Delaware corporations can proactively reduce risk of expensive multi-forum litigation by amending corporate bylaws to include a forum selection bylaw.

Duplicative shareholder class actions and derivative actions across multiple forums have become a systemic problem, “impos[ing] high costs on…corporations and hurt[ing] investors by causing needless costs that are ultimately born by stockholders.”1 Historically, companies have employed defensive strategies in the litigation to combat this problem.2 But, in In re Revlon, Inc. Shareholders Litigation,3 Vice Chancellor Laster suggested a proactive solution: the adoption of forum selection clauses in corporate bylaws and charters.4 Within fifteen months of the Revlon decision, the number of publicly traded companies with intra-corporate forum selection clauses in charters and bylaws had quadrupled from 16 to 133. After three years, more than 250 companies had forum selection clauses in their charters or bylaws.5

Early judicial decisions, however, raised uncertainties regarding the enforcement of forum selection bylaws. Two federal courts refused to enforce forum selection bylaws in the context of derivative litigation,6 and plaintiffs’ firms filed a dozen class action complaints in the Delaware Court of Chancery challenging corporate decisions to adopt forum selection bylaws.7 Faced with litigation, most of the defendant companies “repealed their bylaws, and the complaints against them were dismissed.”8 Two companies, Chevron and FedEx, defended the merits of forum selection bylaws.9

The Facts

Chevron and FedEx are Delaware corporations with certificates of incorporation that confer authority on their boards to adopt bylaws under 8 Del. C. § 109(a). In September 2010, the Chevron board adopted a forum selection bylaw which provided that the Delaware Court of Chancery would be the sole and exclusive forum for derivative actions, actions asserting a breach of fiduciary duty, actions arising under the Delaware General Corporation Law (DGCL), as well as actions asserting a claim governed by the internal affairs doctrine.10 In March 2011, the FedEx board adopted an identical forum selection bylaw.

Plaintiffs claimed that these bylaws were statutorily invalid because they were beyond the boards’ authority under the DGCL, and that the bylaws were contractually invalid because they were unilaterally adopted by the Chevron and FedEx boards. The court consolidated the two actions to decide the facial validity of the forum selection bylaws.

The Decision

On June 25, 2013, the Delaware Chancery Court upheld the forum selection bylaws.11 First, the Court held that the forum selection bylaws are statutorily valid exercises of the board’s authority under 8 Del. C. § 109(b). The Court reasoned that such bylaws “plainly” address a proper bylaw subject matter, as they relate to the rights of stockholders and the conduct of the corporation. The Court rejected the plaintiffs’ contention that the bylaws regulate “external matters” finding that the bylaws govern where, not whether, a stockholder may file suit.

Second, the Court held that board adopted forum selection bylaws are contractually valid if the corporation’s articles of incorporation allow unilateral adoption. Bylaws and certificates of incorporation constitute a binding part of the contract between a Delaware corporation and its stockholders. Therefore, by purchasing stock, stockholders assent to the articles of incorporation, including provisions allowing unilateral adoption of the forum selection bylaw.

The fact that the corporations retained procedural safeguards to control against the misuse of a forum selection bylaw supported both holdings. First, the bylaws themselves provided that the boards could waive the corporations’ rights when the bylaws would not serve proper corporate purposes. Second, shareholders retain the ability to adopt, amend, or repeal the bylaws by a majority vote, and retain the annual opportunity to elect directors who espouse their positions with regard to bylaw provisions. Third, stockholders can challenge the forum selection bylaws on an as-applied basis; by either filing suit in a separate jurisdiction and requiring the corporation to raise a proper jurisdictional defense, or by asserting that the bylaws are invalid under traditional contractual forum selection clause principles.

The Implications

  • Delaware corporations can be proactive and reduce expensive multi-forum litigation by amending corporate bylaws to include a forum selection bylaw. Where the articles of incorporation permit unilateral bylaw adoption, adoption by the board is both statutorily and contractually valid. Where stockholder approval is required, corporations now have a powerful decision supporting the use of such provisions.
  • Forum selection bylaws may not eliminate expensive multi-forum litigation, but they should reduce the risk and the ultimate costs. In Chevron, Chancellor Strine suggested that plaintiffs may challenge forum selection bylaws on an as-applied basis, requiring a defendant to raise jurisdictional defenses. Nevertheless, forum selection bylaws likely will serve as a powerful tool to deter and defeat duplicative litigation.