Delegating Enforceability: A Novel Solution to Corporate Forum Selection Disputes

Since their introduction nearly two decades ago,[1] forum selection provisions have become standard in modern corporate governance, with Delaware corporations routinely designating the Court of Chancery as the exclusive forum for “internal affairs” disputes. Yet questions persist about the construction, scope, and enforceability of these provisions—questions that implicate important issues of Delaware corporate law but are often decided by courts outside Delaware.

Consider the recent California Supreme Court decision in EpicentRx, Inc. v. Superior Court, which reversed lower court rulings that had declined to enforce forum selection provisions in a corporation’s charter and bylaws on public policy grounds.[2] While ultimately holding that California’s jury trial policy did not bar enforcement, the court remanded for consideration of whether the provisions were “freely and voluntarily negotiated”—a Delaware law question that California courts must now address.[3]

Similar tensions arise with claims under federal securities laws. Forum selection provisions in charters and bylaws that channel derivative Section 14(a) proxy fraud claims to Chancery have generated particularly acute conflicts—the Ninth Circuit, in Lee v. Fisher, recently upheld such provisions, finding them consistent with both Delaware and federal law, while a divided panel of the Seventh Circuit concluded the opposite in Seafarers Pension Plan v. Bradway.[4]

This splintered authority threatens to upend the central purpose of the forum selection revolution—concentrating litigation about corporate matters in the state of incorporation, where the courts can definitively resolve any disputes. While federal courts can certify novel state law questions to state supreme courts, certification is discretionary and unwieldy. Moreover, Delaware’s constitution does not permit its Supreme Court to accept questions certified by the trial and intermediate appellate courts of other states, meaning many courts have no procedural mechanism for deferring to Delaware.[5]

We propose a solution: corporations should adopt delegation provisions in their forum selection bylaws, expressly assigning threshold questions about the provisions’ scope, validity, and enforceability to Delaware courts.

The Arbitration Analogy

There is nothing novel about delegation. Modern arbitration agreements—which are simply “a specialized kind of forum-selection clause”[6]—routinely assign threshold questions about their own interpretation, applicability, and enforceability to the arbitrator rather than courts. The U.S. Supreme Court has repeatedly upheld such provisions, which have been broadly recognized by state supreme courts and foreign jurisdictions as well.[7] The reasoning of these decisions rests on fundamental contract law principles: parties may agree not only to arbitrate substantive disputes but also threshold questions about the arbitration agreement itself.[8] When parties clearly delegate such questions to an arbitrator, courts must honor that agreement.

Extending Delegation to Forum Selection

The same blackletter principles apply to the broader category of forum selection provisions. Contracting parties should be able to specify not only where disputes will be resolved but also which forum decides threshold disputes concerning the forum selection clause itself. Analogously, Delaware corporations could adopt charter or bylaw provisions expressly delegating threshold questions to the Court of Chancery. For example, a provision could read:

Forum Selection. Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery lacks jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) shall be the sole and exclusive forum for Covered Claims or Delegated Disputes.

“Covered Claims” means: (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or stockholder of the Corporation to the Corporation or to the Corporation’s stockholders, (iii) any action arising pursuant to any provision of the DGCL or the Certificate of Incorporation or these Bylaws (as either may be amended from time to time) or (iv) any action asserting a claim against the Corporation governed by the internal affairs doctrine.

“Delegated Disputes” means any claim concerning the validity, interpretation, scope, applicability, or enforceability of this Article, including any dispute concerning: (i) whether a particular claim constitutes a Covered Claim; and (ii) whether any provision of this Article is valid under Delaware law.

This approach operates similarly to arbitration delegation provisions. When a shareholder files a claim outside of Delaware that is arguably within the forum selection bylaw’s scope, the corporation would move to enforce the provision. Rather than immediately deciding enforceability, the court would recognize the delegation provision and either transfer the case, dismiss without prejudice, or stay proceedings to allow parties to seek declaratory judgment in Delaware with respect to their dispute concerning the forum selection provision.[9]  Alternately, where an initial lawsuit is filed in state court, corporate defendants could file suit in the Court of Chancery to secure an antisuit injunction pending resolution of the bylaw dispute.[10]  Delaware courts would then address the threshold Delaware law questions: Does Delaware law permit forum selection bylaws to encompass the claim type at issue? Is the provision valid under the DGCL? Does the provision capture the claims asserted?

Such delegation of Delaware corporate disputes has firm footing in the DGCL. Section 115(c) authorizes forum selection provisions for claims that “relate to . . . .the rights or powers of the corporation or its stockholders.” A dispute about the interrelation, validity, or enforceability of a charter or bylaw provision falls within this authorization—it directly concerns the rights and powers established by the corporation’s governing documents.  And even if Section 115 were inapplicable, the delegation of such technical claims regarding the construction, application, and validity of a Delaware corporation’s bylaws fits comfortably within the broad construction of Sections 102(b)(1) and 109(b) adopted by the Court of Chancery in Boilermakers Local 154 Retirement Fund v. Chevron Corp.[11] and Delaware’s Supreme Court in Salzberg v. Sciabacucchi.[12]

Notably, a delegation provision could also be drafted expressly to assign federal law disputes to the Delaware courts—much as the Salzberg court addressed such arguments in connection with the enforcement of a federal forum provision—though the enforceability of such a provision is less clear. Federal courts typically determine compliance with public policy themselves before enforcing forum selection provisions, and whether this determination can be delegated is a novel question.[13] But even if federal courts decline to defer on federal law questions, they could still enforce delegation provisions with respect to threshold Delaware law issues. In practice, this would mean the federal court would either address questions of federal public policy prior to enforcing a delegation provision or would stay the proceedings to address the open issues of federal law once the Delaware court decides the delegated issues. Similar questions—and potential solutions—would apply were the delegation extended to state public policy issues, such as the issue of jury waivers raised in EpicentRx.

Benefits and Potential Objections

Though novel—and, as a result, likely to meet resistance from the plaintiffs’ bar—delegation provisions offer a host of potential advantages.

Institutional Competence and Comity. Perhaps the strongest justification for delegation provisions lies in principles of comity and expertise. Delaware courts possess unparalleled familiarity with Delaware corporate law, developed through decades of specialized adjudication. When federal or sister-state courts interpret novel questions of Delaware law without Delaware judicial input, they risk error and inject uncertainty into the course of the proceeding. Delegation provisions would ensure that Delaware courts resolve these threshold Delaware law questions.

Promoting Uniformity. As the circuit split between the Ninth and Seventh Circuits on Section 14(a) claims illustrates, the current regime generates unpredictable outcomes and invites forum shopping—precisely the outcomes that charter and bylaw forum-selection clauses were designed to avoid. Delegation provisions channel threshold Delaware law questions to a single authoritative interpreter, promoting more uniform treatment of Delaware corporations.

Judicial Economy. From a resource allocation perspective, delegation provisions might prevent wasteful expenditure of judicial resources on repeated adjudication of identical Delaware law questions across multiple jurisdictions.

Some might argue that delegation provisions would lead to piecemeal litigation, as where a threshold dispute over scope is dispatched to Delaware for resolution. However, the initial Delaware proceeding would involve purely legal questions suitable for summary disposition, permitting prompt resolution. Moreover, if Delaware concludes a provision is invalid, stockholders can return to their chosen forum. Nor is the contemplated procedure unusual. Even outside the arbitration and delegation context, the U.S. Supreme Court has long recognized that federal courts may properly abstain to allow state courts to resolve threshold state law questions.[14] Litigation of the delegated issues could proceed in like fashion.

Similarly, some might object that delegation provisions will be mired in the same legal challenges that confront charter and bylaw forum-selection provisions more generally. But this objection misunderstands the distinct procedural valence of delegation. The typical challenges to forum selection provisions—that they were not adopted in a procedurally proper manner, exceed the permissible scope of Delaware law, or infringe on the rights of the parties seeking to assert claims—do not bear upon the delegation provision itself, which, as explained above, is firmly rooted in the DGCL and does not itself foreclose any substantive right.  Consider, for example, the (erstwhile) frequent argument that enforcement of a forum selection provision improperly functions to waive claims under the Exchange Act.  That argument would have no application to a delegation provision, which merely designates the forum for disputes over the validity of the forum selection provision itself. Given the narrow and procedural quality of the disputes within the scope of the delegation provision, the objections typically leveled at forum selection provisions would have no application.

Conclusion

Current uncertainty surrounding forum selection bylaws stems from a coordination problem: courts in multiple jurisdictions interpret Delaware corporate law in the first instance, often reaching divergent conclusions. Delegation provisions offer one potential mechanism to channel threshold Delaware law questions to Delaware—the forum with greatest expertise to resolve them and the only forum that can authoritatively do so. Whether courts will prove receptive remains uncertain. What seems clear is that the status quo—where Delaware law questions are routinely decided by non-Delaware courts without Delaware judicial input—is suboptimal. At minimum, delegation provisions merit serious consideration as one tool for addressing these persistent challenges.