On June 25, 2013, in a judicial development that may help ease the curse of multi-jurisdiction litigation, ChancellorLeo E. Strine, Jr. of the Delaware Court of Chancery held that forum selection bylaws adopted by Chevron and Federal Express are statutorily and contractually valid. The company’s by-laws designated Delaware as the sole forum for derivative lawsuits, lawsuits under the Delaware General Corporation Law and other lawsuit involving the “internal affairs” of the companies. A copy of the Chancellor’s opinion can be found here.
Whether or not the forum selection bylaw would be enforceable in any given future situation will depend on existing judicial standards for the enforcement of forum selection clauses. However, given that under the existing standards forum selection clauses are presumptively enforceable, a company adopting a foreign selection by-law will have a substantial chance of avoiding multi-jurisdiction litigation and ensuring that the corporate litigation will go forward in Delaware.
Because companies incorporated in one state often have their principal place of business in other states, and operations and shareholders in many other states, a corporate event or dispute can result in litigation involving a company can result in litigation in many different jurisdictions. This problem arises in many contexts but has been a particular curse in M&A related litigation.
As discussed here, in 2010, Vice Chancellor Laster in the Revlon Shareholder litigation endorsed the idea of corporation’s modifying their corporate charters to designate a forum for resolution of corporate litigation. The idea gained significant currency as it was advocated by leading academics and others.
According to Chancellor Strine’s opinion in the Chevron case, in the last three years over 250 publicly traded companies adopted forum selection bylaws. Chevron and Fed Ex were among the companies adopting this type of bylaw. Chancellor Strine recites in his opinion thatChevron’s board adopted the bylaw due to concerns about “the inefficient costs of defending the same claim in multiple jurisdictions” and in order to “minimize or eliminate the risk of what they view as wasteful duplicative litigation.” The bylaw essentially designates Delaware as the exclusive forum for derivative litigation, breach of fiduciary duty litigation, disputes under the DGCL, and disputes involving the companies’ internal affairs .Fed Ex’s bylaw is substantially similar.
The first judicial challenge to a forum selection bylalw resulted in a set back for the idea. As discussed here, in January 2011, a judge in the Northern District of California refused to enforce a forum selection by-law that had been adopted by Oracle, because it had not been made a part of the company’s corporate charter and adopted by shareholder, but rather had been adopted only by the company’s board of directors.
In February 2012, institutional plaintiffs, represented by the same law firm, filed a total of twelve separate lawsuits seeking to challenge the defendant companies’ adoption of a forum selection bylaw. Ten of the companies dropped their by-law and the plaintiffs dropped their suits against those companies. However, Chevron and Fed Ex declined to drop the bylaws and the cases against the two companies went forward.
The defendant companies moved for judgment on the pleadings as to the plaintiffs’ claims that the bylaws are beyond the board’s authority and that the bylaws are contractually invalid and therefore cannot be enforced like other contractual forum selection clauses because they were unilaterally adopted by the companies’ boards.
In his June 25 Opinion, Chancellor Strine granted the defendants’ motion for judgment on the pleadings.First, he ruled that the by laws are valid under Delaware statutory law specifying that by-laws may contain any provision relating to “the business of the company, the conduct of its affairs, and its right or powers or the right or powers of its stockholders, directors officers and employees.” He noted that the bylaws related only to suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine. He found that the by-laws are “not facially invalid as a matter of statutory law.”
Chancellor Strine also held that the bylaws are valid and enforceable contractual forum selection clauses. He said that the Delaware Code allows directors to adopt and amend by-laws unilaterally. Thus, “when investors bought stock in Chevron and Fed Ext, they knew… the certificates of incorporate gave the board the power to adopt and amend bylaws unilaterally.” Strine rejected the argument that the bylaw was not enforceable because it had not been adopted by shareholders. Chancellor Strine went on to hold that “a forum selection clause adopted by a board with the authority to adopt bylaws is valid and enforceable under Delaware law to the same extent as other contractual forum selection clauses.”
Finally Chancellor Strine rejected the plaintiffs efforts to undercut the by laws by reference to “purely hypothetical situtions” where the bylaws might not be enforceable or would result in unreasonable outcomes.
Chancellor Strine expressly noted that many other companies have adopted similar bylaws, and cited this fact as a reason to decide the defendants’ motion for judgment on the pleadings rather than, as the plaintiffs’ urged, to defer ruling. He specifically noted that “a decision as to the basic legal questions presented by the plaintiffs’ complaints will provide efficiency benefits to not only the defendants and their stockholders, but to other corporations and their investors.” In other words, Chancellor Strine’s opinion expressly assumes that his determinations will guide the determination of the validity of other companies’ bylaws – at least those with the characteristics of Chevron’s and Fed Ex’s by laws.
Of course, these plaintiffs have the right to appeal the Chancellor’s determination to the Delaware Supreme Court. Given the stakes involved for plaintiffs’ lawyers, it seems likely that the plaintiffs will appeal. There is of course the possibility that Chancellor’s rulings will be overturned on appeal.
Even if Chancellor Strine’s determinations are not overruled, there is s till the question of what will happen if a future plaintiff decides to disregard the bylaw and file a lawsuit in another jurisdiction. The defendant company will have to decide whether to invoke the bylaw and to seek to have the case dismissed because the suit was filed in the wrong court.
The bylaws will be subject to scrutiny under the principles of the U.S. Supreme Court’s decision in Bremen v. Zapata Off-Shore Co.which held that forum seleection claluses are valid provided that they are "uaffected by fraud, undue influence or overweenig bargaining power." The forum seleection clause "should be enforced unless enforcement is shown by the resisting party to be "unreasonable." In other words, the forum selection bylaws will be "presumptively, but not necessarily, situationally enforceable." ,
As the Wilson Sonsini firm noted in its June 25, 2013 memo about Chancellor Strine’s opinion (here), “Although the Delaware Supreme Court has yet to weigh in on the facial validity of forum selection bylaws (and an appeal is likely), the decision upholds a potentially powerful tool in responding to the problem of multi-forum litigation and protecting stockholders’ interests against duplicative litigation.”
Special thanks to a loyal reader for sending me a copy of the Chevron opinion.