Delaware Court Of Chancery Once Again Upholds Forum Selection Bylaw Requiring Intra-Corporate Litigation To Be Brought In A Forum Chosen By The Board Of Directors

Summary: Once announced, merger and acquisition transactions typically result in the filing of numerous lawsuits in multiple jurisdictions. The Delaware Chancery Court has once again approved forum selection bylaw as a way to reduce the expense and distraction of multi-forum litigation.

On September 8, 2014, Chancellor Andre G. Bouchard reaffirmed and extended a decision from last year by then-Chancellor, now Chief Justice, Leo E. Strine, Jr. that Boards of Directors may permissibly adopt forum selection bylaws to avoid the expense of multi-forum litigation. In City of Providence v. First Citizens Bancshares, Inc. (Citizens Bancshares), Chancellor Bouchard dismissed litigation challenging a proposed merger holding that the rationale from Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) (Chevron), in which the court upheld the facial validity of forum selection bylaws requiring litigation be brought in the Delaware courts, equally applied to compel the dismissal of a suit challenging the facial and as-applied validity of a bylaw requiring litigation be brought in the courts of North Carolina.

Plaintiffs' Claims

The plaintiffs challenged the facial validity of the bylaw and asserted a claim for breach of fiduciary duty in connection with the adoption of the bylaw on the same day that the proposed merger was announced. The plaintiffs also challenged the proposed merger by asserting that the board and a controlling shareholder had breached their fiduciary duties in connection with the proposed transaction by agreeing to overpay for the company to be acquired in the transaction to the benefit of the controlling shareholder that had an interest in the company to be acquired. The parties agreed to have the motion to dismiss the validity of the bylaw heard in advance of any preliminary injunction or motions to dismiss the Complaint on other grounds.

The Court's Analysis

Facial Challenges

The court first noted that the forum selection bylaw, like those at issue in Chevron, sought to regulate the filing of certain lawsuits into a single forum.1 The forum selection bylaw was virtually identical to the ones that then-Chancellor Strine found to be facially valid in Chevron, except that it selected the forum of the United States District Court for the Eastern District of North Carolina, or, if that court lacked jurisdiction, any North Carolina State Court, instead of the State or Federal Courts of Delaware. The bylaw...