Chancery Upholds Bylaws with Forum Selection Clause

Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220-CS (Del. Ch. June 25, 2013). Court of Chancery Building

Issue Addressed: Enforceability of bylaws adopted by the Board of Directors providing that litigation relating to the internal affairs of the corporation must be filed only in Delaware.

Short Answer:  Enforceability upheld.  See, e.g., 8 Del. C. § 109(a).

Preface

This momentous decision will undoubtedly result in an increase in the number of companies that amend their bylaws to require lawsuits regarding internal affairs of Delaware companies to be brought only in Delaware courts.  The number of companies that currently have similar bylaws is likely to rise sharply. This opinion noted that over 250 publicly held companies currently have similar provisions. (The sketch above is a likeness of the Court of Chancery Courthouse in Georgetown, Delaware, from the Court’s website.)

Background

This case challenged the bylaws of Chevron and was consolidated with a suit challenging similar bylaws of FedEx Corporation.  Both cases were filed at about the same time as complaints against ten other companies with similar bylaws.  The opinion was decided on a motion for judgment on the pleadings relating to the statutory and contractual validity of the bylaws amended by the Board of Directors to require suits regarding the internal affairs of the Delaware corporations involved to be brought in Delaware, when all indispensable parties are within the jurisdiction of the court.

Analysis

The court’s analysis can be divided primarily into two parts.  The first part was the power of the Board of Directors under the Delaware General Corporation Law Section 109 to amend the bylaws, as part of the contract between the stockholders and the corporation.  The second category of analysis was the enforceability generally of forum selection clauses in contracts.

The following syllogism summarizes the reasoning of the court.  First, the bylaws were properly amended pursuant to statutory authority to include a forum selection clause.  Second, forum selection clauses are enforceable generally.  Therefore, the bylaw amendment providing for a forum selection clause is enforceable.

In its ruling, the Court of Chancery relies heavily on decisions of the United States Supreme Court recognizing the internal affairs doctrine, as well as the general validity of forum selection clauses in contracts.  In addition, the court relies on the scholarship of Professor Joseph Grundfest who is one of the leading scholars advocating forum selection clauses as part of the organic documents of a corporation.

The court engaged in an extensive discussion of DGCL Section 109 to support its reasoning that the board was within its authority to amend the bylaws in the manner that it did, and that stockholders buying stock in a Delaware corporation are on notice that the board has the authority to amend the bylaws in such a manner.

The stated purpose of the forum selection bylaws was to avoid the chaos and the expense of duplicative and multiple derivative and similar corporate lawsuits against directors filed in multiple fora around the country, often on the same day.

The Court of Chancery explained that:

“… an unbroken line of decisions dating back several generations, [by] our Supreme Court has made clear that the bylaws constitute a binding part of the contract between the Delaware corporation and its stockholders.  Stockholders are on notice that, as to those subjects that are the subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt the bylaws addressing those subjects.”  See footnotes 97 and 98.

The court also emphasized the limited nature of the forum selection clause in this matter to the extent that it does not foreclose a plaintiff from exercising any statutory right of action created by the federal government.  Rather, the forum selection bylaws focus on claims covered by the internal affairs doctrine which applies the law of the state of incorporation.

The court concluded that its ruling was based on merely a facial challenge, and did not address how it would rule if a concrete factual situation developed in which a plaintiff believed that the board was operating in an unreasonable or unlawful manner, and whether the plaintiff could challenge the use of the board’s power under the bylaws as being inconsistent with its fiduciary duties in some future dispute.  See footnote 146.

It is also noteworthy to clarify and emphasize what this decision did not address and did not opine on.  For example, this opinion did not rule on the validity of a forum selection clause in a certificate of incorporation.  Nor does the decision specifically address the fiduciary obligations of boards in adopting such provisions.  It also remains to be seen whether courts outside of Delaware addressing the same issue will follow suit.

Postscript: In the short time since its publication, predictably, this opinion has already generated substantial commentary. For example, Peg Brickley wrote an article for The Wall Street Journal in which she quoted yours truly. Professor Stephen Bainbridge provides scholarly insights at this link.