A recent seminal decision of the Delaware Court of Chancery must be included in the lexicon of every lawyer who wants to understand the boundaries of Delaware law on forum-selection clauses in corporate documents. In the case of Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), the Court determined that a forum-selection clause in a certificate of incorporation was invalid and ineffective to the extent that it purported to “require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal Forum Provisions”).

Why this Case is Noteworthy: The court reasoned in its holding that: “The constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.  In this case, the Federal Forum Provisions attempt to accomplish that feat.  They are therefore ineffective and invalid.”

Overview of Key Points:

This opinion is destined to form part of the bedrock of foundational Delaware corporate decisions and could rightly be the subject of a lengthy law review article, but for purposes of this quick blog post, I will merely highlight a few of the more notable excerpts in bullet points.

  • A substantial basis for the court’s reasoning was a prior decision from the Court of Chancery which upheld the validity of corporate bylaws that required claims based on the internal affairs doctrine and related claims to be brought exclusively in the Court of Chancery. That decision by the current Chief Justice of Delaware, writing at the time as the Chancellor, was Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. June 25, 2018).
  • Although the Boilermakers case involved bylaws, the Sciabacucchi decision explained why that same reasoning applied to a certificate of incorporation which is governed by similar provisions in the Delaware General Corporation Law (DGCL). The court in Sciabacucchi explained that the reasoning in Boilermakers focused on the ability to enforce forum-selection clauses that related to the internal corporate matters of a Delaware corporation as opposed to external matters, such as claims arising under the Securities Act of 1933.
  • The Court buttressed its reasoning by referring to the codification of the Boilermakers decision, shortly after its publication, by means of the adoption of a new Section 115 of the DGCL. In connection with that new DGCL section, the Delaware General Assembly also passed new amendments to Sections 102 and 109 of the DGCL which prohibit fee-shifting provisions in the certificate of incorporation or bylaws particularly in connection with claims related to the internal affairs of a corporation as defined by DGCL Section 115.
  •  The Court’s reasoning was also supported by reference to what the court referred to as “first principles.” Those first principles included several basic tenets of corporate law such as the following: (i) Although the document filed with the state that gives rise to an artificial entity such as a corporation, and confers powers on it, is a contract, it is not an ordinary private contract among private actors; (ii) The certificate of incorporation is a multi-party contract that includes the State of Delaware. Unlike an ordinary contract, it also includes terms by reference that are imposed by the DGCL; (iii) Unlike an ordinary contract, a charter can only be amended to the extent that it complies with the DGCL; (iv) The DGCL specifies what provisions a charter may or may not include; and (v) Although the courts enforce both types of contracts, when enforcing relationships created by the corporate contract, the courts use an overlay of fiduciary duty. See pages 38 to 42 and footnotes 111 to 125.
  • A thorough analysis of the contours and policy behind the internal affairs doctrine is an important feature of this opinion. See, e.g., pages 41-46.

In sum, the court reasoned that the “constitutive documents of a Delaware corporation cannot bind the plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” The opinion provides extensive citations to substantial scholarship, case law and statutes.

Prof. Ann Lipton provides extensive insights in her blog post about this case with links to her articles on the topic. The good professor’s scholarship on this issue was also cited by the court in the above opinion.

Many cases have been highlighted on this blog regarding forum-selection clauses in private agreements. See, e.g., here and here. In some of the posts on these pages about cases involving forum-selection clauses, a graphic of the Roman Forum adds color as well as an etymological connection.

SUPPLEMENT: Professor Stephen Bainbridge, a prolific corporate law scholar, kindly links to this post on his blog.

A recent Delaware Court of Chancery decision recognized that a non-signatory to an agreement may enforce the provisions of a forum-selection clause under certain conditions. Although this holding is counterintuitive, there are other Delaware decisions which recognize that in some circumstances a non-signatory to an agreement may either enjoy the benefits of that agreement or may enforce certain terms of that agreement. See, e.g., selected cases addressing this topic on this blog over the last 13 years.

In the case of Lexington Services Ltd. v. U.S. Patent No. 8019807 Delegate, LLC, C.A. No. 2018-0137-TMR (Del. Ch. Oct. 26, 2018), two important principles of Delaware law regarding enforceability of forum-selection clauses were explained. This case involved multiple litigations in several jurisdictions, including a foreign country, regarding the disputed transfer of rights in a U.S. patent.  (The photo nearby of the Roman Forum seems appropriate to add color to an overview of a case involving a forum-selection clause.)

The first principle of well-established Delaware law recognized in this decision was the enforceability generally in Delaware of forum-selection clauses.  They are regarded as presumptively valid and should be specifically enforced absent a showing that the enforcement would be unreasonable and unjust for reasons such as fraud. See footnote 28.  Mere inconvenience or additional expense is not the test of unreasonableness. Id.

Next, this decision recognizes that Delaware law allows non-signatories to invoke forum-selection clause provisions in an agreement where they are “closely related to one of the signatories such that a non-party’s enforcement of the clause is foreseeable by virtue of the relationship between the signatory and the parties sought to be bound.” See footnote 43.  Citing well-settled case law, the court added that, for example, officers and directors of an entity subject to a forum-selection clause may invoke its benefits because they were closely involved in the creation of the entity and because they were being sued as a result of acts that directly implicated the negotiation of the agreement that lead to the entity’s creation. See footnote 44.  Likewise in this case, the defendant is an entity created to receive the patent, and the ownership of the patent and assignment to a different entity such as the defendant was foreseen in the applicable agreement.  The party being sued for his actions as a manager of the defendant entity was foreseeable and is closely related to the agreement.

Relying on prior cases, the court noted that it typically grants motions to dismiss under Court of Chancery Rule 12(b)(3) based upon a forum-selection clause where the parties use express language clearly indicating that the forum-selection clause excludes all other courts before which those parties could otherwise properly bring an action. See footnote 31.  In this case, the court imposed a stay due to the possibility that one or more issues would return to Delaware after certain aspects of the case were resolved in the original non-Delaware forum called for in the agreement.

A recent Delaware Court of Chancery decision entertained a request for expedited relief in Delaware despite a New York forum selection clause, in part due to the unavailability of the New York Courts that were not fully operational due to the coronavirus shutdown. Francis Pileggi and Chauna Abner co-authored an article with an overview of the ruling in Conduent Business Services v. Skyview Capital, C.A. No. 2020-0232-JTL, Transcript Ruling at **33-34 (Del. Ch. Mar. 30, 2020), for the Delaware Business Court Insider in its recent edition. The full article appears below.

“While New York Court System is ‘Unavailable’ Delaware Court of Chancery Permits Parties to Seek Relief in Delaware Despite a New York Forum Selection Clause”

by: Francis G.X. Pileggi and Chauna A. Abner

Amidst the COVID-19 pandemic, the Delaware Court of Chancery recently held that despite a forum selection clause designating New York as the appropriate venue to litigate disputes arising under an agreement, the parties could seek relief in the Court of Chancery because New York courts were unavailable.  Conduent Bus. Servs., LLC v. Skyview Capital, LLC, C.A. No. 2020-0232-JTL, Transcript Ruling, at **33-34 (Del. Ch. Mar. 30, 2020).

In Conduent Business Services, the complaint asserted an anticipatory breach of an asset purchase agreement and sought a declaratory judgment interpreting the terms of the agreement. Id. at 10. That agreement had a forum selection clause designating New York as the forum to litigate disputes arising from the contract. Id. at *19. Before the Court was plaintiff’s motion for expedited proceedings.

The defendant argued that plaintiff’s claim for relief was not colorable because venue was not appropriate. Id. at *20. The defendant contended that the applicable law under the contract is New York law, and the Court should not impose “an exception to what remains New York law for which the parties bargained.” Id. at *18. The defendant argued that “part of the corpus of New York law right now is how the New York courts are handling commercial cases. And that includes, as both sides have briefed, that right now they are not handling this.” Id. at **17-18. Finally, the defendant noted that the New York courts provided for emergency applications and the plaintiff did not make that application. Id. at **18-19.

In response, the plaintiff urged that it was not “trying to stomp on the venue clause” and that it was “just trying to make sure that [it] can protect [it]sel[f] from irreparable harm while the New York courts are closed.” Id. at *32.

In ruling on whether venue was appropriate, Vice Chancellor Laster stated: “frankly, I think the fact that the New York Court is unavailable is pretty dispositive.” Id. *10. He explained that there is no dispute that “under normal circumstances, the forum selection clause in New York would be binding.” Id. at *33. Thus, he phrased the issue as “whether the circumstances, where New York — for understandable reasons given, the current crisis that the city is facing — has decided not to accept expedited commercial matters constitutes a situation that allows the parties to resort to other tribunals that are potentially capable of granting emergent or expedited relief.” Id.

In holding that venue was proper in the Court of Chancery to resolve the motion to expedite, the Court reasoned that “case law holds that where a forum selection clause specifies a forum that is unavailable, parties can resort to a different forum, where appropriate jurisdiction exists” and that case law applies here. Id. The Court explained that this ruling was not intended to disrespect the courts of New York, but it acknowledges that “[t]he reality is that [New York courts] face an extraordinary situation right now, and so it’s understandable that they’d be in a position where they can’t handle disputes.” Id. at **33-34.

Given the uncertain times that the COVID-19 pandemic has resulted in, including the unknown long-term effects, if any, that it will have on courts throughout the country, the Court’s ruling that “people can go to other courts, if the jurisdictional bases are met, and seek relief in those courts” is of paramount importance. Id. at *34. Although this is a transcript ruling, in Delaware, parties may cite transcript rulings in briefs as authority.

The Delaware Supreme Court recently issued a highly anticipated decision in Salzberg v. Sciabacucchi, No. 346-2019 (Del. Mar. 18, 2020).  Many law professors and other commentators have written much learned commentary and published extensive scholarly analysis of the issues raised in the Court of Chancery’s decision, and have opined on what the Supreme Court was likely to decide in this case–and how the commentators thought the appeal should be decided.  Moreover, I expect that there will be a flood of additional learned commentary and analysis about this decision in the near future.  See, e.g., recent analysis of the Supreme Court’s opinion in this case by Professor Bainbridge for the Washington Legal Foundation.

Therefore, I will only limit this post to a few highlights that should be an incentive to read all 53-pages of the court’s opinion, to which a full-length law review article could easily be devoted. The photo nearby features one of the oldest venues, the Roman Forum.

The highlights of the Chancery decision in this case can be found on these pages.

Federal Forum Clause at Issue:

Delaware’s High Court referred to the Federal Forum Selection Provisions in the certificate of incorporation of the several companies whose charter provisions were jointly challenged in this case.  In essence, the clauses purported to require that the U.S. Federal District Court would be the sole and exclusive forum for the resolution of any complaint arising under the Securities Act of 1933 and that any person purchasing shares of stock in the companies with those provisions consented to the forum selection provision.

Highlights of Court’s Analysis:

The court began its analysis with the text of Section 102 of the DGCL which governs matters contained in the certificate of incorporation.  The court emphasized that Section 102(b)(1) authorizes two broad types of provisions:  (i) Any provision for the management of the business and for the conduct of the affairs of the corporation; and (ii) Any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.

The Delaware Supreme Court reviewed several key U.S. Supreme Court decisions and prior decisions of the Delaware Supreme Court, including the recent SCOTUS opinion in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061, which held that federal and state courts have concurrent jurisdiction over class actions based on the 1933 Securities Act and that such claims are not removable to federal court.

Highlights of Court’s Decision:

  • The court determined that DGCL Section 115 did no alter the scope of DGCL Section 102(b)(1). Section 115 was added as an amendment to the DGCL in 2015 and was intended to codify the Boilermakers Chancery decision to preclude a charter or bylaw provision from excluding Delaware as a forum for internal corporate claims.  Slip op. at 16-17.
  • The opinion employs general principles of statutory construction of widespread applicability and usefulness. See Slip op. at 18-24.
  • Readers will enjoy a “deep dive” into the internal affairs doctrine. The appellate analysis concluded that the Court of Chancery’s opinion defined “internal affairs” too narrowly. See Slip op. at 31-38.  See also footnote 124-126 and related text, referring to the internal affairs doctrine as a principle of “serious constitutional proportions; not just a conflict of laws matter.”
  • The decision features a thorough discussion of why Section 102(b)(1) is more expansive than Section 115–the latter focuses on internal corporate claims. See Slip op. at 38.
  • The court described the facial challenge of constitutionality in this matter and concluded that the provision at issue neither violated federal law nor federal policy. See Slip op. at 43.
  • Both Delaware case law and decisions of the U.S. Supreme Court were relied on for the well-established presumption of enforceability of forum selection clauses. See footnotes 136-139 and accompanying text.
  • Especially notable is footnote 169, which addressed a concern that many had during the appeal of this case: enforcing the federal forum provision in this matter would, perhaps by analogy, “open the flood gates” for arbitration clauses in charters. But the Supreme Court explained that at least in terms of forum selection clauses for claims involving Delaware corporate internal affairs, in part based on the synopsis of Section 115, such a concern was unfounded.

For readers who follow the law regarding forum selection clauses, a recent article by Professor Joseph Grundfest should be of interest. The good professor addresses the December 2018 Court of Chancery decision in Sciabacucchi v. Salzberg (highlighted on these pages), and the intersection of Delaware law and Federal law in the context of forum selection clauses and the internal affairs doctrine. The abstract follows to his article titled: The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

Abstract

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

In Sciabacucchi, Chancery applies “first principles” to invalidate FFPs primarily on grounds that charter provisions may only regulate internal affairs, and that Securities Act claims are always external. In so concluding, Sciabacucchi adopts a novel definition of internal affairs that is narrower than precedent, and asserts that plaintiffs have a federal right to bring state court Securities Act claims. It describes all Securities Act plaintiffs as purchasers who are not owed fiduciary duties at the time of purchase. The opinion constrains all actions of the Delaware legislature relating to the DGCL to comply with its novel definition of “internal affairs.”

Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect. It asserts that FFPs are “contrary to the federal regime” because they preclude state court litigation of Securities Act claims. But the U.S. Supreme Court in Rodriguez holds that there is no immutable right to litigate Securities Act claims in state court, and enforces an agreement that precludes state court Securities Act litigation. Sciabacucchi assumes that Securities Act plaintiffs are never existing stockholders to whom fiduciary duties are owed. But SEC filings and the pervasiveness of order splitting conclusively establish that purchasers are commonly existing holders protected by fiduciary duties. The opinion fears hypothetical extraterritorial application of the DGCL. To prevent this result, it invents a novel definition of “internal affairs” that it applies to constrain all of the Legislature’s past and future activity. But the opinion nowhere addresses the large corpus of U.S. and Delaware Supreme Court precedent that already precludes extraterritorial applications of the DGCL. It thus invents novel doctrine that conflicts with established precedent in an effort to solve a problem that is already solved. The opinion’s novel, divergent definition of “internal affairs” also conflicts with U.S. and Delaware Supreme Court precedent that the opinion nowhere considers.

Sciabacucchi is additionally problematic from a policy perspective. By using Delaware law to preclude a federal practice in federal court under a federal statute that is permissible under federal law, Sciabacucchi veers Delaware law sharply into the federal lane and creates unprecedented tension with the federal regime. Its narrow “internal affairs” definition invites sister states to regulate matters traditionally viewed as internal by Delaware, and advances a position inimical to Delaware’s interests. By propounding its divergent internal affairs constraint as a categorical restriction on the General Assembly’s actions, past and future, the opinion causes the judiciary to intrude into the legislature’s lane. And, data indicate that the opinion in Sciabacucchi caused a statistically and economically significant decline in the stock price of recent IPO issuers with FFPs in their organic documents.

In contrast, a straightforward textualist approach would apply the doctrine of consistent usage and use simple dictionary definitions to preclude any extension of the DGCL beyond its traditional bounds. Textualism avoids all of the concerns that inspire the invention of a divergent “internal affairs” definition. Textualism does not require counter-factual assumptions, conflict with U.S. or Delaware Supreme Court precedent, cause Delaware to constrain federal practice in a manner inconsistent with federal law, or advocate policy positions inimical to Delaware’s interest. Textualism also interprets the DGCL in a manner that profoundly constrains the ability of all Delaware corporations to adopt mandatory arbitration of Securities Act claims. Textualism validates FFPs in a manner that precludes the adverse, hypothetical, collateral consequences that animate Sciabacucchi’s fragile analysis, without generating Sciabacucchi’s challenging sequelae.

Keywords: Securities Act, forum selection, Delaware, jurisdiction, litigation, Section 11, charters, by-laws, internal affairs, federal forum provisions

JEL Classification: K22, K41

Suggested Citation

Grundfest, Joseph A., The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi (September 12, 2019). Rock Center for Corporate Governance at Stanford University Working Paper No. 241. Available at SSRN: https://ssrn.com/abstract=3448651 or http://dx.doi.org/10.2139/ssrn.3448651

 

Utilipath, LLC v. Baxter McLindon Hayes, Jr., C.A. No. 9922-VCP (Del. Ch., Apr. 14, 2015), is a short Chancery opinion notable for a few short reasons:5409380582_0b993a45d0_m

  • In light of a non-exclusive forum selection clause pursuant to which the parties agreed to litigate their dispute in Delaware, the court declined to apply the first-filed rule, known as the McWane doctrine, and denied a motion to dismiss. But the greater import of this case lies in its potential application on a larger stage.
  • One reasonable application of this Court of Chancery opinion is that: when parties have irrevocably consented to Delaware courts as a non-exclusive forum, even if a first-filed suit has been filed elsewhere involving similar parties and similar claims, the McWane doctrine may not require that the Delaware action be stayed in deference to the pending action in another forum.
  • This decision may have relevance to the pending legislation in Delaware described on these pages, that would require forum selection clauses that are included in bylaws to provide for the selection of Delaware courts in addition to any other state. In other words, when a forum selection clause is included in a bylaw to cover intra-corporate disputes, any state in the country can be selected as the forum–as long as Delaware is also included as one of those two fora. Stated another way, if the legislation is passed, when forum selection clauses are included in bylaws for stockholder disputes, Delaware must be either (i) the exclusive forum; or (ii) if another forum is selected, Delaware must be included as an additional forum.
  • Also notable is footnote 29 of the opinion which described a conversation that the author of this Chancery opinion had with the federal judge overseeing the related first-filed case in the U.S. District Court for the Eastern District of Pennsylvania, in which both jurists invited cooperation to the extent that there may be some overlap between the two cases.

Roman forum (an ancient forum selection) image above provided by Flikr’s Creative Commons by Benson Kua.

City of Providence v. First Citizens BancShares Inc., et al., No. 9795, 2014 WL 4409816 (Del. Ch. Sept. 8, 2014).

The Delaware Court of Chancery upheld the forum selection clause of the bylaws of a Delaware corporation that requires most shareholder suits against the company to be filed in North Carolina, where the company’s main office is located. This is a natural evolution of the prior Chancery decision in the Chevron decision, highlighted on these pages.

N.B. This decision was later superseded by a change in the Delaware statute.

I wrote an article about this case for a publication of the National Association of Corporate Directors, available at this hyperlink.

Frank Reynolds of Thomson Reuters provides an insightful overview of the case that includes a quote from yours truly and others.

Supplement: Many posts on this topic have appeared on these pages. Ted Mirvis writes on the Harvard Corporate Governance Blog about a recent federal decision that upheld a Delaware forum selection bylaw and which provides useful reasoning that may have broader application in similar cases.

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.

Carlyle Investment Management L.L.C. v. National Industries Group (Holding), C.A. No. 5527-CS (Del. Ch. Oct. 11, 2012).

Issue Presented: Whether a default judgment should be opened when the defendant Kuwaiti company agreed to a forum selection clause in Delaware and willfully ignored multiple opportunities to participate in the lawsuit.

Short Answer: No.

Brief Background: This case involves the Carlyle Group, which the Court described as one of the largest private equity firms in the world, and National Industries Group, which is described as a multi-national, multi-billion dollar conglomerate based in Kuwait. (Note Kuwaiti flag above.)  The parties entered into various agreements involving the investment by National in various closed-end investment funds of Carlyle which were unsuccessful.  The agreements between the parties included a forum selection clause requiring that any disputes to be litigated exclusively in the Delaware Court of Chancery.  Carlyle filed suit in the Court of Chancery to enjoin National from litigating a dispute regarding the agreements in Kuwait.  Despite multiple attempts to encourage National to participate, National continued to ignore the Delaware lawsuit and continued to litigate in Kuwait.  The Delaware Court of Chancery issued a default judgment which included an anti-suit injunction preventing National from litigating in Kuwait.  After many months of ignoring Delaware proceedings, and in connection with a motion by Carlyle to have National held in contempt for violation of the injunction, National filed a motion to vacate the default judgment under Court of Chancery Rule 60(b)(4) and Rule 60(b)(6).  The Court denied the motion to vacate the judgment.

Analysis

Although most businesses do not intentionally permit a default judgment to be entered against them, this case is still notable for its robust analysis of the enforceability of forum selection clauses and the policy underpinning the enforceability of those clauses.  This opinion is also helpful to explain why it is a gamble not worth taking, to allow a default judgment to be entered and thereafter to seek to have that judgment vacated under Rule 60.  The Court rejected arguments based on alleged lack of personal jurisdiction and based on an alleged lack of subject matter jurisdiction, as well as rejecting arguments about the non-enforceability of the forum selection clause.  Highlights from this relatively short 33-page opinion include the following:

●          A Rule 60(b) motion is “not an opportunity for a do-over or an appeal.”

●          At a Rule 60(b) hearing, a party does not have the privilege of contesting whether the injunction should have issued.  Rather, one must show that the judgment is void under Rule 60(b)(4) or that “extraordinary circumstances” warrant vacating it under Rule 60(b)(6).

●          Decisions from the Supreme Court of the United States and of Delaware’s Supreme Court were cited to support the general enforceability of forum selection clauses.  See, e.g., footnote 54.

●          A party may use a Rule 60(b)(4) motion only to attack the jurisdiction of the Court and not to attack the resolution of a case on the merits.

●          Delaware courts prevent a party from “making an end-run around an otherwise enforceable forum selection provision through an argument about the enforceability of other terms in the contract.”  See footnote 87.

●          The recent Delaware Supreme Court decision in Ingres Corp. v. CA, Inc. ruled that the Court of Chancery did not err in granting an anti-suit injunction in order to enforce a forum selection clause and prevent a party from litigating in another forum.  See footnote 99, and highlights of that case on these pages available hereSee also Malouf decision by the Court of Chancery, highlighted here.

●          Although Rule 60(b)(6) may be seen as a catch-all provision, and the Court may grant relief “for any other reason,” the standard is stringent and the moving party must show “extraordinary circumstances.”  A strategy by National in this case not to appear and to allow a default judgment may have been unwise, but it does not constitute extraordinary circumstances relieving it of the consequences of its own tactical choice.

A fair amount of legal scholarship has focused recently on providing for the selection of a litigation forum in the organizational documents of a corporation. Professor Joseph Grundfest has been a prime proponent of the idea and we wrote here about a speech he gave about it recently. Professor Steven Davidoff has written about it here. A decision of the Delaware Court of Chancery last year intimated the legitimacy of the concept in the case of In re Revlon, Inc. Shareholders Litigation, 990 A.2d 940, 960 (Del. Ch., 2010).

Just this week, however, one federal judge in California decided he was not willing to "join the party" on this concept. In Galaviz v. Berg, N.D. CA, No. C 10-3392-RS (Jan. 3, 2011), available here, the U.S. District Court for the Northern District of California applied federal law to reject the argument that directors can amend bylaws to require (without seeking shareholder approval), all derivative suits to be filed in a particular jurisdiction, such as the state of formation. The Court did not make its decision based on Delaware law. The Court also suggested that the analysis would be different if the forum selection clause, requiring derivative suits against the company to be filed exclusively in Delaware, were made a part of the corporate charter instead of the bylaws only. Reportedly, this is the first reported decision to address the issue directly. Jim Hamilton has a helpful post about this case here.

Perhaps this ruling is an insight for those who might favor the federalization of corporate law. This decision was based on federal law and was made by one of the hundreds of federal judges sitting among dozens of U.S. District Courts around the country. Conceivably, the future could present us with hundreds of other decisions on this corporate issue that we may need to sort out in the coming years.

SUPPLEMENT: Frank Reynolds writes for Westlaw’s Securities Litigation Newsletter here with his insights on this decision. Prof.Bainbridge links to this post here. Max Kennerly comments on the topic in general here.