Forum Selection Bylaws and a Race to the Bottom

Delaware has approved the use of forum selection bylaws.  Under these bylaws, shareholders are obligated to bring actions in a designated forum, usually Delaware.  The bylaws typically apply to cases with a nexus to the internal affairs of the corporation.  They apply to actions for breach of fiduciary duty but do not, for example, typically apply to federal causes of action.  So the bylaws do not apply to actions under the federal securities laws.

The forum selection bylaws applied mostly to actions that implicated the internal affairs doctrine. Nonetheless, the bylaws went beyond traditional norms by regulating judicial process.   Judicial process is not a matter of a corporation's internal affairs.  As a result, the issue is not limited to the state of incorporation.  Other jurisdictions can also regulate judicial process, including the venue for particular actions.  The result has been the possibility that corporations will be subject to conflicting requirements.   

The Virginia House has stepped into the fray by specifically approving forum selection bylaws.  The House has adopted an amendment to §13.1-624 to allow bylaws to contain:   

  • A requirement that a circuit court or a federal district court in the Commonwealth or the jurisdiction in which the corporation has its principal office shall be the sole and exclusive forum for (i) any derivative action brought on behalf of the corporation; (ii) any action for breach of duty to the corporation or the corporation's shareholders by any current or former officer or director of the corporation; or (iii) any action against the corporation or any current or former officer or director of the corporation arising pursuant to this chapter or the corporation's articles of incorporation or bylaws.

The requirement is not yet law.  To the extent put in place, it will have limited reach.  The provision only applies to companies incorporated in the state of Virginia.  Moreover, the limit to the Commonwealth or the principal office is largely redundant since businesses incorporated in Virginia are probably headquartered there.

The most interesting aspect of the provision, however, is that it would preclude Delaware as a choice of venue. Few public companies are actually headquartered in Delaware (DuPont is an exception).  Thus, while the provision is unlikely to have significant impact, it is a reflection of another state attempting to eliminate Delaware as a choice of venue.  

J Robert Brown Jr.