On June 25, 2013, Chancellor Strine of the Delaware Court of Chancery upheld bylaws adopted by the boards of directors of Chevron Corporation and FedEx Corporation that designated Delaware as the exclusive forum for litigation regarding their internal affairs. In these cases of first impression under Delaware law, the Court held that the forum selection bylaws were valid and enforceable. The decision is the first concrete step towards the elimination of stockholder suits filed in two or more jurisdictions concerning the same issues that raise the specter of different rulings on identical legal issues and result in higher legal fees that drain corporate pocketbooks.
In 2010 and 2011, Chevron and FedEx adopted bylaws designating the Delaware Court of Chancery as the sole forum for derivative actions, claims of breach of fiduciary duty, claims arising under the General Corporation Law of the State of Delaware (DGCL), and claims governed by the internal affairs doctrine, absent written consent by the corporation to jurisdiction elsewhere. The companies adopted the forum selection clauses to combat the inefficiencies and costs of multiforum stockholder litigation. Chevron subsequently amended and expanded its forum selection bylaw to include Delaware federal courts and other Delaware state courts.
In February 2012, plaintiff stockholders in Chevron and FedEx filed suit against these and several other corporations that had adopted similar bylaws on two grounds. First, plaintiffs contended that the bylaws were statutorily invalid under the DGCL because they exceeded the authority of the respective boards of directors. Second, plaintiffs alleged that the bylaws were contractually invalid due to their adoption without stockholder consent. In response most defendants withdrew their bylaws, but Chevron and FedEx stood firm and defended the litigation.
Chancellor Strine rejected both of plaintiffs’ claims and entered judgment in favor of Chevron and FedEx. The Court concluded that the forum selection bylaws were limited by their text to cases involving the “internal affairs” of the corporations, a proper subject for bylaws under DGCL § 109(b). As a result, the bylaws were statutorily valid. Similarly, the Court rejected the plaintiffs’ contract law claim that the bylaws were invalid because they were adopted by the board of directors rather than by stockholder vote. The respective certificates of incorporation authorized both boards to amend the bylaws unilaterally. Thus, by purchasing stock in Chevron and FedEx, stockholders assented to the authority of the respective boards to adopt binding bylaws consistent with the DGCL.
The Court noted that if stockholders are unhappy with such bylaws, they can repeal them with a majority vote, use their power to elect directors to discipline boards that have adopted those bylaws or otherwise make their preferences known. Chancellor Strine also acknowledged that although the forum selection bylaws are not per se invalid, plaintiffs could raise further challenges to them, as with respect to other forum selection clauses, “in the event that a plaintiff believes that the clause is operating in a situationally unreasonable or unlawful manner” under the U.S. Supreme Court’s long standing decision in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972).
Possible Appeal and Impact on Non-Delaware Courts
The decision is subject to possible review by the Delaware Supreme Court. Nonetheless, Chancellor Strine’s reasoning is careful and comprehensive and unlikely to be reversed. Although the decision is not binding on courts outside Delaware, it may well persuade such courts to adopt similar reasoning to reach the identical conclusion. However, some courts outside of Delaware that have grown accustomed to presiding over cases that likely would be subject to an exclusive forum by-law provision — such as the profusion of derivative shareholder litigation filed in state courts outside of Delaware over the past five years — may resist relinquishing control over such cases to the Delaware courts.
Considerations in Whether or Not to Adopt an Exclusive Forum Bylaw
In the wake of this decision, Delaware corporations should consider whether or not to adopt forum selection bylaws. Corporations should evaluate carefully their circumstances and the potential advantages and disadvantages of such a provision. Companies that do plan to adopt such bylaws, even through unilateral board action, are advised to have a robust process in place to consider such a bylaw and clearly document the reasons for adoption, such as cost-savings. By carefully making a case for adopting and supporting a forum selection bylaw, directors may be more successful in persuading stockholders to support such a provision and fend off other possible challenges to the validity of such a provision under the specific factual circumstances at issue.
When considering an exclusive forum provision, companies should also be aware of stockholder proposals opposing such provisions and the position of institutional shareholder advisory services. In 2013, proxy advisory service Institutional Shareholder Services (ISS) amended its policy regarding exclusive forum provisions to provide for voting on a case-by-case basis (migrating from its presumptive “no” vote the previous year). The recommendation takes into account whether the company has:
- previously been materially harmed by shareholder litigation outside its jurisdiction of incorporation;
- adopted identified governance features such as an annually elected board elected by a majority vote; and
- not adopted a poison pill.
It remains to be seen if ISS’s policy will change in the coming year.
More Delaware companies in the wake of the Chancery Court’s decision are expected to adopt similar exclusive forum bylaws. Over time, this decision should result in a significant decline in multiforum securities litigation and resolution of the matters in question exclusively in the Delaware courts rather than in courts of the state in which those companies may be headquartered. If that occurs, companies that adopt such a bylaw may be able to persuade their directors’ and officers’ insurance carriers that premiums should be reduced or coverage enhanced as the risk of multiple cases in different fora on the same issues has been significantly reduced, if not eliminated.
It will be interesting to see if the Delaware courts extend the reasoning of this decision to alternative dispute resolution provisions, such as arbitration clauses. That development will need to await a company adopting such a bylaw and then sticking by that decision through the inevitable litigation that would be filed to challenge its enforceability.