Directors of Delaware corporations can now prohibit the corporation’s stockholders from suing them anywhere except Delaware. This is the long-awaited result of a June 25, 2013 decision in Boilermakers Local 154 Retirement Fund, et al., v. Chevron Corp., et al. , C.A. No. 7220-CS (June 25, 2013, Del. Ch.). In Boilermakers, the Delaware Court of Chancery upheld the facial validity of a director-adopted corporate bylaw that designates Delaware as the exclusive forum for certain types of stockholder litigation: derivative litigation, fiduciary duty litigation, statutory claims under the Delaware General Corporation Law, and other claims regarding the internal affairs of the corporation.
A forum selection bylaw can benefit companies of all shapes and sizes. A small start-up corporation would benefit from a forum selection bylaw by limiting the risk and uncertainty of stockholder litigation associated with all aspects of operating a for-profit corporation, from stockholders’ books and records requests to annual meetings, to corporate elections, and to the business decisions made by the directors and officers on a constant basis. A large, multinational conglomerate would benefit from a forum selection bylaw in all the same ways. In addition, for an acquisitive corporation that tends to be a repeat player in the M&A market, the forum selection bylaw is perhaps the most potent weapon now being deployed by corporations against costly multijurisdictional litigation, in which different stockholder plaintiffs seek to litigate the same claims on behalf of the same putative class of stockholders challenging the same transaction in parallel.
Forum selection bylaws permitted by the Boilermakers case warrant serious consideration by any business entity chartered in Delaware.
And now is the time to do it. The argument in favor of enforcing of a forum selection bylaw in a given case is much stronger if the board of directors of the corporation can credibly claim to have adopted the bylaw on the proverbial “clear day,” long before the board was aware of any potential litigation.
Depending on the provisions in a corporation’s charter, forum selection bylaws may be adopted unilaterally by the board of directors without explicit stockholder approval. Yet the stockholders retain the right, under Section 109 of the Delaware General Corporation Law, to amend or repeal a board-enacted bylaw provision. This is another reason that a corporation may want to move quickly: The longer that a board-adopted bylaw remains on the books without amendment or repeal by the stockholders, the better the case for the stockholders’ implied consent to the provision, if it ends up being challenged in court.
The Court of Chancery’s decision is currently on appeal to the Delaware Supreme Court. The prediction here is that the Court of Chancery’s thoughtful and well-reasoned decision will be affirmed. But even in the unlikely event that the decision is overturned on appeal, the benefits to adopting a forum selection bylaw promptly outweigh what little downside, if any, exists. If Boilermakers is overturned on appeal, then the forum selection provision can be quickly and relatively costlessly excised from the bylaws. If stockholders don’t like the bylaw provision, they may remove it. And if a non-Delaware court fails to enforce a forum selection bylaw, then the corporation finds itself exactly where it is today – facing the unseemly prospect of multiforum litigation, and forced to litigate first the issue of where the case should proceed.
The views expressed in this article are not necessarily those of Seitz Ross or its clients.