Jody Keeling is an Associate in our Tampa office
Michael Redondo is an Associate in our Miami office
On June 25, 2013, Chancellor Strine of the Delaware Court of Chancery upheld the statutory and contractual validity of bylaws adopted by a corporation's board of directors that specifically designate an exclusive forum for litigating disputes regarding the internal affairs of the corporation. Generally speaking, a forum selection bylaw is a provision in a corporation's bylaws that designates a forum as the exclusive venue for certain stockholder suits against the corporation, either as an actual or nominal defendant, as well as its directors and employees. The plaintiffs in this particular lawsuit claimed that the forum selection bylaws were statutorily invalid because they were beyond the scope of the board's authority under the Delaware General Corporation Law (DGCL) and that the bylaws were contractually invalid because they were unilaterally adopted by the board without shareholder approval.
First, the court held that the forum selection bylaws are statutorily valid exercises of board authority under 8 Del. C. §109(b). Section 109(b) provides that the bylaws of a corporation "may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." The court found that the bylaws "plainly relate to the business of the corporation[s], the conduct of [their] affairs, and regulate the rights or powers of [their] stockholders." Therefore, the court found that such forum selection bylaws were not invalid as a matter of statutory law.
Second, the court held that board-adopted forum selection bylaws are contractually valid if the corporation's articles of incorporation allow for unilateral adoption or amendment of the bylaws. The court concluded that the board-adopted bylaws were binding on the stockholders because, consistent with 8 Del. C. §109(a), the certificate of incorporation gave the board the power to adopt and amend bylaws unilaterally and that 8 Del. C. §109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs and the rights or powers of its stockholders. Therefore, by purchasing stock in the corporation, the stockholders agreed to the articles of incorporation of the corporation, which included the provisions that allowed for the unilateral adoption of the bylaws. In addition, the court noted that there are several ways that stockholders have the ability to check the board's authority. For example, stockholders can repeal the bylaws by majority vote or withhold votes from certain directors at annual elections.
The court's opinion now clears a path for directors of Delaware corporations, when authorized by the certificate of incorporation, to adopt forum selection bylaws to limit a company's exposure to duplicative shareholder class actions and derivative actions across multiple forums. However, there are a few important points to note about the court's decision. First, the court emphasized the limited nature of the forum selection bylaws at issue in that they did not affect a plaintiff from filing a lawsuit under a statutory right of action pursuant to any federal statute, and that the bylaws merely addressed claims covered by the internal affairs doctrine that applies the law of the state of incorporation in any event. Second, the court based its decision on the fact that it was addressing a facial challenge to the validity of the bylaws in question, but it did not address how it would rule if there were specific allegations that the companies' boards were breaching their fiduciary duty or even whether future plaintiffs could challenge the use of the board's power under the bylaws as inconsistent with its fiduciary duty. This decision is still subject to review by the Delaware Supreme Court and it is likely that it will be appealed.
Delaware Court of Chancery Opinion:
http://courts.state.de.us/opinions/download.aspx?ID=190990
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