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Wednesday
Jul032013

Delaware Upholds Board Adopted Forum Selection By-Laws

On June 25, in an entirely unsurprising opinion, the Delaware Court of Chancery ruled in Boilermakers Local 154 Retirement Fund v. Chevron Corporation that unilateral director-adopted forum selection bylaws are valid under Delaware law and enforceable to the same extent as other forum selection clauses.  Forum selection bylaws designate a forum as the exclusive venue for particular kinds of suits.  The decision shows once again the Delaware court’s protective stance towards corporations and boards of directors.

The case considered actions taken by the boards of Chevron Corporation and FedEx Corporation, each a Delaware corporation.  Each company adopted bylaws designating Delaware courts as the exclusive forum for any stockholder litigation involving derivative actions, claims for breach of fiduciary duty, claims under the DGCL, and other claims concerning corporate internal affairs. The Chevron and FedEx boards stated that they adopted these bylaws in response to being subject to litigation over a single transaction or a board decision in more than one forum simultaneously, so-called “multiforum litigation.”

The plaintiffs challenged these forum selection bylaws arguing that the boards of the defendant corporations had no authority to adopt the bylaws and that they were invalid as a matter of contract.  The plaintiffs sought a declaration that the bylaws were invalid and a breach of fiduciary duty.  After staying the claim for breach of fiduciary duty, Chancellor Strine, writing for the court, flatly rejected the DCGL and contract claims and upheld the bylaws.

As to the content of the forum selection bylaws, Chancellor Strine began by addressing 8 Del. C. § 109(b), stating:

  • [h]aving challenged whether the bylaws are authorized by 8 Del. C. § 109(b), the plaintiffs have to confront the broad subjects that § 109(b) permits bylaws to address. The DGCL provides that bylaws may address any subject, ’not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.”…. As a matter of easy linguistics, the forum selection bylaws address the “rights” of the stockholders, because they regulate where stockholders can exercise their right to bring certain internal affairs claims against the corporation and its directors and officers. They also plainly relate to the conduct of the corporation by channeling internal affairs cases into the courts of the state of incorporation, providing for the opportunity to have internal affairs cases.

8 Del. C. § 109(b) has long been understood to allow the corporation to set “self-imposed rules and regulations [that are] deemed expedient for its convenient functioning.” The forum selection bylaws here fit this description. They are process-oriented, because they regulate where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain on behalf of herself or the corporation.

For Chancellor Strine, this proves that by-laws regulating choice of forum are permissable.  The next issue was whether the DCGL gives the board of directors the power to adopt such by-laws unilaterally. To resolve that issue, Strine turned to DCGL Section 109(a), the provision that identifies who has the power to adopt, amend, and repeal the bylaws. The provision states:

  • [T]he power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote. . . . Notwithstanding the foregoing, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors . . . . The fact that such power has been so conferred upon the directors . . . shall not divest the stockholders . . . of the power, nor limit their power to adopt, amend or repeal bylaws.

Chancellor Strine noted that “both Chevron’s and FedEx’s certificates of incorporation conferred on the boards the power to adopt bylaws under 8 Del. C. § 109(a). Thus, all investors who bought stock in the corporations whose forum selection bylaws are at stake knew that (i) the DGCL allows for bylaws to address the subjects identified in 8 Del. C. § 109(b), (ii) the DGCL permits the certificate of incorporation to contain a provision allowing directors to adopt bylaws unilaterally, and (iii) the certificates of incorporation of Chevron and FedEx contained a provision conferring this power on the boards.”  Rejecting the “vested rights” view, Strine stated, “when stockholders have authorized a board to unilaterally adopt bylaws, it follows that the bylaws are not contractually invalid simply because the board-adopted bylaw lacks the contemporaneous assent of the stockholders.”

The bottom line for Chancellor Strine is that a corporation’s bylaws are part of an inherently flexible contract between the stockholders and the corporation.  If shareholders are unhappy with unilateral action taken by the board to adopt bylaws, they can either repeal it (which the law gives them the power to do) or vote out the directors taking the action at the next shareholder meeting.

All well and good -- except consider the likelihood of shareholder repeal or ouster of directors.  Neither is likely to prove a realistic check on boards’ power to force shareholders to litigate in a particular (inconvenient) forum.  The decision stands in direct contrast to (and specifically rejects the reasoning of) Galaviz v. Berg which held that board-adopted forum selection bylaws were not contractually enforceable for lack of stockholder assent.

 In Galaviz, involving a forum-selection clause adopted by the board of directors of Oracle, the court found that a forum provision unilaterally adopted by directors without the consent of existing shareholders who acquired their shares when no such bylaw was in effect was invalid as a matter of contract law because “a party's consent to a written agreement may serve as consent to all the terms therein, whether or not all of them were specifically negotiated or even read, but it does not follow that a contracting party may thereafter unilaterally add or modify contractual provisions.” 

While the Boilermakers decision clearly shows that the Delaware court rejects this contractual interpretation, the decision also indirectly addressed another important argument made in Galaviz.  In considering the enforceability of Oracle’s forum-selection by-law the court noted that:

  • assuming, however, that the directors had the power to adopt a bylaw of this nature in the abstract, the enforceability of a purported venue requirement is a matter of federal common law. Manetti-Farrow, Inc. v. Gucci Am., Inc., 858 F.2d 509, 512-513 (9th Cir. 1988). Oracle has not shown federal law requires or even permits the federal courts to defer to any provision of state corporate law that might purport to give a corporation's directors the power to control venue….

Chancellor Strine suggests that the concern about a forum-selection by-law being an invalid attempt to block suits in federal courts is moot because

“the forum selection bylaws plainly focus on claims governed by the internal affairs doctrine and thus the law of the state of incorporation. In the event that a plaintiff seeking to bring a claim within the exclusive jurisdiction of the federal courts is met with a motion to dismiss because of the forum selection clause, the plaintiff will have the most hospitable forum possible to address the motion by pressing an argument that the bylaw cannot operate to foreclose her suit—a federal court.”

It may be that shareholders would win a federal court action to force waiver of a forum-selection by-law but once again the burden will be on the shareholders to engage additional (not free) action. Nowhere does the opinion address an alternative method of adopting forum-selection by-laws which would be to let shareholders vote on their inclusion in charter documents.  In its usual all power to the board approach the Chancery Court simply says boards can take this action alone and therefore won’t even consider whether they should or not.

The fate of unilateral director-adopted forum-selection clauses is not yet conclusively determined.  The Court of Chancery’s decision leaves open the possibility of case-specific challenges to forum selection bylaws and it is unclear whether non-Delaware courts will apply a forum selection clause contained in a Delaware corporation’s bylaws.  Still, the decision continues Delaware’s legacy of favoring corporate interests, giving companies a strong weapon in the corporate litigation arena and foreclosing the ABC (anything but Chancery) strategy favored by shareholder attorneys.

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