Delaware Limits Right to Sue Elsewhere in Forum Selection Decision

Forum Shopping

Many U.S. corporations are established or incorporated in Delaware and so will be keenly interested in a recent Delaware decision enforcing forum selection clauses in corporate bylaws. 

For non-lawyers, forum selection clauses are used to avoid forum shopping, or the ever popular multiple forum shopping exercises, where the same matter is brought almost simultaneously before courts in multiple jurisdictions (aka “multiforum litigation”).

Forum Selection Clause

A clause in a contract pre-selecting a particular forum, such as a given state, country, court or administrative proceeding for the resolution of a dispute…

Forum Shopping

Such occurs when a party attempts to have his action tried in a particular court of jurisdiction where he feels he will receive the most favorable judgment or verdict.

– Black’s Law Dictionary

Shareholders Challenge Boards’ Forum Selection Clauses

In this case, shareholders in two major corporations sued those companies and their directors for adopting forum selection clauses, arguing that they are unenforceable because they were unilaterally adopted by the boards using their power to make bylaws. The plaintiffs also claimed that the two boards breached their fiduciary duties in adopting the bylaws.

In Delaware, bylaws are presumed to be valid, so challenging the validity of the forum selection bylaws, the plaintiffs assumed the tough challenge of showing that the disputed bylaws could not operate validly in any conceivable circumstance.

The Words/Language Being Disputed

One of the forum-selection bylaws being disputed read as follows:

Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (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 other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this [bylaw].

The Decision: Boards Make the Rules

In holding in favor of the defendant organizations and their boards, and upholding the change to the bylaws, Chancellor Strine, with his usual illuminating language, held that:

…our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader [Delaware General Corporation Law], form part of a flexible contract between corporations and stockholders…  stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.

Leaving the Door Open (a Crack)

But the plaintiffs were left with some (really) scant hope. The court indicated that

  1. Where a plaintiff faces a motion to dismiss because it filed outside the forum identified in the forum selection clause, the plaintiff can argue that enforcing the clause in the circumstances of that case would be unreasonable, and
  2.  If a shareholder believes that a board is breaching its fiduciary duties by applying a forum selection clause to obtain dismissal of an actual case filed outside the forum designated by the bylaws, it may sue at that time.

Ruling is a Relief to Boards—and Carriers

During February 2012, a dozen complaints were filed in Delaware against corporations whose boards had adopted forum selection bylaws without stockholder votes. The threshold issue in all of these complaints was substantively identical—and filed for clients of the same law firm.

The court tells us that 10 of the 12 defendant corporations repealed their bylaws and so the complaints against them were dismissed. The remaining two companies stood firm and the court consolidated the complaints into this action.

In the world of D&O litigation, we have seen the high, duplicative costs associated with forum shopping and multi-forum litigation. This decision will be a welcome relief to boards and their D&O carriers, alike.

In its decision, the court noted that in the last three years, over 250 publicly traded corporations have adopted such provisions. This trend may well continue, at least in Delaware.

 


A huge shout out to Francis Pileggi and his marvelous Delaware Corporate & Commercial Litigation Blog for his timely and succinct discussion of this case and other decisions of importance from the Delaware Supreme Court and Court of Chancery: thank you and, as always, great job!

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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