At or near the end of many corporations’ bylaws is a forum selection provision, requiring certain types of actions against the company to be brought in the courts of a designated state (often, Delaware). These provisions reflect three Delaware court decisions and one addition to the Delaware General Corporation Law (DGCL), all within the last eight years.
First, in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), the Delaware Court of Chancery upheld the validity of such provisions in the bylaws of Chevron and of Exxon, even though the boards of those companies had thereby unilaterally (without involving the shareholders) restricted to Delaware shareholders’ direct or derivative suits—and any shareholder suits involving claims under the Delaware General Corporation Law or other “internal affairs claims.”
The Court observed that because the certificates of incorporation of each company authorized the board itself to amend the bylaws, “stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.” Id. at 939.
It also acknowledged the boards’ arguments that “multiforum litigation, when it is brought by dispersed stockholders in different forums, directly or derivatively, to challenge a single corporate action, imposes high costs on the corporations and hurts investors by causing needless costs that are ultimately born by stockholders, and that these costs are not justified by rational benefits for stockholders from multiforum filings”; and noted that “in the last three years, over 250 publicly traded corporations have adopted such provisions.” Id. at 944.
The Court found forum selection provisions permissible under Delaware General Corporation Law (DGCL) Section 109(b), under which bylaws can concern any issue “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.” Id. at 952.
Moreover, “precisely because forum selection bylaws are part of a larger contract between the corporation and its stockholders, and because bylaws are interpreted using contractual principles, the bylaws will also be subject to scrutiny under the principles for evaluating contractual forum selection clauses established by the Supreme Court of the United States in The Bremen v. Zapata Off–Shore Co., [92 S.Ct. 1907 (1972),] and adopted by our Supreme Court.
“In Bremen, the Court held that forum selection clauses are valid provided that they are ‘unaffected by fraud, undue influence, or overweening bargaining power,’ and that the provisions ‘should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable.’
“In [Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010)], our Supreme Court explicitly adopted this ruling, and held not only that forum selection clauses are presumptively enforceable, but also that such clauses are subject to as-applied review under Bremen in real-world situations to ensure that they are not used ‘unreasonabl[y] and unjust[ly].’ The forum selection bylaws will therefore be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable.” Id. at 957.
Second, fifteen months later, the Chancery Court approved a bylaw provision very similar to Chevron’s and Exxon’s, which selected North Carolina’s courts instead of Delaware’s, and which added that the forum selection would apply “to the fullest extent permitted by law.” City of Providence v. First Citizens Bancshares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014):
“[N]othing in the text or reasoning of Chevroncan be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws. Thus, the fact that the Board selected the federal and state courts of North Carolina—the second most obviously reasonable forum given that FC North is headquartered and has most of its operations there—rather than those of Delaware as the exclusive forums for intra-corporate disputes does not, in my view, call into question the facial validity of the Forum Selection Bylaw.” Id. at 235.
Third, the following year, the Delaware Legislature added to the DGCL a new Section 115, which authorized companies to include in their articles of incorporation or bylaws, “consistent with applicable jurisdictional requirements, [a requirement] that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.”
For these purposes, the section defined “internal corporate claims” as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”
Fourth, In 2020, the Delaware Supreme Court, overruling the Chancery Court, held that companies could include in their articles/certificates of incorporation provisions requiring claims for alleged violations of the federal Securities Act of 1933 to be filed in federal courts. Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020).
Such Federal Forum Provisions (FFPs) fell within the scope of the DGCL’s Section 102(b)(1), which allows certificates of incorporation to include “any provision for the management of the business and for the conduct of the affairs of the corporation,” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.” Id. at 113-114.
Moreover, they did not violate Section 115, which “merely confirms affirmatively. . . that a charter may specify that internal corporate claims must be brought in ‘the courts in this State’ (presumably, including the federal court) [and], read fairly, does not address the propriety of forum-selection provisions applicable to other types of claims.” Id. at 119.
The Sciabacucchi Court concluded that
“FFPs are a relatively recent phenomenon designed to address. . . difficulties presented by multi-forum litigation of Securities Act claims. The policies underlying the DGCL include certainty and predictability, uniformity, and prompt judicial resolution to corporate disputes. Our law strives to enhance flexibility in order to engage in private ordering, and to defer to case-by-case law development. Delaware courts attempt ‘to achieve judicial economy and avoid duplicative efforts among courts in resolving disputes.’ FFPs advance these goals.” Id. at 137.
See also Sylebra Capital Partners Master Fund, Limited v. Perelman, 2020 WL 5989473 (Del. Ch.) (upholding the Nevada-centric forum selection provision of a Nevada corporation formerly incorporated in Delaware, and noting, at *11, that “a stockholder in a Delaware corporation gives consent to be bound by current and future bylaws when it buys stock. Whether or not the alleged wrongdoing comes before or after the adoption of a forum selection bylaw is irrelevant in determining the reasonableness or overall enforceability of the bylaw.”)
However, in Seafarers Pension Plan v. Bradway, 2020 WL 3246326 (N.D. Ill.), at *1, the shareholder plaintiff targeted Boeing (a Delaware-incorporated company) “pursuant to Section 14(a) of the Securities and Exchange Act of 1934, alleging the dissemination of materially false and misleading proxy statements.”
The District Court observed that “The 1934 Act gives federal courts exclusive jurisdiction over derivative suits filed under the Act. The bylaw in question adopted by Boeing prohibits the filing of derivative suits in any court other than a Delaware state court.” Id.
Nonetheless, it granted Boeing’s motion to dismiss for forum non conveniens, apparently accepting the company’s arguments that “because Delaware securities law provides for a derivative cause of action similar to that provided by the 1934 Act, the bylaw does not deprive Plaintiff of a remedy and Plaintiff is not harmed substantively,” id. at *2; and noting, at *3, the benefits to the corporation of avoiding “multi-forum litigation.”
Drafters, reviewers, and/or revisers of forum selection provisions appearing in bylaws or articles/certificate of incorporation might consider the following items (which are not provided or offered as legal advice):
First, if the company is not incorporated in Delaware, does the corporate statute of the state of incorporation contain any parallel to DGCL Section 115? Does that statute at include provisions similar to DCGL Sections 109(b) and 102(b)(1), allowing a broad range of issues to be addressed by (respectively) bylaws and the articles/certificate of incorporation”
Second, allow the company the option of waiving the selection of forum. Many provisions begin, “Unless the Corporation consents in writing to the selection of an alternative forum, . . . “
Third, carefully specify the courts selected, and their alternatives: for instance, “the Court of Chancery of the State of Delaware (or, in the event that that Court does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware)” might be preferable to “a state or federal court located within the state of Delaware.” But would it be better than referring to “a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware)”?
Another example of a sequential selection appears in Sylebra Capital Partners, supra, at *10: “In the event that the Eighth Judicial District Court of Clark County, Nevada does not have jurisdiction over any such action, suit or proceeding, then any other state district court located in the State of Nevada shall be the sole and exclusive forum therefor and in the event that no state district court in the State of Nevada has jurisdiction over any such action, suit or proceeding, then a federal court located within the State of Nevada shall be the sole and exclusive forum therefor.”
Fourth, categorize the actions affected by this forum restriction. Provisions requiring actions to be brought in Delaware state courts generally expand on and/or refer to the language of DGCL Section 115, in asserting their applicability to, for example,:
“(i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim for or based on a breach of a fiduciary duty owed by any current or former director or officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, including a claim alleging the aiding and abetting of such a breach of fiduciary duty, (iii) any action asserting a claim against the Corporation or any current or former director or officer or other employee of the Corporation arising pursuant to any provision of the DGCL [Delaware General Corporation Law] or the Certificate of Incorporation or these By-Laws (as either may be amended from time to time), (iv) any action asserting a claim related to or involving the Corporation that is governed by the internal affairs doctrine, or (v) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. . . .”
Green v. Paz, 2020 WL 555052 (E.D. Mo.), at *2.
Fifth, indicate that the forum for federal securities law claims under the Securities Act of 1933 will be federal district courts, as did the provision in Sciabacucchi: “[T]he federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933.” 227 A.3d at 111-112.
Sixth, in light of the Seafarers Pension Plan decision discussed above, clarify that the forum restriction provisions will not apply to actions brought under the Securities Exchange Act of 1934.
Seventh, add that the forum restrictions are to operate “to the fullest extent permitted by law,” especially if the selected forum(s) is/are in a different state than the company’s state of incorporation. In First Citizens Bankshares, the Delaware Chancery Court noted that “[t]his qualification appears to carve out from the ambit of the Forum Selection Bylaw [requiring certain actions to be brought in North Carolina’s courts] a claim for relief, if any, that may be asserted only in the Court of Chancery” itself. 99 A.3d at 236.
Eighth, characterize the restrictions, as DGCL Section 115 already indicates, as “subject to applicable jurisdictional requirements”; and/or as “subject to the [designated court’s or courts’] having personal jurisdiction over the indispensable parties named as defendants.”
Ninth, because the Chancery Court has identified the latter language above as “a factor counseling against implicit consent, ” In re Pilgrim’s Pride Corp. Derivative Litigation, 2019 WL 1224556 (Del. Ch.), at *14, indicate that a stockholder who files a relevant action in any forum other than the one(s) specified will be considered to have consented to personal jurisdiction in any of the designated forums (and to service on her counsel, wherever that counsel is located) should the corporation bring an action in one of the designated forums to enforce the selection provision. (In Pilgrim’s Pride, at *15, the Chancery Court cautioned that “This decision does not address whether a Delaware court could assert jurisdiction over a stockholder based solely on a board-adopted forum-selection provision if the stockholder had no other ties to this state”).
Tenth, indicate that anyone who buying or otherwise acquiring or holding any interest in shares of the corporation will be deemed to have notice of and consented to the forum selection provision of the bylaws. Some provisions specifically include “any beneficial owner” among those so affected. See Maloney v. Forterra, 2019 WL 3429046 (N.D. Tex.), at *3 (reproducing such a provision).
Eleventh, include a severability statement, indicating that if any element of the forum selection provision “shall be held to be invalid, illegal or unenforceable. . . then, to the fullest extent permitted by law, the validity, legality and enforceability of such provision(s) in any other circumstance and of the remaining [elements]. . . shall not in any way be affected or impaired thereby.” Drulias v. 1st Century Bancshares, Inc., 241 Cal. Rptr. 3d 843, 847 n.2 (Ct. App. 2018) (reproducing the provision).
Twelfth, take into account the expressed positions of institutional shareholders and proxy advisors on forum selection provisions.
For instance, the Institutional Shareholder Services (ISS) United States Proxy Voting Guidelines: Benchmark Policy Recommendations (Nov. 19, 202, pp. 25-26) generally support provisions “that specify ‘the district courts of the United States’ as the exclusive forum for federal securities law matters,” as well as those that “specify courts located wihin the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations,” in both cases “in the absence of serious concerns about corporate governance or board responsiveness to shareholders.” Similarly, the State Street Global Advisors Proxy Voting and Engagement Guidelines (March 2021, p.14) list exclusive forum provisions among the initiatives that State Street will “generally support.”
However, the CalPERS Proxy Voting Guidelines (April 2021, p.9) indicate that “We vote against proposals seeking to establish an exclusive forum provisions [sic] since we oppose restrictions on shareowners to pursue derivative claims and participate in the selection of appropriate venue.” The Council of Institutional Investors’ Corporate Governance Policies (Sept. 22, 2020, p.5) state that “Companies should not attempt to restrict the venue for shareowner claims by adopting charter or bylaw provisions that seek to establish an exclusive forum.”
By contrast, Vanguard Funds’ Summary of its proxy voting policies for U.S. portfolio companies (2020, p.19) notes that each “fund will vote case-by-case on management proposals to adopt an exclusive forum provision. Considerations include the reasons for the proposal, regulations, governance and shareholder rights available in the applicable jurisdiction, and the breadth of the application of the bylaw.” And Glass Lewis’ 2021 Proxy Paper Guidelines (2020, p.52) recommend that shareholders oppose such proposals “unless the company: (i) provides a compelling argument on why the provision would directly benefit shareholders; (ii) provides evidence of abuse of legal process in other, non-favored jurisdictions; (iii) narrowly tailors such provision to the risks involved; and (iv) maintains a strong record of good corporate governance practices.”
Although courts (and some legislatures) will certainly be visiting (or revisiting) the issue of forum selection by corporations, careful and informed drafting could well enable boards of directors not only to stand but also to choose their legal ground(s).
