Delaware Court of Chancery Upholds Forum Selection Provisions in Bylaws

Over the last several years, a number of companies have included in their certificates of incorporation or bylaws exclusive forum selection provisions. These provisions generally require that derivative actions and other stockholder actions relating to the internal affairs of a corporation are brought exclusively in the company’s state of incorporation (very often Delaware). Such provisions have typically been adopted to address the recent increase in “multiforum litigation,” in which duplicative stockholder and derivative suits are brought in multiple jurisdictions, including jurisdictions outside the corporation’s jurisdiction of incorporation. Exclusive forum selection bylaws unilaterally adopted by boards of directors have come under scrutiny and have been the subject of legal challenges. 

On June 25, the Delaware Court of Chancery issued an opinion in Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corporation, et al., C.A. No. 7220-CS, and IClub Investment Partnership v. FedEx Corporation., et al., C.A. No. 7238-CS, upholding the enforceability of forum selection bylaw provisions adopted unilaterally by the boards of directors of Chevron Corporation and FedEx Corporation, two Delaware corporations. The court ruled that provisions in the bylaws of Chevron Corporation and FedEx Corporation requiring that litigation relating to the corporations’ internal affairs be conducted in Delaware were valid under Delaware law.   

The court rejected the plaintiffs’ claims that such bylaw provisions are beyond the authority of the board of a Delaware corporation. The court noted that 8 Del. C. § 109(b) 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 the rights or powers of the corporation or its stockholders, and found that these bylaws “plainly relate” to such matters. The court also rejected the plaintiffs’ claims that the bylaws are contractually invalid because they were unilaterally adopted by the corporations’ boards of directors without stockholder approval. In the opinion, the court explained that bylaws, along with the certificate of incorporation and the Delaware General Corporation Law (DGCL), are considered “part of a flexible contract between corporations and stockholders,” and that “stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.”   

The court did note that if a plaintiff believes a forum selection clause cannot be equitably enforced in a particular situation, the plaintiff may bring a suit in the plaintiff’s preferred forum and respond to a defendant’s motion to dismiss for improper venue by arguing that the application of the forum selection clause would be unreasonable. Though the court does note in its opinion that foreign courts must respect the internal affairs doctrine in a suit relating to the enforceability of bylaws and, as such, these foreign courts will first consider whether the bylaws of a Delaware corporation are valid under Delaware law, it may be difficult to predict the extent to which courts in other jurisdictions will dismiss lawsuits based upon Delaware forum selection provisions.   

This decision may be appealed by the plaintiffs to the Delaware Supreme Court. 

In light of this decision, boards of directors of public companies that have not yet adopted forum selection bylaws may now want to consider whether it is appropriate for them to do so.

To read the full text of the decision, click here.