Delaware is a management friendly jurisdiction. This is particularly true with respect to the interpretation of fiduciary duties by the Delaware courts. Perhaps as a result, there has been a much discussed litigation "flight from Delaware," with shareholders increasingly bringing suits in other jurisdictions.
This does not give shareholders more favorable law. With respect to fiduciary obligations, the internal affairs doctrine requires that a court apply the law from the state of incorporation. As a result, a court in New York or California will still be required to apply Delaware law so long as the company is incorporated in that state. What shareholders do gain from the flight, however, is a different set of decision makers. By filing in other states, they have their case reviewed by judges who do not sit on the Delaware Chancery Court or the Delaware Supreme Court.
The decision to bring cases in other jurisdictions is not good news for the Delaware economy. Cases bring business to Delaware. They employ lawyers and fill hotels. They also give Delaware judges control over the outcome of the claim, something that may increase the incentive to incorporate in the state.
One way to temper the "flight from Delaware" would be to adopt a jurisdictional approach that eliminated much of the benefit associated with the filing of derivative suits outside of Delaware. For that to occur, the Delaware courts would likely have to make decisions that were less management friendly. Given the current trend, there is no significant evidence that this approach is underway. An alternative approach could be the imposition of restrictions on the right of shareholders to bring actions in other states.
The Chancery Court addressed the ability of management to impose such restrictions in Boilermakers Local 154 v. Chevron (we posted on the case here). In that case, shareholders challenged a pair of "forum selection bylaws." One of them provided that exclusive jurisdiction for derivative suits (and certain other fiduciary/internal affairs/DGCL claims) rested with "a state or federal court located within the state of Delaware" so long as the court had "personal jurisdiction over the indispensable parties named as defendants." The bylaws provided that anyone "purchasing or otherwise acquiring" shares in the company was "deemed to have notice of and consented" to the bylaw.
Other than a choice between the federal district court in Delaware or the Delaware Chancery Court, the bylaw effectively eliminated the right of shareholders to seek other jurists in other jurisdictions to adjudicate their claims. Moreover, despite the references to "consent," the requirement was simply imposed on existing shareholders. See Id. ("Such a change by the board is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own.").
The bylaw fell far outside the traditional boundaries of the internal affairs doctrine. The bylaw did not address the relationship between, or the law governing, directors and shareholders, only the forum used to address those issues. With the legal standards clear, therefore, the bylaws did not implicate the underlying purpose of the "intenal affairs doctrine." See Vantage Point v. Examen, 871 A.2d 1108 (Del. 2005) ("The inernal affairs doctrine developed on the premise that, in order to prevent corporations from being subjected to inconsistent legal standards, the authority to regulate a corporation's internal affairs should not rest with multiple jurisdictions.").
The weakness in the court's reasoning was apparent from the lack of limitations that flowed from the analysis. The court included no analytical restraint on the substance of these bylaws, nothing that suggested there was a "bylaw too far." The only limitation was on the identity of the person subject to the bylaw. As the court reasoned:
- The bylaws would be regulating external matters if the board adopted a bylaw that purported to bind a plaintiff, even a stockholder plaintiff, who sought to bring a tort claim against the company based on a personal injury she suffered that occurred on the company's premises or a contract claim based on a commercial contract with the corporation. The reason why those kinds of bylaws would be beyond the statutory language of 8 Del. C. §109(b) is obvious: the bylaws would not deal with the rights and powers of the plaintiff-stockholder as a stockholder.
So long as the bylaw applied to shareholders qua shareholders, the analytical rubric allowed companies to rewrite the rules of civil procedure. They could adopt bylaws requiring shareholders to arbitrate fiduciary duty claims, forego discovery, agree to reduced time periods to litigate and, perhaps, submit to a shorter statute of limitations. Whatever the merits of these restrictions, they went well beyond the traditional notions of corporate governance and the traditional boundaries of the internal affairs doctrine.
Shareholders ultimately discontinued the appeal so the reasoning has not yet been examined by the Delaware Supreme Court. The Supreme Court was likely to affirm and, while there is some truth to the claim that it was due to the "incontestability of the Chancellor’s ruling" a more complete description would be the "incontestability of the Chancellor's ruling" in Delaware. As a result, the reasoning of the decision will play out not in Delaware but in the other courts that have to determine whether this divested them of jurisdiction. In those jurisdictions, the "incontestability of the Chancellor's ruling" is likely to be less clear.