The Delaware Chancery Court has issued a long-awaited and highly-anticipated decision in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220 (Del. Ch. June 25, 2013) (Strine, C.), concerning the validity of forum-selection bylaws that designate Delaware as the sole forum for litigation concerning the internal affairs of Delaware corporations. The court ruled that forum selection bylaws — which cover derivative shareholder suits, breach of fiduciary duty claims, and other corporate governance claims — are valid as a matter of law under the Delaware General Corporation Law (DGCL) and enforceable to the same extent as contractual forum selection clauses. Although the decision does not rule out challenges to the enforcement of a forum selection bylaw in particular situations, the decision affirms an important corporate governance tool for boards of directors in addressing concerns about costly and duplicative multijurisdictional shareholder litigation.
Background and Summary
For several years the Delaware Chancery Court has sought to address the proliferation of litigation involving issues of Delaware corporate law brought concurrently in multiple forums, particularly in actions challenging mergers and acquisitions. This has often taken the form of the Court of Chancery declining to stay actions commenced in Delaware after litigation has been brought in another forum, notwithstanding the presumption that comity and the first-filed rule typically requires deference to the earlier commenced parallel proceeding. Indeed, in an academic article earlier this year Chancellor Strine criticized the rules of jurisdictional priority that favor the first-filed lawsuit and proposed in matters concerning corporate governance the application of a rebuttable presumption that the litigation should proceed in the courts of the state of incorporation.1 The Boilermakers decision, subject to possible review by the Delaware Supreme Court, may offer corporations a powerful option for addressing the problem of multi-jurisdictional shareholder litigation through bylaw amendments that would presumptively result in dismissal of cases in non-Delaware courts for lack of venue rather than merely the possibility of a stay.
Providing for an exclusive choice of forum for the resolution of intra-corporate disputes in corporate governance documents gained momentum when Vice Chancellor Laster endorsed such an approach in dicta in In re Revlon, Inc. Shareholders Litig.,2 after which numerous boards of public companies adopted forum selection bylaws as being in the best interests of the corporation and its shareholders. In February 2012, complaints were filed in Delaware Chancery Court against twelve Delaware corporations whose boards of directors had adopted forum selection bylaws. The complaints alleged that it was beyond the boards’ power under the DGCL to adopt the forum selection bylaws, that the bylaws were unenforceable unilateral contracts, and that the directors had breached their fiduciary duties in adopting the bylaws. Ten of the corporations repealed the forum selection bylaws in response to the lawsuits rather than litigate. Only Chevron Corporation and FedEx Corporation opted to litigate the underlying issues as to the validity of their forum selection bylaws.
Chancellor Strine rejected the plaintiffs’ statutory and contract arguments and upheld the forum selection bylaws against the plaintiffs’ facial challenge.
Chancellor Strine first rejected the argument that forum selection bylaws are inconsistent with the Delaware General Corporate Law. Section 109(b) of the DGCL provides that the bylaws of a corporation “may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” Chancellor Strine determined that derivative suits, fiduciary duty suits, suits under the DGCL and other suits concerning the internal affairs of the corporation are an appropriate subject for a corporate bylaw as they readily relate to the corporation’s business, the conduct of its affairs and shareholder rights. Thus, the forum selection bylaws in question are consistent with Section 109(b) of the DGCL insofar as they “only regulate suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine.”
Chancellor Strine then held that forum selection bylaws are enforceable as forum selection clauses by virtue of operation of the DGCL. Under the DGCL and related Delaware caselaw, “the bylaws of a Delaware corporation constitute part of a binding broader contract among the directors, officers, and stockholders formed within the statutory framework of the DGCL.” The statutory framework of the DGCL provides that (i) directors, through the certificate of incorporation, may be granted the unilateral power to adopt and amend the bylaws; (ii) boards are allowed to adopt bylaws to regulate a corporation’s internal affairs, including the rights or powers of its stockholders; and (iii) valid bylaws adopted by the board are binding on stockholders. Thus, according to Chancellor Strine, stockholders that invest in a Delaware corporation assent to being “bound by bylaws adopted unilaterally by their boards.” Chevron’s and FedEx’s respective certificates of incorporation empowered their boards of directors to adopt bylaws without a shareholder vote and their shareholders were accordingly bound by contract to the resulting forum selection. Chancellor Strine specifically rejected as inconsistent with the DGCL the reasoning of a California federal district court in Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011), the only previous decision to directly address the validity of a forum selection bylaw under Delaware law, which refused to apply the forum selection bylaw of a Delaware corporation on the basis that it had not received shareholder assent.
Chancellor Strine’s decision in Boilermakers concerned a facial challenge to the forum selection clause. Thus, while the decision recognized that forum selection bylaws “will be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable,” the decision leaves open the possibility that the forum selection bylaw can be challenged as applied to any given matter. Such a challenge will require a showing that application of the clause under the circumstances would be fundamentally inequitable or otherwise run contrary to established law. Notwithstanding Chancellor Strine’s decision, enterprising plaintiffs may test the willingness of non-Delaware courts to enforce directoradopted forum selection bylaws.
In addition to forum selection bylaws, numerous companies have adopted forum selection provisions by amendment to the corporate charter through a shareholder vote. While the Boilermakers decision did not address such forum selection provisions, given that the opinion affirms forum selection bylaws unilaterally adopted by a board of directors it would appear to similarly confirm the enforceability of forum selection provisions adopted with explicit shareholder assent via charter amendment.
Chancellor Strine also did not address whether the use of the bylaws to choose a forum amounts to a breach of fiduciary duty. Rather, he held that the question must await an as-applied challenge when a plaintiff seeks to file a suit outside of the forum provided in the bylaw. Notwithstanding Chancellor Strine’s clear signal that adoption of a forum selection bylaw of itself would not amount to a breach of duty, this may present an interesting issue for a company that seeks to enforce a forum selection bylaw adopted by the board where the directors had previously adopted then repealed such a bylaw. Companies and directors in such a situation should work closely with counsel to ensure adoption of the forum selection bylaw after a previous repeal is done consistent with the DGCL and applicable director duties.
The Court of Chancery’s decision, subject to possible review by the Delaware Supreme Court, removes uncertainty over the validity of an important corporate governance tool under Delaware law to address concerns over the proliferation of multi-jurisdictional stockholder litigation, especially in the context of near-automatic merger and acquisition suits. While the result of the Chancellor’s decision is to confirm that “a forum selection clause adopted by a board with the authority to adopt bylaws is valid and enforceable under Delaware law to the same extent as other contractual forum selection clauses,” the practical issue of whether non-Delaware courts will apply the forum selection clause reflected in a corporation’s bylaws will likely depend upon the jurisdiction and the claims and facts of the specific case.