the bylaw has been unilaterally adopted by the board of directors without shareholder approval. The court’s reasoning in Boilermakers was based primarily upon the presumptive validity of bylaws and the principle that investors purchasing stock in a corporation do so with the agreement that they will be bound by board-adopted bylaws, so long as the company’s certificate of incorporation grants directors the power to adopt and amend bylaws.
Notwithstanding Boilermakers, shareholder plaintiffs often challenge the enforceability of forum-selection bylaws, particularly where the bylaw was adopted simultaneously with the announcement of a challenged transaction or after the board’s purported wrongdoing—a so-called “cloudy day.” In 2014, however, nearly all courts that considered the validity of forum-selection bylaws ultimately enforced them.
Most notable among these 2014 decisions is the Delaware Court of Chancery’s September ruling in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014). The case involved a challenge to the enforceability of a forum-selection bylaw adopted by First Citizens BancShares, Inc. (“FC North”) on the same day that it announced a merger agreement to acquire First Citizens Bancorporation, Inc. (“FC South”). The bylaw called for litigation of intra-company disputes in North Carolina. The plaintiff shareholder filed a lawsuit asserting claims against the FC North board of directors related to the proposed merger, as well as a separate action challenging the validity of the forum-selection bylaw and asserting a claim of breach of fiduciary duty in connection with its adoption.
Chancellor Bouchard granted the defendants’ motions to dismiss both complaints, concluding that the bylaw was both facially valid and valid as applied to the particular circumstances of the case. Chancellor Bouchard reiterated the conclusion in Boilermakersthat board-adopted forum-selection bylaws are statutorily and contractually valid under Delaware law. Although the bylaw under consideration mandated litigation in North Carolina, the Chancellor concluded that nothing in Boilermakers prohibited directors of a Delaware corporation from designating an exclusive forum other than Delaware. The Chancellor rejected as “conclusory” the plaintiff’s allegations that adoption of the bylaw was a component of the board’s self-interested, disloyal conduct in approving the merger. He further noted that the bylaw did not insulate the board’s approval of the merger from judicial review but merely required that review to take place in a particular forum. He reasoned that the plaintiff failed to offer any facts sufficient to question the integrity of the North Carolina courts or to explain how litigation in North Carolina advanced the defendants’ purported self interests. Ultimately, he found the board’s adoption of the bylaw on a “cloudy” day to be “immaterial given the lack of any well-pled allegations . . . demonstrating any impropriety in this timing.” He also rejected plaintiff’s contention that the forum-selection bylaw should not be enforced because it would be applied to claims that arose before the bylaw was adopted.
Shortly after the First Citizens Bancshares opinion was issued, in a shareholder derivative action brought against Chemed Corporation and its directors alleging breach of fiduciary duty, gross mismanagement and other wrongdoing, an Ohio federal judge upheld a forum-selection bylaw and granted the defendants’ motion to transfer the case to Delaware federal court, where a similar lawsuit was already pending. North v. McNamara, No. 1:13-cv-833, 2014 U.S. Dist. LEXIS 131672 (S.D. Ohio Sept. 19, 2014). In so ruling, the court rejected the plaintiff’s argument that she had never consented to the bylaw, which she contended was adopted unilaterally by the board of directors after she purchased her shares, after her claims arose, and without adequate notice. Adopting the rationale of Boilermakers, the court concluded that the Chemed shareholders consented to the Delaware framework of corporate law by buying shares in a Delaware corporation and agreeing to a certificate of incorporation that allowed the board to unilaterally adopt bylaws.
The North court acknowledged that the court in Boilermakers had not been confronted with the question of whether a forum-selection bylaw could be enforced if adopted after the purported wrongdoing and noted the conflicting precedent on that issue. Relying upon the general principle, articulated in Boilermakers, that a corporation may enact a forum-selection bylaw that is reasonable and fair for purposes consolidating litigation, the North court ultimately concluded that binding shareholders to such a bylaw would not be unreasonable or unjust. Moreover, the timing of adoption alone was insufficient to show that the bylaw had been adopted for an improper purpose. The court found that the plaintiff had not explained how proceeding in Delaware would be “unfairly advantageous” to the defendants.
Courts in California, Illinois, Louisiana, Texas and Alabama reached similar conclusions in 2014, all finding that the challenged forum-selection bylaw was valid and enforceable. In Miller v. Beam, Inc., the Circuit Court of Cook County, Illinois honored a Delaware forum-selection bylaw, rejecting the plaintiff’s argument that the bylaw should not be applied to those who purchased shares before it was adopted. No. 2014 CH 00932, Circuit Court of Cook County, Illinois (Mar. 5, 2014). Among other things, the court noted that it was reasonable for a corporation to wish to limit litigation to a single forum and that, by buying shares, shareholders consented to the articles of incorporation and the board of directors’ power to adopt bylaws. The complaint failed to sufficiently allege that the bylaw had been adopted with a sinister purpose, and there were no allegations of wrongdoing at the time the bylaw was adopted.
In Groen v. Safeway, Inc., No. RG14716641 (Cal. Super. Ct., May 14, 2014), the California Supreme Court dismissed four shareholder class actions after concluding that the plaintiffs had failed to establish that application of the bylaw would be unreasonable. Plaintiffs’ argument that the bylaw was adopted after the board’s wrongdoing was “not supported by the record.”
Other similar rulings were issued in Genoud v. Edgen Group, Inc., No. 625,244 (19th Jud. Dist. Ct., E. Baton Rouge, La., Jan. 17, 2014) (relying upon forum-selection bylaw to dismiss action on grounds of subject matter jurisdiction and improper venue, as well as forum non conveniens); Golovoy v. MetroPCS Communications, Inc., No CC-12-06144-A (Tex. Cnty. Ct. Apr. 18, 2014) (dismissing stockholder action in favor of Delaware forum mandated by bylaws provision); and Edelman v. Protective Life Corp., No. CV-2014-902474 (Cir. Ct. of Jefferson Cnty, Ala., Sept. 19, 2014) (granting defendants’ motion to dismiss shareholder litigation based upon Delaware forum-selection bylaw adopted contemporaneously with challenged merger transaction).
Although it did not involve a forum-selection bylaw, a 2014 Maryland ruling found a real estate investment trust bylaw mandating arbitration of shareholder actions to be validly adopted and enforceable against shareholders, regardless of when those shareholders acquired their shares. Katz v. Commonwealth REIT, No. 24-C-13-001299 (Md. Cir. Ct. Balt. City Feb. 19, 2014). The court opted to follow the rationale of Boilermakers, in light of the Chancery Court’s recognized expertise and the dearth of Maryland precedent.
Thus, looking back at rulings issued in 2014, corporations arguably can feel relatively confident regarding the ultimate enforceability of forum-selection bylaws. Most notably, the Delaware Court of Chancery’s ruling in First Citizens BancSharesappears to have added a solid additional layer to the foundation established by the 2013 Boilermakers decision, further bolstering the presumptive validity of such bylaws, even when adopted on an allegedly “cloudy day.” Of course, the enforceability of forum-selection bylaws is not guaranteed, particularly when challenged in jurisdictions outside Delaware that are not bound by, or may not properly interpret, this precedent.