The September 2012 issue of the Corporate Practice Newswire included an article entitled "Continuing Challenges to Exclusive Forum Bylaw Provisions," in which the authors discussed some of the factors a company should consider before deciding to adopt a forum selection bylaw provision requiring certain stockholder suits to be brought in Delaware courts as the exclusive forum, including a discussion of the uncertainty regarding such provisions stemming from the then-pending litigation against Chevron Corporation and FedEx Corporation. This article reports on a significant recent update, the June 25, 2013 decision of the Delaware Chancery Court upholding the validity and enforceability of the exclusive forum bylaw provisions adopted by the Chevron and FedEx boards without stockholder approval. See Boilermakers Local 154 Ret. Fund, et al. v. Chevron Corp., et al., C.A. Nos 7220-CS, 7238-CS, slip op. (Del. Ch. June 25, 2013).
For companies currently contemplating whether to include a forum selection provision in their bylaws, the recent court decision removes some of the uncertainty as to the enforceability of forum selection bylaw provisions in Delaware. However, the decision is still subject to appeal to the Delaware Supreme Court. And, as the court noted, a forum selection bylaw provision may still be challenged as applied in any particular situation, for example, as "operating in a situationally unreasonable or unlawful manner" or in a manner inconsistent with the board’s fiduciary duties. In addition, as more fully discussed in the September 2012 article, adopting a forum selection bylaw provision could result in possible negative vote recommendations from proxy advisory firms. They have historically not considered forum selection provisions to be "best practices" for what they consider to be good corporate governance.
Forum Selection Provisions
Forum selection provisions, also known as exclusive forum provisions, have been adopted by many companies for a number of reasons, including decreased litigation costs, avoiding parallel litigation in multiple jurisdictions and the predictability of Delaware courts. They generally provide for the Delaware courts to be the exclusive forum for four types of suits:
- derivative actions brought on behalf of the corporation;
- actions asserting breach of fiduciary duty claims;
- actions asserting claims pursuant to the Delaware General Corporation Law (DGCL); and
- actions asserting a claim governed by the internal affairs doctrine (i.e., matters peculiar to the relationships among or between the corporation and its officers, directors and stockholders).
Chancellor Strine’s opinion decides two of four invalidity claims made by the plaintiffs, holding that the bylaws:
- were not statutorily invalid because they were beyond the boards’ authority under the DGCL; and
- were contractually valid and binding on stockholders, notwithstanding the absence of shareholder approval.
The court did not rule on plaintiff’s claims that:
- the bylaws might operate inconsistently with law or unreasonably in some cases; or
- the boards breached their fiduciary duties in adopting the bylaws.
The Statutory Validity Claim. The plaintiffs argued that the forum selection bylaw provisions were statutorily invalid because they do not regulate a proper subject matter under the DGCL and are thus beyond the authority granted under the DGCL. The court rejected this claim, finding that the forum selection bylaw provisions are not facially invalid and "easily meet" the requirements of DGCL § 109(b). That section provides that 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 power or the rights or powers of its stockholders, directors, officers or employees." The court noted that the forum selection bylaw provisions at issue address the rights of stockholders and relate to the conduct of the companies’ internal affairs.
The court rejected the plaintiffs’ arguments that the exclusive forum provisions involved a "novel" subject matter for bylaws, beyond the three areas traditionally considered appropriate subjects for bylaws — stockholder minutes, the board of directors and its committees and officerships. Here, Chancellor Strine made two points:
- "The bylaws cannot fairly be argued to regulate a novel subject matter: the plaintiffs ignore that, in the analogous contexts of LLC agreements and stockholder agreements, the Supreme Court and this court have held that forum selection clauses are valid."
- "[T]he Supreme Court long ago rejected the position that board action should be invalidated or enjoined simply because it involves a novel use of statutory authority," citing the 1985 decision in Moran v. Household International establishing the validity of so-called poison pills.
The Contractual Validity Claim. The plaintiffs argued that the forum selection bylaws were contractually invalid because they were unilaterally adopted by the boards without shareholder approval. The court rejected this claim, finding 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 court noted that the DGCL allows a corporation to grant its board the authority to adopt bylaws pursuant to the corporation’s certificate of incorporation. The court further noted that in purchasing the stock of a corporation, stockholders are entering into a binding contractual agreement with the corporation established through the DGCL and the corporation’s bylaws and certificate of incorporation. Thus, stockholders are deemed to "assent to be bound by board-adopted bylaws" when they buy stock in corporations that grant authority to their boards to adopt bylaws and where such board-adopted bylaws are consistent with the DGCL.
Other Claims. The court did not rule on the potential invalidity of the bylaws in various hypothetical situations raised by the plaintiffs, where application of the forum selection bylaw provision might be unreasonable or otherwise contrary to law. The court concluded that such situations would only merit a decision when there is a plaintiff-stockholder whose case is actually affected by the application of a forum selection bylaw provision. The court noted that forum selection bylaw provisions are no different than other forum selection clauses and may still be challenged in a particular situation where a plaintiff believes that the operation of the provision is unreasonable under the standard set by the US Supreme Court case, The Bremen v. Zapata Off-shore Co., 407 U.S. 1 (1972), which was adopted by the Delaware Supreme Court. In addition, as is the case with any other bylaw provision, a plaintiff might challenge a forum selection bylaw provision by arguing that its application constitutes a breach of fiduciary duty.
CHEVRON FORUM SELECTION PROVISION
The following is the forum selection provision contained in Chevron’s bylaws that the Delaware Chancery Court recently determined is valid and enforceable:
Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this [bylaw].