Delaware Update: Court of Chancery Upholds Validity of Board-Adopted Forum Selection Bylaws

In a highly anticipated decision, the Delaware Court of Chancery has upheld the validity of board-adopted forum selection bylaws.[1] If upheld on appeal, the court's decision means that the boards of Delaware corporations can reduce the threat of multiforum litigation by amending their bylaws to designate Delaware as the exclusive forum for litigation relating to the corporation's internal affairs. This will enable corporations to litigate certain stockholder disputes more efficiently and with greater predictability.

Board-Adopted Forum Selection Bylaws Are Valid

In recent years, nearly every announcement of a merger or an adverse corporate development is followed by stockholder litigation, and cases are often commenced in multiple jurisdictions simultaneously. Defending the same claim in multiple courts—"multiforum litigation"—imposes significant costs on companies and their stockholders, who ultimately bear the costs of litigation and settlement. In response to that phenomenon, Chevron's and FedEx's boards each adopted a bylaw provision selecting Delaware courts as the exclusive forum for disputes relating to the corporation's internal affairs (except where the corporations consent to another forum). Each board adopted the bylaw pursuant to powers granted to it in the company's certificate of incorporation; no stockholder vote was taken. Chevron later amended its bylaw to address potential concerns about subject-matter jurisdiction for exclusively federal claims and personal jurisdiction over certain defendants.[2]

Chevron and FedEx stockholders challenged the statutory and contractual validity of the forum selection bylaws. The Chancery Court held that such provisions are valid under the relevant Delaware statute because they concern a matter—where a stockholder may sue a company—that bylaws properly may address. The court also rejected the argument that the bylaws are not contractually binding on stockholders because they were unilaterally adopted by the boards without stockholder consent. Bylaws constitute a binding contract between a Delaware corporation and its stockholders, and where a Delaware corporation's certificate of incorporation permits a board to unilaterally amend the bylaws, stockholders are on notice when they purchase stock that they are party to an inherently flexible contract. Thus the board can amend the bylaws without a stockholder vote, as long as those provisions are otherwise consistent with law.

The court also noted that even valid forum selection provisions may not always be enforceable. There may be limited circumstances in which requiring a plaintiff to litigate in the company-selected forum could be unreasonable. For example, a plaintiff may try to avoid enforcement of the provision if only some of the intended corporate defendants would be subject to jurisdiction in the forum. That sort of challenge does not, however, undermine the validity of the bylaws, and would not be expected to affect their enforceability very often. The Chevron bylaw, as amended, would not be susceptible to that potential obstacle to enforceability.

Practice Pointers

Delaware corporations whose bylaws do not currently contain forum selection provisions and whose certificates of incorporation permit the board to adopt and amend bylaws should consider amending their bylaws to include a forum selection provision that identifies the Delaware Chancery Court as the exclusive forum for certain types of actions, including derivative actions, fiduciary-duty lawsuits, claims under the Delaware General Corporation Law, and any other claims related to the corporation's internal affairs. Companies also should consider adopting bylaws modeled after the amended Chevron bylaw, which takes into account the jurisdictional limits of the Chancery Court by designating a federal court for federal-law claims and addresses circumstances where personal jurisdiction may be lacking. Some corporations will decide to await the outcome of any appeal of Chevron/FedEx before adopting exclusive forum provisions, but pending the results of any appeal, Chevron/FedEx is the current law in Delaware and provides Delaware corporations a means for reducing the burden and cost of multiforum litigation.

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.

Robert A. Profusek
New York
+1.212.326.3800
raprofusek@jonesday.com

James P. Dougherty
Cleveland / New York
+1.216.586.7302 / +1.212.326.3409
jpdougherty@jonesday.com

Philip Le B. Douglas
New York
+1.212.326.3611
pldouglas@jonesday.com

N. Scott Fletcher
Houston
+1.832.239.3846
sfletcher@jonesday.com

William S. Freeman
Silicon Valley / San Francisco
+1.650.687.4164 / +1.415.626.3939
wfreeman@jonesday.com

Lyle G. Ganske
Cleveland
+1.216.586.7264
lganske@jonesday.com

Thomas R. Jackson
Dallas
+1.214.969.2978
trjackson@jonesday.com

Thomas S. Jones
Pittsburgh
+1.412.394.7924
tsjones@jonesday.com

Eric Landau
Irvine
+1.949.553.7517
elandau@jonesday.com

Andrew M. Levine
New York
+1.212.326.8319
amlevine@jonesday.com

Michael J. McConnell
Atlanta
+1.404.581.8526
mmcconnell@jonesday.com

Robert C. Micheletto
New York
+1.212.326.3690
rmicheletto@jonesday.com

Geoffrey J. Ritts
Cleveland
+1.216.586.7065
gjritts@jonesday.com

Philip S. Stamatakos
Chicago
+1.312.269.4097
pstamatakos@jonesday.com

John C. Tang
San Francisco / Silicon Valley
+1.415.875.5892 / +1.650.687.4129
jctang@jonesday.com

Patricia J. Villareal
Dallas
+1.214.969.2973
pjvillareal@jonesday.com

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.