Delaware Chancery Court Upholds "Forum Selection Bylaws"

These days, hardly a merger or acquisition goes by without challenge from a class action or derivative lawsuit. As the sheer volume of these cases has exploded in recent years, so has the creativity of plaintiffs' lawyers to increase potential cost and uncertainty, and correspondingly increase the likelihood of a quick, easy, and lucrative settlement. One tactic is to file the lawsuit somewhere, anywhere, other than Delaware to avoid its rich body of case law and experienced Chancery judges ready to apply it. Several different plaintiffs also may challenge the same transaction in multiple forums around the country, leading to inefficiency, expense, and decreased predictability of outcome. In response, many Delaware corporations have adopted bylaws making Delaware the exclusive venue for litigation relating to their internal affairs. In the last three years, over 250 publicly traded corporations have adopted such provisions. This week, in a case of first impression that is likely to be appealed to the Delaware Supreme Court, Chancellor Leo Strine upheld the enforceability of these forum selection bylaws, thereby increasing the presumed predictability of outcomes for those Delaware corporations that have adopted them. See Boilermakers Local 154 Retirement Fund et al. v. Chevron Corp. and ICLUB Investment Partnership v. FedEx Corp., No. 7220-CS, June 25, 2013.

In Chevron/FedEx, both the Chevron and FedEx boards adopted bylaws without stockholder approval designating the Delaware Chancery Courts as having sole and exclusive jurisdiction for any (1) derivative claims, (2) fiduciary duty claims, (3) claims under the Delaware General Corporation Law (“DGCL"), and (4) claims relating to the corporation’s "internal affairs." (Chevron later amended its bylaw to include federal courts located within Delaware). Within several weeks, one law firm filed identical complaints against a dozen companies that had adopted similar bylaws, including Chevron and FedEx. In the face of these complaints, 10 of the 12 companies repealed their bylaws, and the cases against them were dismissed. Chevron and FedEx chose to fight it out.

Plaintiffs argued that the bylaws were "statutorily invalid" because the boards did not have authority to adopt them under the DGCL, and "contractually invalid" because the boards adopted them unilaterally without stockholder approval. Chancellor Strine disagreed and held that the bylaws fit well within the statute's authorization for bylaws "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." DGCL §109(b). Chancellor Strine also determined that bylaws "constitute part of a binding broader contract among the directors, officers, and stockholders formed within the statutory framework of the DGCL." Further, because stockholders know when they buy stock the board has the power to amend a Delaware corporation’s bylaws, stockholders have consented to new bylaws that fall within the scope permitted by the statute. Accordingly, the forum selection bylaws are both statutorily and contractually enforceable.

Chancellor Strine did not eliminate challenge to these forum selection bylaws altogether. As the opinion acknowledges, a plaintiff who files outside Delaware will certainly face a motion to dismiss based on the bylaw, but may argue in response that enforcing the bylaw under the circumstances would be unfair or unreasonable as a matter of federal common law (pursuant to The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), providing the standard for enforceability of forum selection clauses under federal common law), or that the board breached its fiduciary duty under Delaware law by invoking the bylaw in that particular case. As a result, even if this case is not appealed to the Delaware Supreme Court, some uncertainty remains, as plaintiffs likely will litigate this issue in the years to come. Nonetheless, Delaware corporations that have adopted similar bylaws will have a powerful argument for dismissal of appropriate cases filed outside Delaware.

Of course, not all companies are incorporated in Delaware. For companies not governed by Delaware law, Chevron/FedEx will not provide a path to the presumed predictability and experience of the Delaware Court of Chancery. However, Chevron/FedEx does provide a strong doctrinal basis for a non-Delaware incorporated company to adopt a similar forum selection bylaw that designates either its own state of incorporation or, potentially, the state in which the corporation has its headquarters. The enforceability of forum selection bylaws will likely vary among the states, depending upon each state's corporation statute, its precedent and its courts.* While similar bylaws may not get non-Delaware companies into the experienced Delaware courts, they will mitigate the risk of having to litigate similar claims in multiple forums, and could decrease the cost of litigation as well as the possibility of inconsistent (and correspondingly expensive) orders from multiple state and federal courts around the country.

* For example, boards of Minnesota corporations have broad authority to adopt, amend or repeal bylaws under the Minnesota Business Corporation Act (“MBCA”), subject only to specific reservation of that power to shareholders that is set forth in the company’s articles of incorporation and to limited actions that may not be taken by the board after the initial adoption of the bylaws. See MBCA §302A.181. Similarly, in the State of Washington, boards have the authority to amend or repeal bylaws, or adopt new bylaws, under the Washington Business Corporation Act (“WBCA”), subject only to specific reservation of that power to shareholders that is set forth in the company’s articles of incorporation or a shareholders’ agreement or in other limited circumstances specified in the WBCA. See WBCA §23B.10.200. We note, however, that unlike DGCL §109(b), neither the MBCA nor the WBCA provide the same explicit authority to include in a corporation’s bylaws any provision “relating to … the rights or powers of its stockholders.”