Search results for: 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.

National Industries Group (Holding) v. Carlyle  Investment Management LLC, Del. Supr., No. 596, 2012 (May 29, 2013).

Issues Addressed: Enforceability of a forum selection clause, and the prerequisites to vacate a judgment under Court of Chancery Rule 60(b)(6).

Brief Background

This case involved a dispute between two sophisticated entities. One was based in Kuwait and one in the U.S. The parties’ forum selection clause required disputes to be litigated exclusively in the courts of Delaware. When the Kuwaiti company sued the U.S. company, Carlyle Investment Management, in Kuwait, Carlyle sued in the Delaware Court of Chancery seeking an injunction to bar the suit in Kuwait. The strange part of this case is that the Kuwaiti company ignored the Delaware proceedings, based on its position that there was no jurisdiction over it, and allowed a default judgment to be entered against it. Then, a year later, the Kuwaiti company tried to have the judgment against it vacated. After it sought to vacate the judgment, it admitted that it was aware of the proceedings in Delaware. Bad strategy.

The Supreme Court upheld the default judgment.  The Court of Chancery opinion was highlighted on these pages at this link.

Key Takeaway: Forum selection clauses in an agreement between sophisticated parties will be upheld in Delaware, as a general principle. Although, there still must be equitable jurisdiction for the Court of Chancery to hear a case, because the parties cannot confer that by contract. Nonetheless, Delaware’s high court found that there was equitable jurisdiction in this matter.

As a practice tip, in order to avoid the issue of equitable jurisdiction, a forum selection clause should allow for any court in Delaware to be the forum for disputes, as compared to naming a particular court. There are many other nuances about a forum selection clause issue in this decision, as well as an exploration of the deep roots on which the court’s reasoning is based, including U.S. Supreme Court opinions. This decision is must reading for those who need to know the latest Delaware law on forum selection clauses.

As an added bonus, Delaware’s high court discusses the requirements for vacating a default judgment under Court of Chancery Rule 60(b)(6). Hint: Not a good idea to ignore the proceedings and then wait a year before seeking to vacate.

Supplement: Frank Reynolds of Thomson Reuters provides helpful commentary about the case at this link.

In Metropolitan Life Ins. Co v. Tremont Group Holdings, et al. C.A. No. 7092-VCP (Del. Ch. Dec. 20, 2012). 

Plaintiff insurance carriers, who were limited partners in a Delaware limited partnership that invested in another fund which invested substantially all of its investment capital in Bernie Madoff’s investment firm, brought an action alleging a number of claims including, among others, fraud, breach of contract, breach of fiduciary duty, negligent misrepresentation, unjust enrichment, civil conspiracy and aiding and abetting. 

Issue: The defendants moved to dismiss the complaint arguing that: (i) the Court lacked personal jurisdiction over the individual defendants; (ii) the exculpation clause of the Limited Partnership Agreement (“LPA”) barred many of the claims asserted by the plaintiffs; (iii) the derivative claims are barred by res judicata and release because of the claims that were settled in the consolidated action in New York and the failure to make demand; and (iv) for the remaining claims the plaintiffs’ failure to state a claim.

Answer:  The Court: (i) found that it lacked personal jurisdiction over the individual defendants; (ii) found certain of the counts were solely derivative in nature, and therefore were dismissed based on res judicata and release; (iii) dismissed the plaintiffs‘ claim for breach of the implied covenant of good faith and fair dealing because the complaint failed to plead a specific, implied contractual obligation; (iv) dismissed plaintiffs‘ negligent misrepresentation claim because it is either barred by the exculpation provision of the limited partnership agreement or duplicative of the fraud and intentional misrepresentation claims; and (v) granted in part the motion to dismiss plaintiffs‘ claims for aiding and abetting and civil conspiracy.

New York Madoff-Related Litigation Against Tremont Settled

After Madoff’s arrest, numerous individual, class, and derivative actions were filed against Madoff’s companies and in particular, Tremont Group Holdings (“TGH”) and others to recover losses as a result of Madoff’s Ponzi scheme. Those actions were consolidated in the United States District Court for the Southern District of New York as In re Tremont Group Holdings, Inc., Securities Litigation.  That case settled, among other things, all Madoff-related derivative and direct claims. The settlement also gave the limited partners in the settling entities an opt-out right, which the plaintiffs in the Court of Chancery action exercised.  After opting out of the settlement, the plaintiffs filed suit in the Court of Chancery on December 7, 2011. 

Consent to Jurisdiction

The first issue the Court addressed was whether it had personal jurisdiction over the individual defendants because the LPA contained a forum selection clause whereby the parties expressly consented to Delaware as the exclusive jurisdiction and venue of the Court of Chancery.  In analyzing this issue, the Court noted that a party may expressly consent to jurisdiction by contract, and if the party properly consents to personal jurisdiction by contract, a minimum contacts’ analysis is not required.  However, in this action, the only parties to the LPA were the Fund’s general partner and its limited partners, including the plaintiff carriers but not the individual defendants.

The Court described in detail the statutory basis for specific and general jurisdiction and the provisions of the Delaware long-arm statute, 10 Del. C. § 3104(c).  The Court ultimately concluded that because the plaintiffs had not alleged contacts that would “meet the minimum contacts standard, such as residing, conducting business, or owning real property or other assets in Delaware,” and that they had failed to allege facts that the individual defendants “purposefully directed their activities at the forum and the litigation resulted from injuries that arose out of or related to those activities,” the Court had no jurisdiction over the individual defendants.

Exculpation Provision

Defendants next argued that the Exculpation Provision of the LPA barred the plaintiffs’ claims for breach of contract, breach of fiduciary duty, negligent misrepresentation and unjust enrichment.  The plaintiffs argued that they had satisfied their burden in the complaint by six allegations of gross negligence and willful and reckless conduct. The Court concluded that the complaint adequately pled facts in support of a claim against Tremont that conceivably could satisfy one or more of the grossly negligent, willful, or reckless requirements set forth in the Exculpation Provision.  Thus, the Court denied Tremont’s motion to dismiss those counts.

Derivative Claims

Tremont next argued that claims should be dismissed because: (i) the doctrines of res judicata and release by operation of the final judgment in the New York action barred the plaintiffs’ derivative claims; (ii) although the plaintiffs label the breach of fiduciary duty and unjust enrichment claims as direct claims, they are also derivative claims and should be barred; and (iii) the plaintiffs have failed to satisfy the demand requirements applicable to those claims.

 Tremont also argued that the claims for breach of fiduciary duty and unjust enrichment arise out of the diminution in the value of the funds resulting from Madoff’s theft of the funds’ assets and from the funds’ payment of allegedly unwarranted fees to Tremont. Because these injuries were suffered by the funds and only indirectly by the plaintiffs, Tremont argued that the claims were derivative, and not direct.  The plaintiffs argued that the settlement rendered their claims direct rather than derivative.  Specifically, they argue that the first prong of the Tooley test—i.e., who suffered the alleged harm—was satisfied because the plaintiffs received no benefit from the settlement because they opted out.  The plaintiffs also argued that they satisfied the second prong of the Tooley test—i.e., who would receive the benefit of any recovery or other remedy—because the claimed damages would benefit the plaintiffs alone.

The Court found that the claims were derivative in nature because Tremont’s misconduct damaged the plaintiffs “only to the extent of their proportionate interest in TOF III independent of the funds.”  However, the Court went on to note that those derivative claims were released by the settlement of the New York litigation therefore, the Court dismissed those claims as barred  by principles of res judicata and release by operation of the final judgment in New York.

Failure to State a Claim

Tremont also moved to dismiss the remaining claims—breach of contract, breach of covenant of good faith and fair dealing, fraud, intentional misrepresentation, negligent misrepresentation, and civil conspiracy/aiding and abetting.  For the contract claim, the Court found that the complaint alleged facts that could conceivably support a reasonable inference that Tremont breached its obligations under the LPA, so the Court denied the motion to dismiss the breach of contract claim. With respect to the breach of an implied covenant, the Court found that the complaint failed to plead a specific implied contractual obligation so the Court granted the motion to dismiss this count.  With respect to fraud or intentional misrepresentation, the Court found that the plaintiffs had adequately pled facts to support both of those claims therefore the motion to dismiss was denied.  However, with respect to the claim for negligent misrepresentation, the Court found that claim to be either barred by the Exculpation Provision or duplicative of the fraud and intentional misrepresentation claim, so it was dismissed.

Finally, the Court found that the plaintiffs had alleged facts sufficient to support their claim for aiding and abetting, thus denying the motion to dismiss, however, the Court dismissed the claim for civil conspiracy.  The complaint alleged that one of the defendants, Tremont Partners, Inc. (“TPI”) was a wholly-owned subsidiary of TGH which, the Court noted, could provide a basis for precluding the plaintiffs’ claim for civil conspiracy under In re Transamerica Airlines, Inc., 2006 WL 587846 (Del. Ch. Feb. 28, 2006) (holding that a corporation generally cannot be deemed to have conspired with its wholly owned subsidiary) but “only if TPI was acting for reasons outside the normal course of its business.”  However, the Court found that the complaint failed to contain any such allegations, so this claim was dismissed.

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 here.  See 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.

In ASDC Holdings, LLC, et al. v. The Richard J. Malouf 2008 All Smiles Grantor Retained Annuity Trust, et al., C.A. No. 6562-VCP (Del. Ch. Sept. 14, 2011), read opinion here, the Court of Chancery held that where a forum selection clause is enforceable in a Delaware court, the Court will enforce it even if Delaware, based on McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., would otherwise default to the first-filed forum.  Accordingly, the Court enforced the forum selection clause and enjoined the first-filed action.

This summary was prepared by Kevin F. Brady and Ryan P. Newell of Connolly Bove Lodge & Hutz LLP.

Background

Plaintiffs included a dental practice (“All Smiles”), a private equity firm and its management firm (“Valor”), a limited liability company formed by Valor to invest in All Smiles (“ASDC”), the CEO and director of the private equity firm, and some directors and officers of the dental group and private equity firm.  Defendants are Dr. Richard J. Malouf, the founder and controlling shareholder of the dental practice, as well as a trust Malouf established and controls (collectively, “Defendants” or “Malouf”).

In a 2010 contract with Malouf, ASDC agreed to invest $65 million in All Smiles, receiving in return 71% of its stock.  At the same time, some of the Plaintiffs entered into various side agreements (the “Agreements”) with the Defendants.  In the Agreements, they agreed to the exclusive jurisdiction in Delaware for “any claim or cause of action arising under or relating to t[he] Agreement[s] . . . .”  In February 2011, Malouf and three other parties filed suit in Texas against a number of the Plaintiffs.  The Plaintiffs who were sued in the Texas action moved to dismiss on the grounds that the forum selection clause in the Agreements conferred jurisdiction only in Delaware.

The Plaintiffs then brought suit in Delaware in June 2011.  Plaintiffs sought specific performance under the Agreements, a declaratory judgment that Defendants must litigate exclusively in Delaware, and a preliminary injunction to enjoin the Texas action.  Defendants moved to dismiss, challenging the Court’s subject matter jurisdiction on the basis that Plaintiffs had an adequate remedy at law as they could have raised the forum selection clause as an affirmative defense in Texas.  They also claim that Plaintiffs cannot satisfy the standard for a preliminary injunction.  Specifically, Defendants contend Plaintiffs have not shown (1) a reasonable probability of success and (2) that they would suffer imminent and irreparable harm if the Texas court determined whether the forum selection clause applied.

Broad vs. Narrow Forum Selection Clauses

In Malouf’s motion to dismiss, he relied upon El Paso Natural Gas Co. v. TransAmerican Natural Gas Corp. where the Delaware Supreme Court affirmed the holding that the Court of Chancery lacked subject matter jurisdiction to enjoin a proceeding in Texas even though the parties had agreed to exclusive jurisdiction in the Court of Chancery.

The Court pointed to two key distinctions between El Paso and this matter.  First, in El Paso the parties contracted to confer subject matter jurisdiction specifically on the Court of Chancery for both legal and equitable claims between the parties.  Because the underlying claims in Texas were legal in nature, the Court of Chancery could not exercise jurisdiction.  Contrary to El Paso, in this case the forum selection clause was broader than the one in the El Paso case and enforceable as to legal and equitable claims because the parties submitted “‘to the exclusive jurisdiction of any state court within New Castle County, Delaware or, if it can obtain jurisdiction, the United States District Court for the District of Delaware sitting in Wilmington, Delaware . . . with respect to any claim or cause of action arising under or relating to th[e] Agreement[s] . . . .’”

Second, the forum selection clause in El Paso was narrower than the one in this case.  The El Paso clause was limited to “ALL ACTIONS TO ENFORCE OR SEEK DAMAGES, SPECIFIC PERFORMANCE . . . FOR THE ALLEGED BREACH OF THIS AGREEMENT . . . .” Such “narrow forum selection clauses only cover claims dealing directly with rights embodied in the relevant contract.”   Because it was so narrow, even if there was subject matter jurisdiction, it was unlikely that the clause could have applied to the claims.  The clause in this case, rather, concerned “any claim or cause of action arising under or relating to th[e] Agreement[s].”  Such broad clauses “apply not only to claims dealing directly with the terms of the contract itself, but also to ‘any issues that touch on contract rights or contract performance.’”  The Court concluded that where such a clause is enforceable the parties’ contract should be honored even if the McWane first-filed analysis would suggest otherwise.

Texas Action Should Be Enjoined

The Court found that Plaintiffs satisfied the three elements for a preliminary injunction.  On the first element, the Court held that even though some of the Delaware plaintiffs in Texas were not signatories to the Agreements “‘officers and directors . . . have standing to invoke [a] Forum Selection Provision as parties closely related to one of the signatories such that the non-party’s enforcement of the clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound.’” It also held that there is a colorable argument that the breach of fiduciary, breach of contract, and unjust enrichment claims arise out of the Agreements, given their broad scope.

On the second element, the Court held that “the procession of a claim in an unwarranted forum poses a threat of irreparable harm warranting a preliminary injunction.” Accordingly, if Plaintiffs are forced to litigate in Texas, they would be deprived of what they bargained for in the forum selection clause.  As to the final element, because the parties agreed to litigate in Delaware, the balance of equities weighed in favor of Plaintiffs and what they bargained for, as opposed to Malouf and his choice of Texas as a forum.

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.

PPF Safeguard LLC v. BCR Safeguard Holding LLC, C.A. No. 4712-VCS (Del. Ch. July 29, 2010), read opinion here.

Brief Overview

Although no new law was announced in this case, the analysis concludes that all the claims are either subject to an arbitration clause or are subject to a mandatory forum selection clause requiring suit to be filed in Louisiana. In addition to the foregoing two provisions, the agreements between the parties had a third permissive (not exclusive) forum clause for Delaware but that was not controlling. The Court described the three overlapping different fora provisions as an “inefficient and convoluted exercise of bargaining liberty . . . .”

Key "Take-Away" Legal Principles

Although the Court acknowledged that because of the overlapping forum selection clauses it was not entirely clear whether certain claims were covered by certain of the forum selection clauses, nonetheless the Court reasoned that dismissal was still required in order to avoid violating the applicable selection clauses neither of which required a Delaware forum. See footnote 59 for cases cited to support the deference that Delaware Courts give generally to forum selection clauses.

 

Baker v. Impact Holding, Inc., C.A. No. 4960-VCP (Del. Ch. May 13, 2010), read opinion here.  

The Court of Chancery in this opinion addresses issues related to those discussed in recent articles and seminars about the exodus of cases involving Delaware corporate law to courts outside of Delaware in which Delaware corporate issues are decided by those foreign courts. See, e.g., here, here and here. 

Professor Ribstein provides scholarly analysis of the case here.

Issues  Involved

The corporate issue in this case involved DGCL Section 225 and whether the director was entitled to a seat on the board of directors of the defendant Delaware corporation. However, before that substantive issue could be addressed, the Court needed to decide a motion to dismiss based on a forum selection clause in an agreement that required all suits to be filed in Dallas, Texas.

Holding

The Court of Chancery upheld the exclusive forum selection clause and dismissed the case without prejudice to it being filed in Dallas, Texas–even though Delaware corporate law clearly applied under the internal affairs doctrine.

Arguments of the Parties

Baker filed this action pursuant to Section 225 of the DGCL to seek a declaratory judgment that his removal from the board was a violation of a right embodied in a Stockholders Agreement (SHA) with the defendant  Delaware corporation and the stockholder that appointed Baker. However, Baker himself was not a signatory to the SHA. He was appointed to the board by a stockholder who was a signatory.

A motion to dismiss was filed based on an exclusive forum selection clause that required all suits related to the SHA to be filed in Dallas, Texas. Because Baker relied on the SHA as the basis for his right to be appointed to the board, the Court reasoned that the suit was clearly related to the SHA.

Baker opposed the motion on the basis that  it was against the public policy of Delaware to enforce an agreement that allowed a court outside of Delaware to adjudicate a matter of Delaware corporate law governed by the internal affairs doctrine and DGCL Section 225. In addition, Baker relied on the fact that he was not a signatory to the agreement.

LLC Act  v. DGCL

Although a Delaware corporation was involved in this case, Baker relied on Section 18-109(d) of the Delaware LLC Act which prohibits a "member who is not a manager" from waiving its right to maintain a legal action or proceeding in the courts of the State of Delaware "with respect to matters relating to the organization or internal affairs of a limited liability company."

The problem with Baker’s argument, the Court explained, was three-fold: First, the DGCL applied in this case and not the LLC Act. Second, even if the LLC Act applied by analogy, only members were prohibited by Section 18-109(d) from waiving the right to litigate in Delaware. However, Baker was a director and by analogy would be in "the same shoes" as a manager of an LLC for purposes of applying this statute by analogy–but the LLC statute does not prohibit managers from waiving their rights to litigate in Delaware any of their disputes related to the LLC. Third, when the Delaware Legislature amended the LLC Act, it did not enact a similar prohibition in the corporate context regarding such waiver. The Court inferred from this that the Legislature did not intend to make an analogous provision applicable to corporations.

Reasoning

A.   Public Policy

The Court ruled that "Delaware does not have an overarching public policy that prevents the stockholders of Delaware corporations from agreeing to exclusive foreign jurisdiction of any matter involving the internal affairs of such entities." Slip op. at 5. See also n. 8 (citing cases where Delaware courts routinely uphold forum selection clauses, even if they specify foreign jurisdictions.)

B.  Non-Signatory Bound by Forum Selection Clause

As for the argument that Baker was not bound by the agreement because he was not a signatory, the Court reasoned that he was estopped from refusing to comply with the forum selection clause provision. Prior Delaware cases have applied a three-step analysis for determining the applicability of a forum selection clause to a non-signatory. See Slip op. at 8 (citing Weygandt v. Weco, LLC, 2009 WL 1351808, at * 4 (Del. Ch. May 14, 2009)(other citations omitted)). The first factor is whether the forum selection clause is valid. Second, the Court inquires as to whether the non-signatories are third-party beneficiaries or closely related parties? Third,  the question is asked: does the claim arise from their standing related to the agreement. All three factors applied to support the conclusion that Baker should be bound by the agreement. This holding is sound notwithstanding the truism, supported by recent Delaware law, that an individual is not personally liable on a contract that he only signs in his representative capacity. See n. 14.

Thus, the motion to dismiss pursuant to Court of Chancery Rule 12(b)(3) for improper venue was granted, without prejudice.

Ashall Homes Limited v. ROK Entertainment Group, Inc., C.A. No. 4643-VCS (Del. Ch. Apr. 23, 2010), read opinion here.

 This Court of Chancery decision upheld a forum selection clause that required the dispute between the parties to be litigated in the Courts of the United Kingdom and to be governed by the laws of England. Notably, the Court observed that the internal affairs doctrine did not require the application of Delaware corporate law to this dispute. This instant decision spends a large proportion of its 25-pages addressing the public policy reasons why forum selection clauses are upheld including the Court’s aversion to “issue splitting”.
 

Compare a more recent Court of Chancery opinion that upheld a forum selection clause requiring the case to be litigated in Texas even though the internal affairs doctrine in that separate case did require the application of Delaware corporate law. See Baker opinion from Chancery here.