Delaware Corporations May Enact Bylaws Requiring Litigation to be Venued in Delaware Courts

On June 25, 2013, the Delaware Court of Chancery paved the way for the boards of directors of Delaware corporations to amend their bylaws to include forum selection clauses requiring any litigation related to the corporation’s internal affairs to be conducted in Delaware courts. Adopting such provisions is intended to avoid the inefficiency and cost of Delaware corporations having to defend against the same litigation in multiple forums (e.g., both in Delaware and the state of the corporation’s principal place of business, as well as in state and federal court).

In Boilermakers Local 154 Retirement Fund v. Chevron Corp., Chancellor Strine considered shareholder challenges to bylaws adopted by the boards of two Delaware corporations, Chevron and FedEx. Chevron’s bylaws selected any Delaware state or federal court as the “sole and exclusive forum” for any litigation relating to the corporation’s internal affairs, while FedEx’s bylaws specifically selected the Delaware Court of Chancery. The provisions were intended to require Delaware venue for four types of suits: (1) derivative suits; (2) suits alleging breach of fiduciary duty; (3) suits arising under the Delaware General Corporation Law; and (4) suits asserting claims governed the “internal affairs” doctrine. The Court upheld both sets of bylaws as valid and enforceable.

First, the Court held that these “forum selection bylaws” are squarely within the board’s authority to adopt bylaws “relating to the business of the corporation, the conduct of its affairs, and . . . the rights or powers of its stockholders” pursuant to section 109 of Delaware General Corporation Law. Second, the Court held that the bylaws are valid contractual forum selection clauses that are binding on shareholders, provided that the corporation’s certificate of incorporation confers authority on the board to unilaterally adopt bylaws without a shareholder vote. The Court emphasized that bylaws, as part of the contract between a corporation and its shareholders, are “flexible and subject to change” and that shareholders are aware of this possibility when they buy stock in Delaware corporations.

Accordingly, Delaware corporations desiring to similarly restrict venue to Delaware courts for actions related to internal corporate governance may now follow the lead of Chevron and FedEx and amend their bylaws to do so.

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