United States: Delaware Chancery Court Provides Further Support For Forum Selection Bylaws

Public companies incorporated in Delaware have increasingly embraced forum selection bylaws following last year's Chancery Court decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., which found 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."1 In City of Providence v. First Citizens Bancshares, Inc., the Chancery Court recently underscored its holding in Chevron by upholding a board-adopted forum section bylaw even though the chosen forum was not Delaware and, more significantly, the bylaw was adopted on the same day as the challenged merger transaction was announced.2


A forum selection bylaw is facially valid even where the chosen forum is not Delaware. Unlike the exclusive forum bylaw found valid in Chevron, the bylaw at issue in First Citizens selected as the exclusive forum courts in North Carolina, where the defendant company was headquartered, rather than the state or federal courts in Delaware. In Chevron, then-Chancellor Strine found that when a corporate charter confers powers on the board to amend bylaws, the "stockholders have assented to a contractual framework established by the [Delaware General Corporation Law] and the certificates of incorporation that explicitly recognizes that stockholders will be bound by bylaws adopted unilaterally by their boards."3 However, he also commented that the forum selection bylaws "address the 'rights' of the stockholders, because they regulate where stockholders can exercise their right to bring certain internal affairs claims against the corporation and its directors and officers. . . . That is, because the forum selection bylaws address internal affairs claims, the subject matter of the actions the bylaws govern relates quintessentially to 'the corporation's business, the conduct of its affairs, and the rights of its stockholders [qua stockholders].'"4 This arguably tied the forum selection for intra-corporate disputes to the "internal affairs" doctrine, which generally makes the law of the state of incorporation control with respect to such issues as the rights of stockholders. 

Indeed, the bylaws in question in Chevron designated Delaware courts as the exclusive fora for intra-corporate disputes. Then-Chancellor Strine observed that Delaware, as the state of incorporation, was "the most obviously reasonable forum"5 for intra-corporate disputes because the case would "be decided in the courts whose Supreme Court has the authoritative final say as to what the governing law means."6 That clearly was not the case in First Citizens. North Carolina courts, including possibly the North Carolina Supreme Court, would be deciding what Delaware law meant in the case and thus the rights of the Delaware stockholders if the exclusive forum bylaw was respected.

Noting that the question was one of first impression, the Chancery Court in First Citizens observed that "nothing in the text or reasoning of Chevron can be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws."7 Thus, the Court determined that the selection of courts in North Carolina – "the second most obviously reasonable forum given that [defendant] is headquartered and has most of its operations there"8 – instead of Delaware as the exclusive fora for intra-corporate disputes does not impact the facial validity of the bylaw. The Court also pointed to the "savings clause" in the bylaw, which stated that it was only enforceable "to the fullest extent permitted by law," which, in the Court's view, would appear "to carve out from the ambit of the Forum Selection Bylaw a claim for relief, if any, that may be asserted only in the Court of Chancery."9

Adoption of the forum selection bylaw is not a breach of fiduciary duty. The Court found "wholly conclusory" the plaintiff's allegations that adopting the forum selection bylaw was self-interested and, therefore, a breach of fiduciary duty. Specifically, the Court noted that the bylaw "plainly" does not insulate the merger's approval from judicial review, but merely requires that the review take place in North Carolina. Due to plaintiff's failure to plead any facts that would question the integrity of North Carolina courts or to explain how the defendants were advancing their interests by having the claims adjudicated in North Carolina, the Court found that the plaintiff failed to rebut the presumption of the business judgment standard of review to the board's adoption of the forum selection bylaw.

Adoption of the bylaw is valid "as-applied." Unlike in Chevron, where the Court only considered the facial validity of the forum selection bylaws at issue, the Court was asked to enforce the forum selection bylaw to dismiss the claims in Delaware. In analyzing the plaintiff's claims, the Court was guided by the U.S. Supreme Court's analysis in The Bremen v. Zapata Off-Shore Company,10 which, as applied and elaborated by Delaware courts, would examine whether application of the forum selection provision would be unreasonable or unjust. The Court also referred to the Delaware Supreme Court's analysis in Schnell v. Chris-Craft Industries, Inc.,11 which would test whether the forum selection bylaw, as applied, would be inequitable.

The Court dismissed the argument that the claims under Delaware law were so novel and substantial that Delaware courts should resolve them despite the selection of an exclusive forum by a board that had the authority to adopt and amend the bylaws. The Court also was not concerned that the bylaw was adopted simultaneously with the merger agreement, noting that its adoption on an "allegedly 'cloudy' day" rather than a "clear" day "is immaterial given the lack of any well-pled allegations...demonstrating any impropriety in this timing."12

Moreover, the Court did not believe that enforcement of the bylaw was "per se unreasonable" merely because a controlling stockholder of the defendant could effectively prevent the repeal of the bylaw by minority stockholders. The Court noted that it did not read "either the [Delaware General Corporation Law] or Chevron to mandate that a board-adopted forum selection bylaw can be applied only if it is realistically possible that stockholders may repeal it."13 The Court indicated that its conclusion does not leave minority stockholders of controlled companies without recourse as, depending on the facts, a foreign forum selection bylaw may not pass muster under Schnell

Practical Considerations

Boards should continue to carefully weigh the decision whether to unilaterally adopt forum selection bylaws. The Court's decisions in Chevron and First Citizens affirm that boards of directors of companies incorporated in Delaware may unilaterally adopt forum selection bylaws by amendment when the charter authorizes the board to adopt bylaw amendments. Nonetheless, boards should still carefully weigh the facts and circumstances surrounding adoption of such a bylaw. Matters to consider include whether the company's governing documents permit the board to unilaterally adopt bylaws, whether a forum selection bylaw is appropriate for the company, the proper forum to be designated in the bylaw14 and the timing of adoption. These considerations will be scrutinized if the bylaw is challenged on an as-applied basis. For example, although the Court upheld the forum selection bylaw in First Citizens, it left the door open for future bylaws to be deemed unenforceable by stating that "[i]n the appropriate case, a foreign forum selection bylaw may not withstand Schnell scrutiny."15

Boards should also consider proxy advisor (that is, ISS and Glass Lewis) and investor reaction to adoption of the bylaw. Although their positions on the bylaws may continue to evolve, the proxy advisory firms and some investors are generally against such bylaws. For example, Glass Lewis will recommend voting against the chair of the board's Governance Committee when (1) during the past year a board adopted such a bylaw without stockholder approval or (2) a board currently seeking approval of a forum selection bylaw bundles the bylaw amendment rather than listing it as a separate proposal. Thorough disclosure of the reasons for adoption of a forum selection bylaw, especially where there is a history of multi-jurisdictional litigation that has harmed the company, may help convince investors that any negative proxy advisor recommendation should not be followed.

Selecting non-Delaware fora to resolve Delaware intra-corporate disputes. The bylaw in question in First Citizens chose a forum that was the "second most obviously reasonable forum"—that is a state where the Delaware corporation was headquartered and conducted most of its operations. Thus, in selecting non-Delaware courts to decide Delaware intra-corporate disputes, advisors should carefully consider the depth and degree of connections of the corporation with the selected forum. 

In addition, in light of First Citizens' reliance on the savings clause (noting that the bylaw would be enforceable to the fullest extent permitted by law) to exclude claims that could only properly be decided in the Chancery Court, prudence may require the inclusion of similar clauses where non-Delaware fora are chosen to resolve Delaware intra-corporate disputes.

Forum selection clauses may not be respected outside Delaware. As additional justification for its decision in First Citizens, the Court noted that "[i]f 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, so too should this Court enforce a Delaware corporation's bylaw that does not designate Delaware as the exclusive forum."16 Although the majority of courts outside of Delaware that have considered forum selection bylaws adopted by Delaware corporations that designate Delaware as the exclusive forum have enforced such bylaws, the risk remains that such courts will not enforce the bylaws on an as-applied basis.


1. 73 A.3d 934, 940 (Del. Ch. 2013). Please see our client alert on this decision dated July 2, 2013, Board-Adopted Forum Selection Bylaws Upheld by Delaware Court of Chancery.

2. See City of Providence v. First Citizens Bancshares, Inc., No. 9795, 2014 WL 4409816 (Del. Ch. Sep. 8, 2014), available at http://courts.delaware.gov/opinions/download.aspx?ID=211430.

3. Chevron at 956.

4. Id. at 951.

5. Id. at 953.

6. Id.

7. First Citizens at 10.

8. Id. The defendant corporation is a holding company for a bank, which had over 70% of its total deposits and over 60% of its branches in North Carolina.

9. Id. at 12.

10. 407 U.S. 1 (1972). The Court noted that the Bremen standard was explicitly embraced as applicable under Delaware law by the Delaware Supreme Court in Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1145 (Del. 2010).

11. 285 A.2d 437 (Del. 1971).

12. First Citizens at 21.

13. Id. at 23.

14. For example, although reserving the opportunity to litigate intra-corporate disputes in courts in the state where a company is headquartered may reduce the cost and time burdens imposed on the company and its representatives, in some cases that benefit may be outweighed by having the opportunity to have the disputes governed by the Delaware courts, which are obviously the most familiar with Delaware law. 

15. First Citizens at 23.

16. Id. at 24.

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