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 in Citizens Bancshares, unlike that in
Chevron, is also applicable only "to the fullest
extent permitted by law."
The court then adopted the analysis used by then-Chancellor Strine
in Chevron. Channeling the suits into North Carolina,
where the Company was headquartered and had most of its operations,
did not call into question the facial validity of the forum
selection bylaw. Nor did it contravene the provisions of the
DGCL by depriving the Delaware court of its exclusive jurisdiction
to hear and determine matters with respect to the DGCL. The
court concluded that the exclusive jurisdiction arguments were
hypothetical and did not need to be addressed.
Fiduciary Duty and As Applied Challenges
The court then rejected the argument that the adoption of the
bylaw was a breach of fiduciary duty because it was supposedly
self-interested. The court concluded the bylaw did not
insulate the board's approval of the proposed merger from
judicial review, but simply required that that review take place in
a court based in North Carolina. The court noted that the
court in Chevron did not reach the question of as-applied
challenges, but only considered the facial validity of forum
selection bylaws. The court then applied the test articulated
by the United States Supreme Court in The Bremen v. Zapata
Off-Shore Co., 407 U.S. 1 (1972) in which the court held that
forum selection clauses are valid provided they are
"unaffected by fraud, undue influence, or overweening
bargaining power" and that they should be enforced
"unless enforcement is shown ... to be
unreasonable."
The court easily dispensed with the as-applied
challenges. First, it found no overarching public policy of
Delaware that prevented boards from adopting this type of
bylaw. Second, it just as easily rejected the argument that
the adoption of the bylaws simultaneously with the announcement of
the proposed merger was somehow unreasonable. The court concluded
that the plaintiffs had not alleged any well-pled facts calling
into question that the board was advancing the self-interest of the
controlling stockholder in adopting the bylaw. The fact that
the board adopted the bylaw on an allegedly "cloudy" day
when it entered into the merger agreement, rather than on a
"clear" day, was immaterial given the lack of
well-pled allegations demonstrating any impropriety in the timing
of the adoption. Finally, the court rejected the argument that
the existence of a majority shareholder somehow made the adoption
of the bylaw unreasonable because the minority shareholders could
not repeal it. The court rejected this per se unreasonable
argument noting it would otherwise render questionable all
board-adopted bylaws of controlled corporations. The court
concluded that the interests of judicial comity also supported its
analysis; if "Delaware corporations are to expect, after
Chevron, that foreign courts will enforce valid bylaws
that designate Delaware as the exclusive forum for intra-corporate
disputes, then, as a matter of comity," the Delaware Chancery
Court should enforce bylaws designating a forum other than Delaware
as the exclusive forum.
Concluding Thoughts
The adoption of a forum selection bylaw can eliminate the
unnecessary expense and distraction of dealing with multi-forum
litigation, most notably the expense and distraction that comes
with the filing of multiple lawsuits in multiple jurisdictions
after the announcement of nearly every merger transaction. In light
of Chevron, and now Citizens Bancshares, boards
of Delaware companies are empowered to adopt forum selection bylaws
to regulate and reduce the costs of such litigation by channeling
the suits to the Delaware courts or the courts where the company is
headquartered.
In assessing whether or not to adopt such bylaws and whether to
apply them in any given case, boards will need to consider whether
such bylaws meet their particular needs, including whether certain
shareholder groups oppose the adoption of these bylaws, whether to
adopt the state of incorporation as opposed to the state where the
company is headquartered as the forum, whether to adopt them on a
"clear" or "cloudy" day, and other
considerations that boards should discuss with their counsel.
Footnote
1 The bylaws apply to derivative claims; claims for breach of fiduciary duty by a director or officer of the corporation; claims arising out of the provisions of the DGCL; and claims governed by the internal affairs doctrine.
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