Chevron, Intra-Corporate Forum Selection Clauses, and the Forum Limitation Trend

KEN M. KANZAWA — Earlier this past October, the plaintiffs voluntarily dismissed their appeal of Chancellor Strine’s decision in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).  In this June 25, 2013 decision, the Delaware Chancery Court upheld the facial validity of corporate boards’ unilateral implementation of mandatory forum selection bylaws in board-adopted forum selection clauses for intra-corporate litigation. In essence, this allows for corporate boards to select forums for intra-corporate disputes between shareholders and the corporate board, limiting the forums in which suits may be filed, and ultimately denying shareholders any possible right they may have to a jury trial. In Chevron, the boards of Chevron and FedEx had amended their bylaws to include clauses providing for forum selection, and stockholders sued alleging invalidity of the adopted bylaws under the Delaware General Corporate Law (DGCL) and because they were unilaterally adopted absent shareholders’ consent. The Court upheld these board-adopted forum selection amendments on the grounds that under DGCL, pursuant to 8 Del. C. § 109(b), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally, noting that stockholders can check this authority by repealing board-adopted bylaws.

Until the 1990s, shareholder plaintiffs tended to file intra-corporate disputes exclusively in the jurisdiction of the state of incorporation; the choice to incorporate in a given state operated as a de facto choice of forum provision. For companies incorporated in Delaware, this meant that most shareholders would file suit in Delaware. Attorneys’ fees were awarded generously in Delaware based on the value of the relief obtained by counsel, as opposed to the lodestar methodology used in other states (which computes fees by hours spent and reasonable hourly fees, along with other factors). Since the 1990s, however, this has not been the case: the Court of Chancery has increased scrutiny of fee awards, leading plaintiffs’ counsel to increasingly file suit outside of Delaware. Corporate boards’ demand for intra-corporate forum selection clauses arose following this shift in where shareholders were deciding to file these suits. In Revlon, a 2010 decision, the Delaware Chancery Court permitted corporations to adopt forum selection provisions in corporate charters. The Chevron decision continued the move toward permitting boards to limit forum selection by upholding these forum selection clauses not only when placed in corporate charters, but when placed in bylaws as unilateral amendments by the board without shareholder consent. Following the Revlon decision, corporations began to include forum selection provisions in their charters and bylaws to limit where they may face suit. While the United States District Court for the Northern District of California held the use of mandatory forum selection clauses in bylaws invalid in Galaviz, given the more recent Chevron decision, we can expect to see a similar increase in amendments to bylaws, and perhaps even a movement toward adopting arbitration provisions in an attempt to further reduce litigation costs.

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