United States: Delaware Court Of Chancery Upholds North Carolina Forum Selection Bylaw For Delaware Corporation

Last Updated: September 10 2014
Article by Chip Phinney

Yesterday, in City of Providence v. First Citizens BancShares, Inc., Chancellor Andre Bouchard of the Delaware Court of Chancery held in a case of first impression that the board of a Delaware corporation may validly adopt a bylaw that designates an exclusive forum other than Delaware for litigating intra-corporate disputes. This decision follows in the footsteps of the decision by former Chancellor Leo Strine (now Chief Justice of the Delaware Supreme Court) in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73A.3d 934 (Del. Ch. 2013), and provides further support for the principle that directors can use bylaws to control the forum for derivative actions and similar types of fiduciary duty litigation, as long as they have the power to amend the bylaws, and the choice of forum is reasonable.

First Citizens BancShares is a bank holding company incorporated in Delaware and based in Raleigh, North Carolina. Its charter grants the power to amend the bylaws to the board. Pursuant to that power the board adopted a bylaw that requires the following types of actions to be brought in the U.S. District Court for the Eastern District of North Carolina or, if that court lacks jurisdiction, in any North Carolina state court that has jurisdiction: (1) derivative claims or other actions brought on behalf of the corporation, (2) actions asserting claims for breaches of fiduciary duty to the corporation or its shareholders, (3) actions asserting claims under the Delaware General Corporation Law, and (4) actions asserting claims governed by the internal affairs doctrine. The City of Providence, as a shareholder, filed a suit challenging the validity of the bylaw and alleging that the board breached its fiduciary duty in adopting it.

The Delaware Court of Chancery dismissed these claims. Following Chevron, the court held that where the corporate charter gives the board the power to amend the bylaws, stockholders are on notice that the board may unilaterally adopt bylaws on appropriate subjects. The court noted that there were only two distinctions between the First Citizens bylaw at issue and the forum selection bylaws approved in Chevron. First, the First Citizens bylaw selects the North Carolina courts as the appropriate forum, rather than the Delaware courts, as in Chevron. Second, the First Citizens bylaw provides that it is applicable only to the fullest extent permitted by law. The court concluded that these distinctions did not render the First Citizens bylaw invalid.

Chancellor Bouchard acknowledged that in Chevron then-Chancellor Strine had commented that Delaware is "the most obviously reasonable forum" for litigation involving the internal affairs of a Delaware corporation. But Chancellor Bouchard went on to observe that nothing in Chevron prohibits the board of a Delaware corporation from designating an exclusive forum other than Delaware. He noted that that even though First Citizens is also a Delaware corporation, the federal and state courts of North Carolina are "the second most obviously reasonable forum" for litigation concerning its internal affairs because the corporation is headquartered and has most of its operations in North Carolina.

Chancellor Bouchard also rejected the argument that the First Citizens bylaw conflicts with Delaware statutes giving the Delaware Court of Chancery exclusive jurisdiction over certain types of corporate litigation under the Delaware General Corporation Law. He cited the decision by Vice Chancellor Laster in IMO Daniel Kloiber Dynasty Trust, which concluded that a statutory grant of exclusive jurisdiction to the Delaware Court of Chancery concerns the allocation of power among the Delaware courts and does not preclude a party from asserting a related claim in a non-Delaware court. And in any event, Chancellor Bouchard reasoned, he did not need to resolve these questions to determine whether the bylaw is facially valid, especially since the bylaw explicitly states that it is only enforceable to the fullest extent permitted by law.

Finally, Chancellor Bouchard ruled that the North Carolina forum selection bylaw was valid as applied in the case before him. He noted that while forum selection clauses are presumptively enforceable, they are still subject to as-applied review to ensure that they are not used unreasonably and unjustly. In this case, however, the plaintiff failed to make such a showing. Even though the bylaw was adopted on the eve of a merger transaction involving First Citizens, the merger could still be challenged in the North Carolina courts, and the plaintiff failed to allege well-pled facts showing that the defendants had advanced their self-interest by having that litigation brought in North Carolina rather than Delaware. While Delaware has an interest in having its courts decide novel questions of Delaware law, that interest does not override the explicit choice of another forum in a corporate bylaw.

Corporate boards are increasingly considering forum selection bylaws as a means of avoiding the costs, inconvenience, and uncertainty of dealing with shareholder suits in multiple jurisdictions. While many Delaware corporations will focus on the Delaware courts as the natural choice for a forum selection bylaw, the First Citizens decision makes it clear that even Delaware corporations can validly choose another jurisdiction, such as the state in which the corporation is headquartered, as the exclusive forum for intra-corporate litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Chip Phinney
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