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My article entitled: Directors Given More Authority to Limit Multi-Forum Litigation, appeared in the November/December issue of NACD Directorship, a publication of the National Association of Corporate Directors. This regular short column discusses the recent Court of Chancery decision in City of Providence v. First Citizens Bancshares, Inc., also highlighted on these pages, which addresses one of the leading issues in Delaware corporate litigation today: forum selection bylaws.

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N.B. This decision was later superseded by a change in the Delaware statute.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

Martinez v. E.I. duPont de Nemours & Co., Inc., Del. Supr., No. 669, 2012 (Feb. 20, 2014).

Why One Should Care About This Decision: This Delaware Supreme Court opinion clarifies the “overwhelming hardship” standard applicable to the law of forum non conveniens and the related Cryo-Maid factors, and affirms a trial court decision that is one of the less common instances in which a case was dismissed in Delaware on the basis of a forum non conveniens argument. The facts involve claims by plaintiffs from Argentina, as well as a DuPont subsidiary in that country and issues relating to the law of Argentina. (Hence the flag of Argentina.)

This decision is must reading for anyone who needs to know the latest iteration of Delaware law on the topic of forum non conveniens. This opinion is also noteworthy for its feature of a rare and spirited dissent in an opinion of the Delaware Supreme Court. The dissenting opinion in this case describes the majority as reversing decades of stare decisis on the law of forum non conveniens, and having an unstated purpose of protecting Delaware’s corporate franchise in reaching its conclusion.

The Harvard Law School Corporate Governance Forum published a revised version of our annual list of top ten corporate decisions from Delaware’s Supreme Court and Court of Chancery. Yes, we are thrilled. For those readers who think other cases should have made it on the top ten list, we welcome suggestions for additions or “honorable mentions”.  Of course there are more than 10 important cases that were decided in Delaware in 2013, so feel free to review the 200 or so Delaware corporate and commercial cases we highlighted on these pages last year and let us know if you would nominate different cases.

BE & K Engineering Company LLC v. Rocktenn CP, LLC, C.A. No 8837-VCL (Del. Ch. Jan 15, 2014)

This useful Court of Chancery opinion addresses the familiar issue of competing forum selection clauses in related agreements and how to decide which forum will prevail for purposes of determine the controlling forum for disputes.

The court’s reasoning in the context of a motion for summary judgment under Rule 56 relied in part on the doctrine of “judicial admissions” in connection with factual statements made to a court in Georgia in a parallel proceeding, including those made in pleadings, depositions, statements of counsel to the court and responses to discovery. Many of those admissions were inconsistent with positions taken by the defendant in Delaware. Such statements are binding upon the parties against whom they operate and serve to limit triable issues of fact.

This 54-page opinion explains in great detail the factual basis for its findings regarding which disputes between the parties are covered by which applicable agreement. The court also explained the standard to convert a preliminary injunction into a permanent anti-suit injunction.

We previously highlighted the Court of Chancery decision that upheld a forum selection provision in corporate bylaws that required certain suits involving the internal affairs of the corporation to be filed in Delaware. Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220-CS (Del. Ch. June 25, 2013).
Professor Larry Hamermesh writes about the voluntary dismissal yesterday of the appeal of that decision by the plaintiffs, and likely ramifications of that dismissal regarding this important issue.

UPDATE: The good professor provides an update on his commentary.

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.