This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Court of Chancery recently barred a Scientific Games Corp. investor from suing ex-Chairman Ron Perelman and his “hand-picked” directors in Delaware because the plaintiff couldn’t prove it was tricked into approving a mandatory forum selection bylaw requiring all corporate governance charges to be tried in Nevada where officers and directors would allegedly be shielded, in Sylebra Capital Partners Master Fund Ltd. et al. v. Perelman, et al., No. 2019-0843-JRS opinion issued (Del. Ch. Oct. 9, 2020).

In his Oct. 9 opinion, Vice Chancellor Joseph Slights dismissed shareholder Sylebra Capital Partners’ breach of duty and declaratory judgment counts on venue grounds.  He  said although Perelman’s alleged scheme to force Sylebra to sell out at an unfairly low price began when SGC was a Delaware-chartered company and invokes Delaware General Corporation Law, Sylebra knew what might happen when the Nevada-based gaming company reincorporated in Nevada in early 2018 and revised its bylaws.

Moreover, the plaintiff had a year to make its charges as counterclaims in a first-filed suit by SGC against Sylebra in the Nevada state court designated in the mandatory forum bylaw — an action that related to the internal affairs claims Sylebra made instead in Delaware, the vice chancellor said.

Not like Delaware forum selection clauses

The suit stands out against the backdrop of the Delaware litigation that has stemmed from the First State’s recent enactment of Delaware General Corporation Law § 115, which allows Delaware corporations to specify through their charter or bylaws, that all litigation involving the company’s internal affairs must be brought exclusively in the Delaware courts.

Section 115 allowed companies to cope with the problem of multi-forum litigation over mergers or other disputed deals by forcing all plaintiffs to sue in one forum — Delaware.  But in this case, the SGC board specified the Nevada state court as the mandatory forum.

The wrong forum

The vice chancellor said Chancery is the wrong forum here because:

(1) plaintiffs seek to invalidate provisions of Delaware constitutive documents that no longer exist,

(2) plaintiffs were stockholders at the time Scientific Games left Delaware for Nevada, yet at no time before now have they challenged that move or sought to pursue their supposed Delaware claims;

(3) plaintiffs’ claims require the Court to decide whether provisions in the constitutive documents of a Nevada corporation are enforceable;

(4) the company’s mandatory Nevada forum selection bylaw is broad and unambiguously covers plaintiffs’ supposed Delaware claims; and

(5) there is a first-filed action pending in Nevada before a court that is fully capable of adjudicating all claims between these parties.

The alleged Perelman scheme

Sylebra charges that Ronald Perelman, who owned 39 percent of SGC through his holding company, McAndrews & Forbes, wanted to force Sylebra out and used the tight gaming industry regulations that governed SGC and its subsidiary, Bally Gaming, Inc., to subject Sylebra to a series of trumped-up investigations into its “suitability” as a gaming investor.

Meanwhile, Perelman misused his influence over the SGC directors  to force through by-law changes that allowed the company to freeze and then forcibly redeem investments by any shareholder found “unsuitable” due to the taint of suspicion that such investigations might incur, the suit says.

At the same time, Perelman tricked the shareholders into supporting a 2018 charter change to Nevada on the pretext that SGC would then be less vulnerable to suits by activist investors hoping to force short-term profit changes on the board, Sylebra claims.  But in fact, the move was made to insulate the directors and officers from liability for helping Perelman elbow Sylebra out and gain power the suit says.

Wrong venue

Addressing defendants’ motion to dismiss under both Chancery Rule 12(b)(3) for improper venue and Chancery Rule 12(b)(6) for failure to state viable claims , Vice Chancellor Slights first denied Sylebra’s belated motion to amend the claims, finding that plaintiff in effect, put the cart before the horse by concentrating on opposing dismissal under 12(b)(6) before seeking leave to amend.

He then found that:

Any request to have the Chancery Court declare SGC’s Delaware charter or bylaw provisions invalid “faces an immediate and insoluble problem”—they ceased to exist after reincorporation.

Any request to have Chancery invalidate the Nevada charter or bylaw provisions would have this Court do “what this Court strongly prefers courts in other jurisdictions not do with respect to Delaware corporations—decide matters that impact the internal affairs of a corporation chartered in another state.”

It is indisputable that the Nevada Charter and Nevada Bylaw provisions implicated by Sylebra’s claims fall within the purview of the internal affairs doctrine.

No escape from forum clause

The vice chancellor ruled that contrary to Sylebra’s assertions:

It did consent to the forum selection bylaw because it knew SGC required securities in the company to “be held subject to the suitability standards” so it might be barred from selling its stock and  besides “the link Sylebra attempts to draw between the ability of a stockholder to sell its shares and that stockholder’s consent to the corporation’s bylaws finds no support in our law.”

The forum selection bylaw Is not unreasonable or unjust because plaintiff’s allegation that Nevada state courts are accustomed to “only holding fiduciaries accountable for ‘intentional misconduct, fraud or a knowing violation of the law” is an unsupported characterization of the Nevada courts.

The forum bylaw was  not procured by fraud because Sylebra failed to allege: “the time, place, and contents of the false representation, the identity of the person(s) making the representation, and what he intended to obtain thereby.”  Plaintiff never opposed the adoption of the bylaw when it was clearly presented for adoption and never provided specifics to support its claim that Nevada law would insulate the directors from fiduciary duty charges.