Valid and Enforceable: Delaware Corporation Bylaws With Forum Selection Clauses

by McCarter & English, LLP

The Delaware Court of Chancery, in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220-CS (Del. Ch. June 25, 2013), has ruled that forum selection bylaws, bylaws providing for litigation to be in a specific forum, are statutorily valid under the Delaware General Corporation Law ("DGCL") and are contractually valid and enforceable as forum selection clauses. Therefore, directors of a Delaware corporation are permitted to amend the corporation's bylaws to provide that the forum for litigation relating to the "internal affairs" of the corporation be filed only in Delaware.

In this case, the boards of Chevron and FedEx were sued by stockholders of both companies for the boards' adoption of bylaws containing these forum selection clauses. The stockholders argued that, among other things, the boards did not have the authority to include such clauses. Although the stockholders of each company sued their respective boards in separate actions, the court decided to address both cases together due to the similarity in both bylaws, the commonality of legal issues, and the target of near-identical complaints.

According to the opinion, most corporations are now adopting these provisions as a way to avoid multiforum filings against the corporation. For the purpose of understanding the context of multiforum filings, corporations, for jurisdictional purposes, are citizens of both the state of incorporation and the state where they have their principal place of business. See 28 U.S.C. §1332(c)(1). For the most part corporations, especially with respect to Delaware corporations, are frequently not headquartered in the state where they are incorporated. As a result, a corporation may be subject to personal jurisdiction as a defendant in a suit involving corporate governance matters in at least two states - the state of incorporation and state of its principal place of business.

The boards of Chevron and FedEx argued "that multiforum litigation, when it is brought by dispersed stockholders in different forums, directly or derivatively, to challenge a single corporate action, imposes high costs on the corporations and hurts investors by causing needless costs that are ultimately borne by stockholders, and that these costs are not justified by rational benefits for stockholders from multiforum filings." The opinion noted that more than 250 publicly traded corporations have adopted such provisions.

In upholding the validity of these forum selection bylaws, the court found 8 Del. C. §109(b) of the DGCL 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 its rights or powers or the rights or powers of its stockholders, directors, officers, or employees." The court explained that forum selection bylaws govern disputes relating to the "internal affairs" of corporations and plainly relate to the "business of the corporation[s]" and the "conduct of [their] affairs" as well as regulate the "rights or powers of [their] stockholders."

The court also emphasized that Delaware law, like federal law, respects and enforces forum selection clauses, and as long as the forum selection bylaws are not inconsistent with the law, the forum selection bylaws are not facially invalid as a matter of statutory law.

In conclusion, the court noted that as with other forum selection clauses, the law provides protection in the event that a plaintiff believes that the clause is operating in a situationally unreasonable or unlawful manner.  It is noteworthy that the court did not address the issue of the directors' fiduciary obligations in adopting the forum selection bylaws.

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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