On June 25, 2013, the Delaware Chancery Court upheld the statutory and contractual validity of Delaware exclusive forum selection bylaws adopted by the boards of directors of Chevron Corporation and FedEx Corporation against facial challenges. The opinion, which was written by Chancellor Strine, is available here.
The forum selection bylaws designate Delaware as the exclusive forum for litigation relating to internal corporate governance, including derivative suits, breach of fiduciary duty suits, suits brought under the Delaware General Corporation Law (the “DGCL”) and suits involving the corporation’s internal affairs. The Chevron bylaw allows for jurisdiction in any Delaware court (including a federal court) whereas the FedEx bylaw is limited to the Delaware Chancery Court. For reference, the text of the Chevron and FedEx forum selection bylaws is provided at the end of this Update.
Hundreds of public companies have adopted forum selection provisions in their organizational documents in the past few years in an effort to minimize the risk of duplicative multiforum stockholder litigation. Such litigation has become extremely common and virtually inevitable following merger announcements.
In February 2012, twelve Delaware corporations, including Chevron and FedEx, were sued by plaintiff stockholders represented by one Delaware law firm challenging the validity of the corporations’ forum selection bylaws which were adopted by the boards of directors without stockholder approval. Ten of the targeted corporations amended their bylaws to repeal the forum selection provisions in exchange for the plaintiffs dropping the suits. Chevron and FedEx did not repeal their forum selection bylaws and the suits proceeded on a consolidated basis. In the wake of this litigation, the pace with which public companies adopted forum selection clauses slowed considerably.
Chancellor Strine first held that the adoption of forum selection bylaws is valid under Delaware statutory law. The plaintiffs argued that the forum selection bylaws adopted by Chevron and FedEx are statutorily invalid because they are beyond the board’s authority under the DGCL. 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 noted that the forum selection bylaws plainly meet the requirements of Section 109(b) in that they establish procedural rules governing disputes related to the corporation’s internal affairs. He also commented that the bylaws are not inconsistent with Delaware case law that has upheld the validity of forum selection clauses in LLC agreements, stockholder agreements and other contracts. Therefore, the Court held that the forum selection bylaws are not facially invalid as a matter of Delaware statutory law.
Next the Court held that the forum selection bylaws are facially valid and enforceable under a contractual analysis. The plaintiffs alleged that the bylaws are contractually invalid, and therefore unenforceable, because they were adopted by the Chevron and FedEx boards without stockholder approval. Chancellor Strine commented that stockholders of Delaware corporations “assent to be bound by board-adopted bylaws when they buy stock in those corporations.” As permitted by the DGCL, the certificates of incorporation of Chevron and FedEx authorized the respective boards of directors to adopt and amend bylaws unilaterally. The Court held that the forum selection bylaws, which were adopted by boards authorized to adopt such bylaws, are valid and enforceable under Delaware law to the same extent as other contractual forum selection clauses.
The Court explicitly declined to opine on several hypothetical situations raised by the plaintiffs in which they contended that the forum selection bylaws would operate unreasonably. Chancellor Strine acknowledged that, based on the particular facts and circumstances, a plaintiff could challenge whether a forum selection bylaw is unreasonable as applied or should not be enforced. He further noted that stockholders who object to forum selection bylaws also have recourse in the form of board elections and the authority of stockholders to repeal board-adopted bylaws.
The decision will likely be appealed to the Delaware Supreme Court where we would expect it to be upheld. Notwithstanding the possibility of an appeal, the opinion by Chancellor Strine provides an important validation of the practice of including forum selection clauses in corporate bylaws. The opinion may provide an impetus for some Delaware corporations that do not already have such a bylaw provision to add one now. In many cases, this may be advisable as the potential benefit of requiring intra-corporation litigation to be brought in a single forum, particularly one as well-established as Delaware, can be significant. If nothing else, the opinion by Chancellor Strine would seem to reduce the risk that Delaware corporations that adopt such a provision now will face litigation over its mere adoption.
Notwithstanding the ruling, significant questions remain. First, although we expect that the Delaware Supreme Court would adopt Chancellor Strine’s analysis, there is no guarantee that this is what would occur. Second, Chancellor Strine’s opinion relates only to the facial validity of forum selection bylaws on a statutory and contractual basis. As Chancellor Strine emphasized repeatedly, the invocation of a forum selection bylaw on any particular set of facts could be subject to a challenge based on equitable principles, breach of fiduciary duty or other grounds. Third, it is yet to be seen how forum selection bylaws will operate and the extent to which they will be honored outside of Delaware. Finally, there could conceivably be situations in which a Delaware court could be less friendly to a corporation than a non-Delaware court may have been (although plaintiffs’ counsel will typically select a Delaware forum in such circumstances). All that being said, we think on balance forum selection bylaws can be beneficial and should be considered.
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Text of Forum Selection Bylaws At Issue in the Litigation
Chevron Corporation Forum Selection Bylaw:
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].
FedEx Corporation Forum Selection Bylaw:
Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be 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. 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].
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