In a closely-watched case of first impression under Delaware law, on June 25, 2013, Chancellor Strine held that the bylaw provisions of Chevron Corp. and FedEx Corp. requiring that any derivative claim, fiduciary duty claim or other stockholder claim under Delaware corporate law be exclusively heard in Delaware courts are legally valid under Delaware law.1 These provisions were adopted by the boards of Chevron and FedEx in response to the costs and inefficiencies inherent in defending multi-forum litigation, although Chancellor Strine premised his ruling on the narrower questions of whether a board of a Delaware corporation has the legal authority to adopt such a bylaw provision under Delaware law, and whether such a bylaw provision adopted unilaterally by a board of directors is contractually valid and enforceable like other contractual forum selection clauses under the test adopted by the United States Supreme Court in The Bremen v. Zapata Off-Shore Co. (407 U.S. 1 (1972)). A copy of Chancellor Strine’s opinion may be accessed here.
Background
In recent years, a number of Delaware corporations have either adopted or proposed stockholder proposals to approve exclusive forum bylaw provisions similar to those at issue in this combined case. These bylaw provisions, as well as exclusive forum charter provisions, are intended to address the increasing number of cases against or involving Delaware corporations filed simultaneously in courts both within and outside of Delaware, particularly but not exclusively in connection with mergers and acquisitions transactions.2 The ubiquity of multi-forum stockholder litigation has been criticized as a “merger tax” often benefitting only the plaintiffs’ lawyers whose fees are paid through a settlement. Others have expressed concerns that multi-forum litigation incentivizes early settlements to avoid the expense and delay of litigating on multiple fronts, which may cause legitimate claims to be missed or not fully investigated due to “disclosure only” settlements in which a targeted company makes limited changes to their public transaction disclosure in exchange for a settlement in which only the plaintiff law firm is paid.
Plaintiffs argued that the Chevron and FedEx exclusive forum bylaw provisions are invalid because, among other things, (a) they exceed the authority granted in Section 109(b) of the Delaware General Corporation Law (“DGCL”), (b) they were adopted without stockholder approval, (c) they could leave plaintiffs without a forum in which to litigate certain types of claims (including federal securities law and patent claims), and (d) they could insulate lower level executives who are not subject to the personal jurisdiction of the Delaware courts from liability for improper actions.
In holding that the Chevron and FedEx bylaws were not per se invalid under Delaware law, Chancellor Strine found that the provisions only regulate suits by stockholders in cases governed by the internal affairs doctrine. In Chancellor Strine’s view, by establishing procedural rules for these types of cases, the provisions “plainly relate to the ‘business of the corporation[s],’ the ‘conduct of their affairs,’ and regulate the ‘rights or powers of [their] stockholders.’” Further, Chancellor Strine noted that forum selection bylaws are not inconsistent with law because Delaware law respects forum selection clauses in other contracts. Having determined that forum selection bylaws meet the standards set forth in Section 109(b) of the DGCL, Chancellor Strine concluded that such bylaws are not facially invalid under Delaware law.
Chancellor Strine noted that as permitted by Section 109(a) of the DGCL, the Chevron and FedEx certificates of incorporation authorize their respective boards to adopt and amend the corporation’s bylaws. Therefore, investors who acquired stock of these corporations were on notice that the bylaws could be amended by the board of directors unilaterally, and by purchasing the stock assented to that right as part of the essential contract represented by the corporation’s bylaws. Chancellor Strine also noted that the plaintiffs’ arguments that a board of directors cannot unilaterally change the terms of the contract represented by the bylaws seeks to revive the outdated “vested rights” doctrine and fundamentally misunderstands the relationship between the corporation and stockholders under the DGCL. Therefore, Chancellor Strine concluded that a forum selection clause validly adopted by a board with the authority to do so is valid and enforceable in Delaware, just as a forum selection clause in any other contract governed by Delaware law is valid and enforceable.
Chancellor Strine cautioned that despite his holding in this combined case, forum selection bylaws are not immune from challenge in the context of a “future real-world situation.” However, Chancellor Strine determined that by asserting a facial validity challenge based on hypothetical or theoretical future harms, the Plaintiffs’ assumed the burden of proving that such bylaws can never operate consistently with law, and that the plaintiffs had not met that burden.
What Comes Next?
Even though exclusive forum bylaw provisions have now been held to be statutorily and contractually valid under Delaware law, courts in other jurisdictions may not defer to this decision and may for state law or public policy reasons decide not to respect the internal affairs doctrine and yield to the Delaware courts.3 Chancellor Strine also left the door open to future challenges to the adoption and application of such provisions in specific, real-world contexts, without providing clear guidance as to what factors may be relevant in assessing when and in what context the adoption or application of such provisions may be deemed invalid. Furthermore, the broad adoption of such provisions may prompt corporate governance-based challenges by activist or institutional shareholders, although such activity has been limited to date.
Conclusion
It is now likely that more public companies will adopt exclusive forum bylaw provisions, either with or without shareholder approval, and that Delaware corporations will continue to include such provisions in their charters and bylaws prior to going public. Delaware corporations considering going public may benefit from adopting exclusive forum charter and bylaw provisions before going public (thereby eliminating arguments based on notice to or consent of public stockholders or the adoption or application of such provisions in a specific factual context). Public Delaware corporations also may benefit from adopting such provisions in their charter documents through a stockholder approved amendment.
To the extent stockholder approval is sought or required, corporations should clearly explain the inefficiencies and potential inequities resulting from multi-forum litigation, and should identify concrete cost savings or other benefits sought to be obtained by adopting such provisions, particularly if the corporation has in the past been subjected to costly multi-forum litigation. By demonstrating the legitimate reasons for the board’s adoption and support of such provisions, such communication can be persuasive in causing stockholders and proxy advisory firms to support the adoption or ratification of such provisions.
Contacts
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Filippone-John1The two cases at issue, Boilermakers Local 154 Retirement Fund et al. v Chevron Corp. et al, No. 7220-CS, and Iclub Investment Partnership v. FedEx Corp. et al, No. 7238-CS were both heard by Chancellor Strine in a combined proceeding, due to the common legal issues at hand and the fact that both bylaws were challenged in nearly identical complaints.
2The percentage of mergers and acquisitions transactions that are litigated has steadily risen in the past few years, and multi-forum litigation has become the norm in these cases. See, Shareholder Litigation Involving Mergers and Acquisitions: Review of 2012 M&A Litigation February 2103 Update (Cornerstone Research) by Robert M. Daines and Olga Koumrian (available here hereinafter the Cornerstone Report). This study reports that 93% of mergers and acquisitions transactions announced in 2012 involving the acquisition of U.S. Companies valued over $100 million were litigated, with an average of 4.8 lawsuits for each transaction. For firms incorporated in Delaware, 65% of the transactions announced in 2012 involving the acquisition of U.S. Companies valued over $100 million were challenged in multiple jurisdictions. Of the transactions announced in 2012 involving the acquisition of U.S. Companies valued over $100 million that were litigated for which Cornerstone research was able to determine the outcome, 81% were settled for additional disclosures and attorney’s fees only, with no payments to the shareholders.
3See, Bushansky v. Armacost et al., No. 12-1597, complaint filed (N.D. Cal. Mar. 30, 2012), which is the California court challenge to Chevron’s exclusive bylaw provision, stayed the action until August, 2013, pending the resolution of the Delaware challenge to Chevron’s exclusive forum bylaw. Conversely, in two 2011 California actions, a federal judge in the Northern District of California refused to enforce an exclusive-forum bylaw that was adopted by the board of a Delaware corporation whose principle executive offices are located in California. Galaviz v Berg et al., No. 10-3392, 2011 WL 135215; Prince v. Berg et al., No. 10-4233, 2011 WL 9103 (N.D. Cal. Jan. 3, 2011).
This article was originally published by Bingham McCutchen LLP.