Court of Chancery Upholds Forum-Selection Bylaws Under the DGCL

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Court of Chancery has rejected statutory and contractual challenges to forum-selection bylaws adopted unilaterally by the boards of directors of Chevron Corporation and FedEx Corporation. In an opinion deciding motions for partial judgment on the pleadings in Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp., et al., C.A. No. 7220-CS, and Iclub Inv. P’ship v. FedEx Corp., et al., C.A. No. 7238-CS, Chancellor Strine determined that a board of directors, if granted authority to adopt bylaws by the certificate of incorporation, has the power under the Delaware General Corporation Law to adopt a bylaw requiring litigation relating to the corporation’s internal affairs to be conducted exclusively in the Delaware courts, and that such a bylaw may become part of the binding agreement between a corporation and its stockholders even though the stockholders do not vote to approve it. The Court emphasized, however, that stockholder-plaintiffs retain the ability to challenge the enforcement of such a bylaw in a particular case, either under the reasonableness standard adopted by the Supreme Court of the United States in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), or under principles of fiduciary duty. The Court also left open the possibility that the boards’ actions in adopting such bylaws could be subject to challenge as a breach of fiduciary duty.

The boards of both Chevron and FedEx had adopted bylaws providing that the Delaware Court of Chancery would be the sole and exclusive forum for (i) any derivative action brought on behalf of the corporation, (ii) any action asserting breach of fiduciary duty claims, (iii) any action asserting a claim arising under the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine. Chevron subsequently amended its bylaw to permit such suits to be brought in “a state or federal court located within the state of Delaware” and to make the bylaw subject to the relevant court possessing personal jurisdiction over “the indispensable parties named as defendants.” Both bylaws allowed litigation in another forum with the corporation’s consent.

The Court considered and rejected a claim that these bylaws were not authorized under 8 Del. C. § 109(b), which provides that a corporation’s bylaws “may contain any provision, 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.” The Court analogized its holding to the Delaware Supreme Court’s seminal decision authorizing poison pill rights plans in Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del. 1985), and wrote, “that a board’s action might involve a new use of plain statutory authority does not make it invalid under our law, and the boards of Delaware corporations have the flexibility to respond to changing dynamics in ways that are authorized by our statutory law.” The Court emphasized that forum-selection bylaws, like rights plans, are subject to challenge if applied inequitably, and further noted that, unlike rights plans, bylaws may be repealed by vote of the stockholders.

The Court also rejected plaintiffs’ contention that the bylaws were invalid as a matter of contract law because the Chevron and FedEx boards of directors had adopted those bylaws unilaterally, without a vote of the stockholders. The Court wrote, “Stockholders are on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects. 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.”

Finally, the Court reiterated that a stockholder-plaintiff is free to sue in a forum other than the one required by the bylaw and to argue, in response to a motion to dismiss, that enforcement of the forum-selection provision would be unreasonable under the circumstances, under the Bremen doctrine, or that the forum-selection provision is being used for an inequitable purpose in breach of the directors’ fiduciary duties, under Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del. 1971).

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