Delaware Applies Moelis Amendment to Enforce Forum Selection in Stockholder Employment Agreement over Corporation’s Bylaw

In a recent decision, the Delaware Court of Chancery applied the Delaware General Corporation Law’s Moelis Amendment in finding that a non-Delaware forum selection clause in a CEO’s employment agreement overrode the corporation’s forum selection bylaw.

The Delaware Court of Chancery issued a significant decision of first impression regarding non-Delaware forum selection clauses in stockholder agreements involving corporate governance disputes.

In Masimo Corporation v. Kiani, the court dismissed the company’s claims against its former chief executive officer (CEO) and controlling stockholder, holding that a California forum-selection clause in the CEO’s employment agreement must be honored, even if the litigation includes claims concerning breaches of fiduciary duty by the CEO that, under the company’s bylaws, could have only been litigated in Delaware.

This decision has important implications for Delaware corporations, their boards, and stockholders negotiating employment agreements with officers or employees who may also be stockholders.

BACKGROUND

Masimo Corporation had a founder who served at its CEO and chairman until September 2024, and the CEO allegedly exercised “virtually absolute control over every aspect of [the Company] and oversaw its expansion.”

In 2015, the board—allegedly hand-picked by the CEO—approved an Employment Agreement granting the CEO substantial severance and a “Special Payment” if terminated under certain conditions, alongside restricted stock units and cash. The Agreement included a forum selection clause requiring all disputes “arising out of or relating to” the agreement to be brought exclusively in the Superior Court of California, County of Orange.

After an activist investor challenged the Agreement and sought board representation, the CEO resigned, claimed “Good Reason” under the Agreement, and initiated a California action seeking severance and the Special Payment. The company then filed suit in Delaware seeking to invalidate the Agreement on the grounds that it was the product of a breach of fiduciary duty. The CEO moved to dismiss, arguing that California was the exclusive forum for disputes arising out of the Employment Agreement, which included the company’s claimed breach of fiduciary duty.

THE COURT’S DECISION

The Delaware Court of Chancery,[1] applying Rule 12(b)(3), analyzed the enforceability and scope of the forum selection clause of the Employment Agreement and the company’s forum selection bylaw.

The company argued that its bylaws designated Delaware as the exclusive forum for its fiduciary duty claims against the CEO, but the court noted the bylaws expressly permitted the company to consent to an alternative forum, which it had done by entering the Employment Agreement.

A central issue was whether the “Independent-Source Principle” from Parfi Holding AB v. Mirror Image Internet Inc., which held that contractual forum selection clauses do not cover fiduciary duty claims arising independently of the contract, still applied.

The court held that the 2024 enactment of the so-called Moelis Amendment, 8 Del. C. § 122(18),[2] abrogated this principle for agreements with “current or prospective stockholders” when exercised by the stockholder “in its or their capacity as such.” Section 122(18) expressly authorizes Delaware corporations to enter into contracts with stockholders—including those specifying exclusive non-Delaware forums for internal affairs claims—unless contrary to the certificate of incorporation or provisions of the Delaware General Corporation Law (DGCL) (with the exception of § 115).

Notably, the amendments to the DGCL generally apply retroactively, meaning the implications from this decision apply to both preexisting and prospective agreements.

Importantly, the court found that while styled as an employment contract, the agreement with the CEO functioned as a governance agreement in his capacity as a controlling and prospective stockholder, falling squarely within § 122(18). In reaching this decision, the court relied on Moelis to conclude that the CEO’s employment agreement here fell within the scope of § 122(18). In Moelis, the Court previously held an agreement giving a controlling stockholder certain governance rights violated § 141(a).

Although the court observed that § 122(18) was adopted as a legislative response to Moelis, the court nonetheless found that a seven-factor test employed in Moelis to identify a previously impermissible “governance agreement” was a useful guide in determining whether the Employment Agreement was actually an agreement “between a corporation and a stockholder in his or her capacity as such.”^[3]

The Moelis factors consider whether the agreement

• has a “statutory grounding in a section of the DGCL;”
• has “intra-corporate actors” as counterparties;
• contains “provisions [that] seek to specify the terms on which intra-corporate actors can authorize the corporation’s exercise of its corporate power;”
• does “not readily reveal an underlying commercial exchange;”
• has “governance rights as their point;”
• “involve[s] control rights, so the presumptive remedy will be equitable relief enforcing the right;” and
• is enduring with the corporation, lacking an indefinite term, and/or limiting the corporation’s ability to terminate.

The court held that application of the Moelis factors to the Employment Agreement demonstrated that it was a “governance agreement” subject to § 122(18) because (1) the CEO was an “intra-corporate actor” as a “large stockholder,” (2) the Agreement had an indefinite term that constrained the company’s ability to terminate it, and (3) the Employment Agreement was “not tied to a specific, one-off commercial exchange; instead it is a lasting agreement whose ‘purpose is to allocate control rights’ over the long term.”

Furthermore, the court rejected the argument that the Agreement’s forum selection clause needed a “clear expression” to cover fiduciary duty claims, holding that § 122(18) eliminates any such requirement. The clause’s language—covering any suit “arising out of or relating to” the Agreement—was deemed “paradigmatically broad” and sufficient to encompass all of the company’s fiduciary duty claims, which were inextricably linked to the Agreement.

As a result, the court granted the CEO’s motion to dismiss, compelling the company to litigate its fiduciary duty claims in California pursuant to the Employment Agreement.

IMPLICATIONS OR RECOMMENDATIONS

This decision has broad implications for Delaware corporations, particularly those with controlling stockholders or executives who are also “current or prospective” stockholders and Delaware forum selection clauses in the bylaws as opposed to the charter. The court’s application of § 122(18) signals that corporations may, by agreement, select non-Delaware forums that will apply to internal affairs disputes, even where the corporation has a Delaware forum selection clause in its bylaws.

Corporations with Delaware forum selection bylaws should review their agreements (including employment agreements) with controlling stockholders, directors, or officers, to identify any non-Delaware forum provisions. Boards may want to ensure that any such agreements do not inadvertently override Delaware-only forum selection bylaws and the protections or predictability that the Delaware forum can provide. Consideration should be given when drafting (or amending) such agreements to include internal affairs carveouts in any non-Delaware forum selection clause.

It may also be prudent to review forum selection clauses in non-executive employment agreements, to the extent such agreements confer prospective equity ownership upon the employee. Although the court in Masimo specifically focused on a “governance agreement” with a “large stockholder” and “controller,” it observed that § 122(18) applied to any agreement with a “current or prospective stockholder in its or their capacity as such,” suggesting that any agreement with an employee that receives equity compensation could fall within the scope of § 122(18).

CONCLUSION

The Delaware Court of Chancery’s enforcement of a non-Delaware forum selection clause in Masimo Corporation v. Kiani establishes under 8 Del. C. § 122(18) that such clauses in stockholder agreements are enforceable as to internal affairs claims that would be required to be litigated in Delaware under a forum selection bylaw.

Delaware corporations with forum selection clauses in their bylaws (as opposed to the charter) should carefully review their contractual arrangements and governance documents to ensure alignment and to understand the forum in which key disputes may be adjudicated.