Governance Minutes - Exclusive Forum Bylaws
, June 26, 2013. In this episode of Governance Minutes Ken Bertsch interviews Lydia Beebe, Corporate Secretary and Chief Governance Officer at Chevron. Lydia discusses Delaware exclusive forum bylaw provisions, and Delaware Chancellor Strine's June 25 decision in favor of Chevron and FedEx on their boards' authority to put in place the bylaws.
Resources & Good Reads
- Harvard Law School Forum on Corporate Governance and Financial Regulation, Delaware Court of Chancery Upholds Forum Selection Bylaw, September 15, 2014
- Katten Muchin Rosenman, Trends in Exclusive Forum Bylaws: They’re Valid, Now What?, November 18, 2013
- Latham & Watkins, Delaware Court of Chancery Holds Forum Selection Bylaws Valid and Enforceable, July 9, 2013
- Cleary Gottlieb, Should Your Company Adopt a Forum Selection Bylaw?, June 27, 2013
- Dorsey & Whitney, Delaware Chancery Court Upholds Forum Selection Bylaws, June 27, 2013
- Davis Polk, Delaware Court of Chancery Upholds Statutory and Contractual Validity of Exclusive Forum-Selection Bylaws, June 26, 2013
- Venable, Exclusive Forum Selection Bylaws in Maryland, July 9, 2013
- Wachtell, Lipton, Rosen & Katz, Implementation of a Forum Selection Bylaw, June 26, 2013
- Wachtell, Lipton, Rosen & Katz, Delaware Court of Chancery Upholds Forum Selection Bylaws, June 25, 2013
- Weil, Gotshal & Manges, Delaware Court Upholds Validity of Director-Adopted Forum Selection Bylaws, June 25, 2013
News & Society Analysis
Ohio Federal Court Enforces Delaware Exclusive Forum Bylaw Following Chevron Decision
Thanks to Wachtell, Lipton for this memo describing a recent U.S. District Court for the Southern District of Ohio that enforced an exclusive forum bylaw under Delaware law. The case, North v. McNamara, (S.D. Ohio Sept.19, 2014) involved a forum selection clause adopted by the Board of Chemed, a Delaware corporation headquartered in Ohio. The company was the subject of multiple suits and moved to transfer the Ohio case to the federal court in Delaware where an earlier derivative suit was pending on the same facts.
The court granted the company's motion to transfer. Relying on the Delaware Chancery Court decision in Boilermakers v. Chevron, the Ohio district court rejected plaintiffs' argument that the shareholders had not consented to the bylaw because they had not voted on it and had purchased their shares before the bylaw was adopted:
As in Boilermakers, the shareholders of Chemed consented to the Delaware corporate framework by buying shares in a Delaware corporation and agreeing to the certificate of incorporation that allowed the board to unilaterally adopt bylaws. The board acted in accordance with the contractual framework and the certificate of incorporation when it amended the bylaws to include the forum-selection clause. While the shareholders did not provide contemporaneous consent to the amendment, they previously chose to be bound by those bylaws adopted unilaterally by the board. (citation omitted)
According to the memo, in so doing, the court "recognized that such bylaws can promote cost and efficiency benefits that inure to the corporation and its shareholders by streamlining litigation into a single forum."
Safeway Seeks Dismissal of Exclusive Forum Bylaw Suit Filed in California Federal Court
Safeway on Monday filed a Motion to Dismiss a complaint brought in U.S. District Court, Northern District of California related to its merger with Albertsons based on its previous adoption of a exclusive forum bylaw. Shortly after the March 6, 2014 announcement of the merger, twelve shareholders filed nearly identical lawsuits challenging the merger; seven were filed in Delaware, four in California state court and one in the Northern District of California Court and the subject of the Motion. Safeway says the complaint filed in the District court (as well as those in the California state court):
ignores the exclusive forum selection clause found in Article VIII of Safeway's publicly filed bylaws...That bylaw designates the Delaware Court of Chancery as 'the sole and exclusive forum' for 'any action asserting a claim of breach of fiduciary duty owed by, or other wrongdoing by, any director of officer of the corporation . . . to the corporation's shareholders.'...In other words, the forum selection clause speaks directly to Plaintiff's lawsuit against the Board for alleged breaches of fiduciary duties, and requires the lawsuit to be filed in Delaware-not here.
Safeway asks that if the motion to dismiss is not granted, that alternatively the Court should stay the action pending the resolution of the parallel Delaware actions. A hearing date is set for August 15.
Chancellor Strine Upholds Forum Selection Bylaws in Suit Against Chevron, FedEx
Delaware Chancellor Leo Strine yesterday ruled that forum selection bylaws adopted by the boards of Chevron and FedEx without shareholder approval were valid.
In Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp., et al., C.A. No. 7220-CS, andIclub Inv. P'ship v. FedEx Corp., et al., C.A. No. 7238-CS, Chancellor Strine held that a board can, if granted authority by the company's certificate of incorporation, adopt bylaws under the Delaware General Corporation Law requiring certain litigation to be conducted exclusively in Delaware. He also held that such a bylaw may become part of the binding agreement between a corporation and its stockholders even though the stockholders do not vote to approve it. "The Court emphasized, however, that stockholder-plaintiffs retain the ability to challenge the enforcement of such a bylaw in a particular case, either under the reasonableness standard adopted by the Supreme Court of the United States in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), or under principles of fiduciary duty. The Court also left open the possibility that the boards' actions in adopting such bylaws could be subject to challenge as a breach of fiduciary duty."
See this Richards Layton & Finger memo. The Society will be posting links to other law firm memos here.
Dual Record Date System; Exclusive Jurisdiction
We noted earlier this year that Noble Energy sought bylaw changes that included authority to use the Delaware dual record date system, with differing dates for notice and voting rights. This won approval from Noble's shareholders at its April 23 annual meeting. Lorillard announced May 14 that its board amended the bylaws to do the same thing.
Noble Energy's shareholders also gave relatively strong approval (72.5% of shares voted) for a proposal to make Delaware the exclusive forum for resolving derivative and certain other disputes. Another proposal is pending at Halcón Resources at its meeting on May 23, and in a written consent that Opthalix is pursuing now.
Shareholder Disclosure Litigation Shows Need for Exclusive Forum Rule, says Halcón
Halcón Resources, a Houston-based company, has joined crosstown Noble Energy in fighting for Delaware exclusive jurisdiction provisions. In proposing a charter amendment, Halcón says its board "is aware that certain proxy advisors, and even some institutional holders, take the view that they will not support an exclusive forum clause until the company requesting it can show it already has suffered material harm as a result of multiple stockholder suits filed in different jurisdictions regarding the same matter."
This position fails to adequately take into account a variety of important considerations, including recent trends in lawyer-driven shareholder litigation, for example, recent lawsuits alleging breach of fiduciary duty relating to disclosures in proxy statements for annual stockholder meetings that threaten to delay or impede the meeting at significant cost to a company unless there is a quick settlement of the matter. These cases have typically been filed in the state court where the company is located rather than the state where it is incorporated, thus requiring a court less familiar with the laws of the jurisdiction in which the company is incorporated to interpret and apply those laws, and to do so under a very tight timeframe.
(Exclusive forum bylaw provisions adopted without shareholder approval are up for consideration by Delaware courts, including defense of provisions by Chevron and FedEx expected in the Delaware Chancery Court this week.)