Delaware Court Upholds Board's Authority To Adopt Exclusive Forum Bylaws

We have previously blogged about corporations adding forum-selection provisions to their bylaws (or other governing documents) to require that stockholder derivative and other intra-corporate lawsuits be filed only in Delaware.  Quelling concerns about the enforceability of adopting such provisions without stockholder approval, earlier this week the Delaware Court of Chancery held that the boards of directors of Delaware corporations may adopt bylaws, which are binding on shareholders, requiring lawsuits over the internal affairs of a Delaware corporation to be brought in Delaware.

Courtesy of John Reed, a partner in DLA Piper’s Delaware office, here is a more detailed summary of the case.

In Boilermakers Local 154 Retirement Fund v. Chevron Corp., Civ. No. 7220 (Del. Ch. June 25, 2013), the Delaware Court of Chancery (Chancellor Leo E. Strine, Jr.) held that the boards of directors of Delaware corporations may adopt bylaws, which are binding on shareholders, requiring lawsuits over the internal affairs of a Delaware corporation to be brought in Delaware.

The Court consolidated two actions for purposes of this opinion because the actions involved virtually identical bylaws and complaints.  Defendants filed a motion for judgment on the pleadings, and the Court granted the motion with respect to two challenges to the bylaws.  The opinion addresses the validity of the bylaws under the Delaware General Corporation Law (“DGCL”) as well as the question of whether bylaws enacted by a board of directors without shareholder involvement can be enforced, as a contractual matter, against shareholder plaintiffs.

The Court made two primary holdings.  First, the Court found that the DGCL permits an exclusive forum selection bylaw.  Specifically, 8 Del. C. § 109(b) allows a corporation’s bylaws to “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 held that forum selection bylaws “easily meet these requirements.” 

Second, the Court held that these forum selection provisions are enforceable against shareholder plaintiffs, even though the bylaws were board-enacted.  The Court criticized the plaintiff’s contract argument as being premised on an incorrect understanding of the nature of the relationship between shareholders and a corporation.  Properly understood, bylaws are part of a flexible contractual relationship between shareholders and a corporation.  Based on the Certificate of Incorporation, stockholders understand whether a particular board of directors has the power to enact bylaws.  If the Certificate of Incorporation grants a board the power to unilaterally amend the corporation’s bylaws, as permitted by 8 Del. C. § 109(a), then the board may enact bylaws and thereby unilaterally alter the flexible contract.   

The Court left the door open for additional litigation over the validity of exclusive forum selection bylaws in particular circumstances, however, by refusing to address Plaintiffs’ arguments that in certain hypothetical situations the enforcement of these bylaws might be unreasonable.

Exclusive forum selection bylaws represent a response to the phenomena of multi-forum litigation, in which plaintiffs bring the same suit in multiple jurisdictions simultaneously.  The Court’s decision is therefore an important step toward addressing this problem.

Topics:  Board of Directors, Bylaws, Corporate Governance, Forum Selection Clause, Shareholders

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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