Forum Selection Bylaws–More Good News

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Fending off merger-related shareholder lawsuits keeps getting easier. Just a week ago, the Delaware Chancery Court upheld the enforceability of the bylaw of a Delaware corporation headquartered in North Carolina that selected North Carolina courts as its exclusive shareholder litigation forum. As a result, the court dismissed the merger-related shareholder lawsuit in question.

A summary of the case…

The suit related to the pending merger between First Citizens BancShares, Inc. (based in North Carolina) and First Citizens Bancorporation, Inc. (based in South Carolina), both of which are controlled by the Holding family. Simultaneously with approving the merger agreement, the board of First Citizens (NC) had also amended and restated its bylaws to, among other things, include a new forum section bylaw.

The relevant bylaw provides that unless the company consents to an alternative forum, the United States District Court for the Eastern District of North Carolina or any North Carolina state court that has jurisdiction will be the sole and exclusive forum for:

  • any derivative action or proceeding brought on behalf of the company,
  • any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee,
  • any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, and
  • any action asserting a claim governed by the internal affairs doctrine.

The forum selection provision is virtually identical to the one approved by the Delaware courts in the 2013 Boilermakers Local 154 Retirement Fund v. Chevron Corporation decision (see Three New Weapons to Combat Shareholder Litigation), except that it selects North Carolina courts, rather than Delaware courts, as the forum.

The plaintiffs claimed that First Citizens (NC) had overpaid for First Citizens (SC). They also claimed that the forum selection bylaw would put them at a disadvantage due to the Holding family’s positive reputation in North Carolina.

Chancellor Andre Bouchard concluded that the plaintiffs had not stated a claim as to the validity of the forum selection bylaw (based on the logic of the Chevron decision), failed to state a claim for breach of fiduciary duty in connection with board’s adoption of the bylaw and failed to demonstrate that it would be “unreasonable, unjust or inequitable” to enforce the bylaw.

Should you adopt a forum selection bylaw?

A typical forum selection bylaw designates a specific jurisdiction for stockholder lawsuits relating to internal corporate governance disputes. It is intended to minimize the hassle and expense of multiple suits in various jurisdictions related to the same event—a strategy some plaintiffs’ lawyers use to gain leverage and induce settlements, many of which result in minimal benefit to the shareholders themselves.

A little over a year ago, following the Chevron decision, I speculated that many Delaware companies would adopt forum selection bylaws, but suggested a wait-and-see approach while the issue continued to work its way through the courts. (See this Doug’s Note.) Clearly, forum selection bylaws have gained momentum in the interim and should at least be on every company’s radar.

Although the First Citizens opinion did not address the timing of the board’s adoption of their forum selection bylaw (that is, simultaneously with the merger approval), it seems prudent to adopt one when nothing is pressing that would cloud the issue of board fiduciary duties. However, if some event has occurred or is pending that might be likely to stimulate shareholder litigation (for example, a merger), consideration of a forum selection bylaw should be prioritized.

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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