Search "forum selection

The Third Circuit, applying Delaware law in Carlyle Investment Management LLC v. Moonmouth Company SA, No. 13-3526 (3rd Cir. Feb. 25, 2015), recently bound a non-signatory to a forum selection clause found in a subscription agreement.  The court applied a three part test to determine whether the non-signatory should be bound by the forum selection clause: (1) is the forum selection clause valid, (2) is the non-signatory a third-party beneficiary or closely related to the agreement, and (3) does the claim at hand arise from the non-signatory’s status related to the agreement?  This opinion provides a contrast to a recent decision of the Court of Chancery, as discussed here.

Delaware_State_CapitolLegislation is being proposed to ask the Delaware Legislature to limit the ability of corporations to adopt fee-shifting provisions in their charter and bylaws, but to provide additional support for adopting forum selection clauses in those same corporate documents. The proposed legislation is available at this link. A memo describing the policy analysis on which the proposal is based has also been provided by a cross section of Delaware lawyers representing the major constituencies involved, such as shareholders, directors and corporations. Also available is a FAQ with answers to the most likely questions about the proposed bill. (Slight modifications to the proposed legislation were made after this post was published, and I would expect other amendments to be made prior to its final passage.)

Most readers are aware that the Corporation Law Section of the Delaware State Bar Association annually proposes amendments to the Delaware General Corporation Law for the Delaware Legislature to pass, in order to refine the DGCL on a regular basis and to make sure it adapts to changes in the marketplace. My first hand experience is that those “routine” amendments are often passed by the Delaware Legislature “routinely”. This is so because the process works well and has a long track record of benefitting the state. If the proposals for amendments to the DGCL ever backfired on the legislators–as a political matter, not necessarily a legal matter, then the next proposed bill to amend the DGCL would not pass as easily the following year. That risk, however, has not come to pass for many decades, if ever.

The proposed legislation provides that if a charter or bylaw includes a forum selection clause for stockholder disputes, Delaware must be one forum that is selected. If another state is selected as a forum, Delaware must be included as an additional optional forum. Thus, a state other than Delaware cannot be selected as the exclusive forum. This would be a legislative reversal of the First Citizens decision recently decided in Chancery. The legislation does not directly address the validity of forum selection clauses that choose states other than Delaware, but the proposed DGCL amendment does not ban a permissive forum outside of Delaware as long as Delaware is also included as a permissive forum.

The proposed legislation about fee-shifting clauses and forum selection provisions in corporate charters or bylaws may be sui generis in some ways. Most amendments to the DGCL that are presented to the Delaware Legislature are not controversial and pass without debate. This one is different. The proposed legislation linked above is, in part, a result of the ATP case, styled as ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014), highlighted here on these pages, in which the Delaware Supreme Court upheld the facial validity of fee-shifting bylaws for a non-stock corporation. Many legal commentators read that decision to apply to stock corporations as well. Not everyone agreed.

Last year, before the June 30 close of the legislature’s term, legislation was proposed to prohibit stock corporations from adopting fee-shifting bylaws. The DuPont Company and other large companies as well as the U.S. Chamber of Commerce opposed the legislation that was proposed last year to limit fee-shifting bylaws. Institutional investors and shareholder-rights groups supported the proposal. Law professors lined up on both sides of the debate. In light of the short amount of time available last year before the close of the legislative session, and the strong lobbies on both sides of the issue, the legislature deferred consideration until the 2015 legislative session.

Unlike routine amendments to the DGCL, this proposed legislation confronts powerful lobbyists on both sides of the issue. Thus, this proposal may be more akin to typical legislation in which the final version of the bill that is passed is not always similar to the first version of the bill that was introduced. The only certainty about this proposed bill, is that it will generate an enormous amount of commentary and discussion. I would not expect a final outcome until the last day of the session on June 30.

If some legislation is passed that ultimately limits the ability of a corporation to adopt fee-shifting bylaws, an interesting issue will be the impact, if any, that the legislation will have on those companies that already adopted fee-shifting provisions. Generally, there is a prohibition against ex post facto laws. Stay tuned.

SUPPLEMENT: Professor Stephen Bainbridge, one of the nation’s foremost corporate law scholars, has written three commentaries already within the one business day since this proposal surfaced, including links to his prolific scholarship on the topic of fee-shifting and forum selection provisions in corporate organic documents. Each of the following titles is hyperlinked to his corresponding post: An Open Letter to the Delaware Legislature on Fee-Shifting Bylaws; Open Letter to the Delaware Legislature on Forum Selection Bylaws; Delaware Legislative Proposals on Fee-Shifting and Forum Selection Bylaws.

SUPPLEMENT II: Professor Larry Hamermesh, Director of the Institute of Delaware Corporate and Business Law, provides scholarly and insightful analysis on the issue of the potential retroactive impact of the proposed legislation on existing fee-shifting bylaws. If the proposed legislation is passed, this may be one of the first issues litigated.

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.

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.

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.