Following the Delaware Chancery Court’s June 2013 ruling upholding the facial validity of the bylaw of Chevron Corporation designating Delaware as the exclusive forum for intra-corporate disputes, the adoption of forum selection bylaws has become mainstream. But while a number of companies have now adopted forum selection bylaws, the circumstances surrounding the adoption by First Citizens BancShares (“FC North”), a North Carolina-based bank holding company, were a little unusual. Not only did the did FC North, a Delaware corporation, designate North Carolina courts as the preferred forum, rather than the courts of Delaware, but it adopted the forum selection bylaw the same day as it announced its intent to acquire First Citizens Bancorporation (“FC South), a South Carolina-based bank holding company. A family group holds controlling interests in both banks.
Despite these circumstances, in a September 8, 2014 opinion (here), Delaware Chancery Court Chancellor Andre G. Bouchard upheld the bylaw both facially and as applied. Although there Chancellor’s opinion held open the possibility that there could be circumstances when an otherwise valid bylaw might not be valid as applied, he found no basis to withhold the enforcement of the bylaw here. The opinion represents an important affirmation of the Delaware courts’ general support for these types of bylaws and of the authority of boards of Delaware corporations to specify the exclusive forum of their choice for resolution of intra-corporate disputes, even if the forum specified is not Delaware and even if Delaware law governs the dispute.
On June 10, 2014, FC North’s board adopted a bylaw provision designating as the specified forum the United States District Court for the Eastern District of North Carolina, or if that is not available, any North Carolina state court with jurisdiction. That same day, FC North announced that it had entered into a merger agreement with FC South. The plaintiff then filed two complaints in Delaware Chancery Court, one challenging the bylaw as invalid and seeking a declaratory judgment that the Chancery Court may exercise jurisdiction, and a second complaint asserting against the FC North board various alleged breaches of fiduciary duty in connection with the merger. Among other things, the merger objection complaint alleges that members of the control group of both companies breached their fiduciary duties as controlling shareholders and unjustly enriched themselves.
FC North moved to dismiss the first complaint for failure to state a claim, and moved to dismiss the second complaint, on the basis of the forum selection bylaw, for improper forum.
In his September 8 order, Chancellor Bouchard granted both of the defendants’ motions to dismiss. With respect to the validity of the bylaw, the Chancellor said that the question presented was whether a board of a Delaware Corporation could adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes. The Chancellor said that the same analysis of Delaware law outlined in the Chevron case “validates the bylaw here” and that nothing in Chevron or in Delaware statutory law prohibits directors from designating an exclusive forum other than Delaware, and particularly given that North Carolina is the “second most obviously reasonable forum,” there was no reason to call into question the facial validity of the bylaw here.
The Chancellor declined to address the various “as applied hypotheticals” the plaintiff had raised to try to challenge the bylaw, particularly given that the FC North bylaw was only enforceable by its own terms “to the fullest extent permitted by law.” He found no reason why the Delaware common law claims could not be addressed and resolved in another forum.
The Chancellor also rejected the plaintiff’s claims that the FC North board had breached its fiduciary duties by adopting the bylaw because the board had been motivated by a desire to protect the interests of certain board members and in order to insulate itself from the jurisdiction of Delaware’s courts. The Chancellor observed that the bylaw does not insulate the board’s approval of the proposed merger from judicial scrutiny, since the scrutiny may get take place in North Carolina’s courts. The Chancellor held that the plaintiff had failed to rebut the business judgment rule relating to the board’s adoption of the forum selection bylaw.
Finally, the Chancellor granted the motion to dismiss for improper venue based upon the forum selection bylaw, finding that no Delaware public policy would require the bylaw to be disregarded in order for the merger objection suit to be heard in Delaware. He noted that there may hypothetically be circumstances under the “as applied” standard where enforcement of a bylaw would not be appropriate, but even notwithstanding the timing of the bylaws adoption, he found no reason to conclude it would be inequitable to require the merger objection suit to be litigated in North Carolina.
In closing, Chancellor Bouchard emphasized that principles of judicial comity also weighed in favor of the enforcement of the bylaw. As he said, “if Delaware corporations are to expect … that foreign courts will enforce valid bylaws that designate Delaware as the exclusive forum for intra-corporate disputes, then as a matter of comity, so too should the Court enforce a Delaware corporation’s bylaw that does not designate Delaware as the exclusive forum.” To do otherwise would “stray too far from the harmony that fundamental principles of judicial comity seek to maintain.”
It is interesting to note that the plaintiff here was seeking to have its case heard in Delaware while the defendants sought another forum. In most of the discussions about forum selection bylaws, the presumption is that the companies would choose to be in Delaware while prospective plaintiffs would seek to be in other courts. This case serves as a reminder that Delaware is not a forum where plaintiffs would never want to proceed, nor is it a forum where defendants would always want to litigate over any other forum. Here, where FC North knew its proposed merger would draw a lawsuit (as does virtually every other merger announced these days), the FC North board simply made a move to ensure that the inevitable lawsuit would take place in a court convenient to the anticipated defendants, the witnesses and the documents. Just the same, it is interesting to wonder why the plaintiff had such a strong preference for Delaware, as opposed to North Carolina. (I don’t think it is too cynical to conjecture that the Delaware and New York lawyers representing the plaintiff saw their own advantage in the case proceeding in Delaware rather than NC.)
The thing that is clear is that the facially validity of forum selection bylaws seems well established now in the Delaware courts and it seems that the Delaware courts are inclined to enforce the bylaws subject only to (so far) purely hypothetical limitations. This may mean an end to the curse of multi-ijurisdiction litigation, but as this case shows it may not necessarily mean that all intra-corporate litigation will now go forward in Delaware. Other companies may now consider whether or not there is another court they would prefer to designate as their preferred forum, rather than the Delaware courts. Delaware law would of course still govern disputes involving Delaware corporations, but the defendant company could at least preserve the opportunity to litigate cases in courts closer to their offices and officials, reducing the burden on the company from intra-corporate litigation.