Board-Adopted Forum Selection Bylaws Upheld By Delaware Court Of Chancery

In an important opinion issued on June 25, 2013, the Delaware Court of Chancery rejected plaintiffs' claims that forum selection bylaws which were unilaterally adopted without stockholder approval by the boards of directors of two Delaware corporations were statutorily and contractually invalid.1 Chancellor Leo E. Strine, Jr. stated that "a forum selection clause adopted by a board with the authority to adopt bylaws is valid and enforceable under Delaware law to the same extent as other contractual forum selection clauses."

Forum selection bylaws adopted by Delaware corporations generally designate the Delaware Court of Chancery as the exclusive venue for stockholder litigation involving internal affairs and are intended to limit duplicative, costly litigation in multiple jurisdictions related to a single transaction or decision, such as suits alleging breaches of fiduciary duties, derivative suits, claims arising under the General Corporation Law of the State of Delaware (DGCL), and other internal affairs claims brought by stockholders. They are not intended to apply to lawsuits unrelated to internal corporate governance matters, such as suits alleging violations of federal securities laws or tort suits. Notably, in the last three years, over 250 publicly traded corporations have adopted forum selection provisions.

Although the decision is subject to appeal to the Delaware Supreme Court, which will have the final say, boards of Delaware corporations may want to consider whether to adopt a forum selection bylaw to attempt to minimize the risk and costs associated with simultaneous multiforum litigation. To do so without stockholder approval, a board must be authorized in the certificate of incorporation to unilaterally adopt or amend the corporation's bylaws. When considering whether to unilaterally adopt a forum selection bylaw, boards should be aware that adoption may result in stockholder proposals to repeal the bylaw. Moreover, boards should consider, among other things, the latest positions of the proxy advisory firms, such as ISS and Glass Lewis, and the voting guidelines of the corporation's institutional investors on unilaterally adopted forum selection bylaws to understand how such bylaws could impact the voting recommendations of the advisory firms and the voting of the institutional investors.

Opinion

Statutory validity. DGCL section 109(b) provides that a corporation's bylaws "may contain any provision, not inconsistent with law...