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Delaware Court of Chancery Upholds Validity of Forum Selection Bylaws

Jul.01.2013

In a recent action granting a motion for judgment on the pleadings, the Delaware Court of Chancery in Boilermakers Local 154 Retirement Fund v. Chevron Corp., C.A. No. 7220-CS (Del. Ch. June 25, 2013) upheld the statutory and contractual validity of forum selection by-laws, which govern disputes related to the "internal affairs" of the corporation. The decision validates the use of forum selection bylaws as a tool for boards of Delaware corporations to attempt to reign in the explosive growth of multiforum litigation on matters relating to corporate internal affairs.

The decision was a consolidated decision relating to challenges on the validity of forum selection bylaws of Chevron Corporation and FedEx Corporation. The bylaws of both corporations provided that unless the corporation consents in writing to an alternative forum, the Delaware Court of Chancery shall be the sole and exclusive forum for "(i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the corporation's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine." The Chevron board subsequently broadened its forum selection bylaw to permit actions to be brought in Delaware state or federal courts. Both bylaws were adopted by board action, pursuant to authorization granted to the board under the certificate of incorporation to adopt bylaws without a stockholder vote. 

The court first considered plaintiffs' claims that the bylaws were statutorily invalid because they were beyond the board's authority under the Delaware General Corporation Law (DGCL). In rejecting this claim, the court looked to DGCL §109(b), which provides that the bylaws of a corporation "may contain any provision, not inconsistent with law of 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 the forum selection bylaws easily meet those requirements because they relate to the internal affairs of the corporation, and thus "plainly relate to "the business of the corporation[s]," the "conduct of [their] affairs," and regulate the "rights or powers of [their] stockholders." 

In rejecting an argument that the bylaws contained impermissible substantive mandates, the court noted that the bylaws were instead process-oriented, and analogized the provisions to advance notice bylaws, which similarly regulate how stockholders may exercise their rights as stockholders. The court noted that like advance notice bylaws, which "help organize what could otherwise be a chaotic stockholder meeting, the forum selection bylaws are designed to bring order to what the boards of Chevron and FedEx say they perceive to be a chaotic filing of duplicative and inefficient derivative and corporate suits against the directors and the corporations." The court also noted that the bylaws were subject to controls on their misuse. Consistent with other exercises of fiduciary authority, "the real-world application of a forum selection bylaw can be challenged as an inequitable breach of fiduciary duty" pursuant to Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del. 1971). Stockholder are also free to bring suit in another forum and respond to a defendant's motion to dismiss by arguing that application of the forum selection clause would be unreasonable, under The Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972). As an additional safeguard, stockholders can simply repeal forum selection bylaws by a majority vote. 

The court next considered plaintiffs' claims that the forum selection by-laws were contractually invalid, and therefore unenforceable, because they were unilaterally adopted by the board. The court noted that bylaws constitute part of a binding broader contract among the directors, officers and stockholders within the framework of the DGCL, that is flexible and subject to change in the manner permitted by the DGCL. It noted that the DGCL allows the corporation, through the certificate of incorporation, to grant the directors the power to adopt and amend the bylaws unilaterally, as they had done to adopt the forum selection bylaws. The court viewed the plaintiffs' arguments to the contrary as a misunderstanding of the relationship between the corporation and stockholders established under the DGCL, and an attempt to revive the outdated "vested rights" doctrine. 

The court noted that stockholders are not left unprotected under the statutory scheme DGCL §109(a) permits stockholders to repeal board-adopted bylaws. In addition, through annual board elections, stockholders can discipline boards who fail to comply with a stockholder vote repealing a forum selection bylaw. The court also observed that plaintiffs could file suit in other courts in the event that they believe that a forum selection bylaw "cannot be equitably enforced in a particular situation." (Slip op. at 38) Presumably mindful, however, of the problem that the forum selection bylaws are intended to address -- plaintiffs filing "wasteful duplicative litigation" in multiple fora (slip op. at 14) -- the court tempered its observation with a warning. It cautioned that a plaintiff who files suit in a forum other than the designated one faces

"the predicament of potentially breaching the bylaws and suffering if the court upholds the forum selection bylaws and dismisses her case, rendering the plaintiff liable for damages. But that predicament is the same as faced by any party that seeks to bring a case outside the forum designated in an applicable forum selection clause. And if a potential plaintiff does not have confidence in the strength of her argument under Bremen that the forum selection clause does not reasonably apply to the case she seeks to bring, she can always choose to file the case in the forum designated in the bylaw." (Slip op. at 38)

The decision represents an important validation of forum selection bylaws. The court also reminds boards that application of these bylaws in concrete situations may be subject to further challenge. In addition, governance activists remain free to remove forum selection bylaws through stockholder vote. 

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