On June 25, 2013, the Delaware Court of Chancery upheld the validity and enforceability of bylaws adopted without stockholder approval by the boards of Chevron Corporation and FedEx Corporation providing for Delaware courts to be the exclusive forum for certain stockholder suits against those companies and their directors, officers and employees relating to internal corporate affairs.1
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 suit:
- 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 its 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 U.S. 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.