Delaware Court of Chancery Upholds Forum Selection Bylaw

On September 8, 2014, Chancellor Andre G. Bouchard issued a notable decision in City of Providence v. First Citizens BancShares, Inc., upholding—as a matter of facial validity and on an “as-applied” basis at the motion to dismiss stage—a forum selection bylaw adopted by a Delaware corporation selecting another jurisdiction (North Carolina, where the company is headquartered) as the forum for intra-corporate disputes. This decision is important not only because it reaffirms the decision last year by then-Chancellor, now Chief Justice, Leo E. Strine, Jr. in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), upholding the facial validity of forum selection bylaws, but also because it includes notable pronouncements from the current Chancellor on the application of such provisions. [1]

In this case, First Citizens Bancshares (FC North), a Delaware corporation headquartered in North Carolina, adopted its forum selection bylaw the same day it announced that it had entered into a merger agreement to acquire First Citizens Bancorporation (FC South), a bank holding company incorporated and based in South Carolina, in a mixed stock and cash deal. Also relevant to the Court’s analysis is that allegedly both FC North and FC South are controlled by members of the Holding family. The plaintiff filed suit in the Court of Chancery on behalf of the minority stockholders of FC North challenging the application of the forum selection bylaw and asserting various breach of fiduciary duty claims related to the merger. This decision represents the Court’s ruling on defendants’ motion to dismiss the claims challenging the forum selection bylaw.

Facial Validity of a Forum Selection Bylaw Selecting a Forum Other than Delaware

The Court noted at the outset that the bylaw at issue was “functionally identical” to the bylaws upheld in Chevron with the exception that the bylaw in this case selects as the forum the U.S. District Court for the Eastern District of North Carolina, or, if that court lacks jurisdiction, any North Carolina state court with jurisdiction, instead of the state or federal courts of Delaware. The Court noted that this distinction raised an “issue of first impression” as to whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes. The Court squarely answered this question in the affirmative, reasoning that the finding in Chevron that Delaware was the “most obviously reasonable forum” for internal affairs cases because of the benefit of Delaware courts interpreting Delaware law did not call into question the FC North board’s decision to select the “second most obviously reasonable forum” where the Company is headquartered and has most of its operations. Moreover, the Court was skeptical that the bylaw would run afoul of the provisions in the Delaware statute designating the Court of Chancery as the “exclusive forum” for certain disputes, but decided that the Court need not reach those issues because they represented hypothetical as-applied challenges that were not implicated by plaintiff’s Delaware common law claims challenging the merger. [2]

Challenge to the Adoption on Breach of Fiduciary Duty Grounds

The Court also concluded that the plaintiff’s allegations that adoption of the forum selection bylaw was self-interested were wholly conclusory and, therefore, offered no basis, even under Delaware’s generous pleading standards, to infer that the forum selection bylaw was the product of a breach of fiduciary duty. In particular, the Court was critical of allegations that the forum selection bylaw was adopted by the board to “insulate itself from the jurisdiction of the Delaware courts,” concluding that the bylaw “plainly” does not insulate the proposed merger from judicial review (it only requires that review to take place in North Carolina) and that the plaintiff had not pled any facts to call into question the integrity of the federal and state courts in North Carolina. Accordingly, the Court held that the plaintiff failed to rebut the presumption of the business judgment rule that attaches to the FC North board’s adoption of the forum selection bylaw.

As-Applied Challenge

Finally, the Court rejected the plaintiff’s “as-applied” challenges to the adoption of FC North’s forum selection bylaw in connection with the proposed merger. The Court began by recognizing that Chevron did not reach the question of whether the forum selection bylaws at issue in that case were valid as applied, but that Chevron nonetheless provides the proper framework for such a challenge: applying both the U.S. Supreme Court’s analysis in The Bremen v. Zapata Off-Shore Company, 407 U.S. 1 (1972), that looks to whether application of the forum selection provision would be “unreasonable” or “unjust” and the Delaware Supreme Court’s teachings in Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971), that otherwise legal action cannot be taken inequitably.

Of particular note, and proceeding under that framework, the Court was not dissuaded by the fact that the FC North board adopted the bylaw in connection with approving the merger agreement. The Court held that the mere fact that the board adopted the forum selection bylaw on an “allegedly cloudy day” when it entered into the merger agreement, rather than on a clear day, was “immaterial given the lack of any well-pled allegations … demonstrating any impropriety in this timing.” [3]

Nor was the Court swayed by the argument that enforcement of the bylaw was unreasonable because FC North had a control group that could arguably preclude minority stockholders from repealing the bylaw. The Court concluded that the mere fact that the control group may favor the forum selection bylaw does not make it unenforceable per se and to conclude otherwise would be tantamount to rendering questionable all board-adopted bylaws of controlled companies.

Chancellor Bouchard ended his analysis by noting that his conclusions were further supported by “important interests of judicial comity.” Indeed, he remarked that just as Delaware expects that other jurisdictions, after Chevron, will enforce forum selection provisions designating Delaware as the selected forum, so too should Delaware courts enforce bylaws designating another jurisdiction, lest the Delaware courts “stray too far from the harmony that fundamental principles of judicial comity seek to maintain.”

Key Takeaways

• City of Providence v. First Citizens BancShares, Inc. is an application of a general guiding principle of Delaware corporate law: promoting flexibility within the context of both director primacy and freedom of contract.
• The opinion recognizes the business reality that multi-forum litigation is often wasteful and excessive, and that Delaware corporate law provides tools for directors and stockholders to combat it, whether by selecting the Delaware courts or, as in this case, the courts in the state where the company is headquartered.
• As we have previously noted, the forum selection bylaw is not a “one size fits all” solution. To the contrary, a board considering adopting a forum selection bylaw should carefully consider the specific needs and issues of the company in making this decision. We expect that the Court’s opinion will lead to further discussions between boards and their counsel about whether or not to adopt a forum selection bylaw, the appropriate forum assuming such a bylaw is adopted, and even whether and when to seek to enforce the bylaw if one is adopted. The Court’s opinion is consistent with long-standing principles of Delaware law insofar as it recognizes that these types of business decisions are vested in the company’s board of directors, and the board’s decisions on any of these issues must be made with due care and in good faith.

Endnotes:

[1] WSGR represented Chevron Corporation in the Boilermakers litigation.
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[2] This outcome was suggested in an earlier transcript ruling in Edgen Group Inc. v. Genoud, C.A. No. 9055-VCL (Del. Ch. Nov. 5, 2013) (transcript), where the Court of Chancery observed in dicta that a forum selection provision designating a non-Delaware forum would be permissible, and this opinion makes clear that such provisions are facially valid.
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[3] Notably, this aspect of the decision stands in contrast to the decision last month by an Oregon state court in Roberts v. TriQuint Semiconductor, Inc., C.A. No. 1402-02441 (Cir. Ct. Or. Aug. 14, 2015), refusing to enforce on equitable grounds a forum selection bylaw adopted in the face of an impending transaction.
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