The Delaware Court of Chancery held that bylaw provisions unilaterally adopted by a Delaware corporation’s board of directors and providing that Delaware is the exclusive forum for resolution of certain disputes involving the corporation’s internal affairs are facially valid under Section 109(b) of the Delaware General Corporation Law (“Section 109(b)”) and contractually valid.
The boards of directors of Chevron Corp. (“Chevron”) and FedEx Corp. (“FedEx”) each unilaterally adopted and amended exclusive forum selection bylaws, providing that certain lawsuits must be brought in a state or federal court located in the State of Delaware. Specifically, these bylaws provided that the following types of actions involving the corporation or its directors, officers, or employees must be brought in Delaware: (i) derivative actions, (ii) actions asserting claims for breach of fiduciary duties, (iii) actions asserting a claim arising under a provision of the Delaware General Corporation Law, and (iv) actions governed by the internal affairs doctrine. In sum, all of these actions relate to disputes concerning internal corporate governance. According to the boards of both companies, these bylaws were adopted to reduce the costs associated with duplicative litigation in multiple jurisdictions. The certificates of incorporation of Chevron and FedEx provided their boards with the power to adopt, amend, and repeal bylaws without action of the stockholders.
In February 2012, the stockholder plaintiffs filed substantially identical complaints challenging these exclusive forum selection bylaws. Among other claims, the plaintiffs asserted that these bylaws were facially invalid under Section 109(b) because they exceeded the scope of matters capable of regulation via bylaws under Section 109(b). The plaintiffs also asserted that these bylaws were contractually invalid and could not be enforced in the same manner as other forum selection clauses because they were unilaterally adopted by the boards. The defendants moved for judgment on the pleadings on the statutory and contractual validity counts of the plaintiffs’ complaints.
The Court first explained that the plaintiffs’ burden in opposing the defendants’ motion for judgment on the pleadings was high because the claims at issue concerned whether the exclusive forum selection bylaws were facially valid under Section 109(b) and contractually valid. The plaintiffs were required to show that the exclusive forum selection bylaws “cannot operate lawfully or equitably under any circumstances.”
The Court then held that the exclusive forum selection bylaws were facially valid under Section 109(b). Section 109(b) provides that corporate bylaws “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.” The Court explained that Chevron’s and FedEx’s forum selection bylaws would exceed the scope of Section 109(b) only if they “do not relate to the business of the corporations, the conduct of their affairs, or the rights of stockholders.” The Court reasoned that these bylaws did not exceed the scope of matters that could permissibly be regulated in bylaws in accordance with Section 109(b) because they address where the stockholders may exercise their rights as stockholders to bring certain actions alleging that directors or officers breached their fiduciary duties or otherwise relating to the internal affairs of Delaware corporations. Moreover, the bylaws related to the conduct of the corporations’ affairs because they directed that actions relating to the corporations’ internal affairs must be asserted in the state of incorporation. The Court further explained that forum selection bylaws are not inconsistent with the law. For these reasons, the Court held that the forum selection bylaws were not facially invalid under Section 109(b).
The Court next held that the exclusive forum selection bylaws were contractually valid even though they were unilaterally adopted. The Court explained that corporate bylaws constitute a “binding part of the contract between a Delaware corporation and its stockholders.” The Court also explained that, as to those subjects that are permissibly regulated by bylaw under Section 109(b), stockholders are on notice that the board may unilaterally adopt bylaws concerning those subjects if the certificate of incorporation so provides. The Court reasoned that Chevron’s and FedEx’s stockholders assented to a “contractual framework” established by the Delaware General Corporation Law and the certificates of incorporation. This framework explicitly contemplates that the stockholders will be bound by bylaws adopted unilaterally by the boards – including the exclusive forum selection bylaws at issue.
The plaintiffs contended that the forum selection bylaws are prohibited by the “vested rights” doctrine, which holds that boards may not modify bylaws in a manner that diminishes or divests pre-existing rights of stockholders without their consent. The Court rejected this argument, holding that the vested rights doctrine does not apply where a corporation’s certificate of incorporation or bylaws give notice that the bylaws may be amended at any time. Accordingly, the Court held that it would enforce forum selection bylaws in the same manner it enforces other contractual forum selection clauses, in accordance with the principles enunciated by the United States Supreme Court in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972),and expressly adopted by the Delaware Supreme Court in Ingres Corporation v. CA, Inc., 8 A.3d 1143 (Del. 2010).
In a further attempt to defeat the motion, plaintiffs recited a number of hypothetical situations in which, plaintiffs contended, the forum selection bylaws could conceivably operate unreasonably. However, the Court noted that it could resolve such hypothetical situations if and when they actually arise. Moreover, under Bremen, a plaintiff can sue in his preferred forum and respond to defendant’s motion to dismiss for improper venue by arguing that application of the forum selection clause would lead to an unreasonable result. A plaintiff could also argue that the forum selection clause should not be enforced where it is being used for improper purposes inconsistent with the directors’ fiduciary duties.
In light of the foregoing, the Court granted defendants’ motion for judgment on the pleadings, finding that the forum selection bylaws were statutorily and contractually valid as a matter of Delaware law. Though technically permissible, the Court’s opinion left open the issue of whether the directors breached their fiduciary duties in adopting the forum selection bylaws.
The full opinion is available here.