Delaware Court of Chancery Reaffirms the Right of Corporations to Enact Forum Selection Clauses in Shareholder Suits

September 12, 2014

A recent decision from the Delaware Court of Chancery has built on an important 2013 ruling protecting Delaware corporations’ right to adopt bylaws that select the forums where shareholders may file suit. In June 2013, the Court of Chancery held in Boilermakers Local 154 Retirement Fund v. Chevron Corp. that companies may include forum selection clauses in their corporate bylaws that require shareholder suits to be brought within the state of Delaware. Chevron recently was reaffirmed – and slightly expanded – in a September 8, 2014, ruling in The City of Providence v. First Citizens Bancshares, Inc. There, the court rejected claims that First Citizens’ board members breached their fiduciary duty by adopting a forum selection clause that required all shareholder disputes to be brought in North Carolina, despite the fact that the company is incorporated in Delaware.

In the suit, the City of Providence, a First Citizens shareholder, argued that the forum selection clause limited the right of shareholders to avail themselves of certain protections afforded only under Delaware corporate law. The shareholder also claimed that First Citizens was attempting to insulate a newly proposed merger from judicial review by restricting access to the Delaware court system.

The Court of Chancery rejected both arguments, first noting that state and federal courts in North Carolina were capable of applying Delaware law where necessary to resolve the suit. The court also ruled that nothing within the forum selection clause limited the ability of shareholders to obtain meaningful judicial review of the proposed merger, just that such review must be sought in North Carolina.

The court’s decision was a strong affirmation of last year’s opinion upholding the facial validity of a Chevron Corporation bylaw designating Delaware as the exclusive forum for shareholder suits. The Chevron decision held that the contractual relationship between a corporation and its stockholders permits a corporate board to unilaterally adopt certain bylaws, including bylaws designating a particular forum for shareholder suits. The validity of forum selection clauses as part of traditional commercial contracts has long been understood, and the Chevron decision extended those protections to intracorporate disputes brought by shareholders.

A possible point of distinction in the City of Providence case, however, was that the forum selection clause in question designated a state other than Delaware, the state of incorporation, as the required forum for shareholder suits brought against First Citizens. The court found this distinction irrelevant, noting that the analysis applied in the Chevron case dictated the same outcome here. The court stated that “nothing in the text or reasoning of Chevron can be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws.”

Nor did the court find persuasive the city’s claim that the timing of the bylaw’s adoption – passed the same day the merger was announced – indicated an unlawful attempt to head off judicial review of the proposed deal or improperly protect the interests of First Citizens’ board members. In rejecting the argument, however, the court noted the possibility that a selection clause might be rendered invalid if the shareholders alleged specific acts of impropriety by the board.

Together with Chevron, the City of Providence case likely provides further incentive for companies to adopt forum selection bylaws as a means of reducing the expenses and uncertainties associated with multijurisdictional litigation. In addition, companies incorporated in Delaware may now consider whether issues of convenience or other factors weigh in favor of focusing intracorporate litigation in another forum. Finally, these opinions may provide persuasive authority to courts outside of Delaware as they often look to Delaware law for guidance.