Delaware Ruling on Exclusive Forum Bylaws: Delaware Court of Chancery Rules that Forum Selection Bylaws Are Valid and Presumptively Enforceable Under Delaware Law

Sullivan & Cromwell LLP - June 28, 2013

In an opinion issued on June 25, 2013 resolving motions for partial judgment, the Delaware Court of Chancery (Strine, C.) rejected facial challenges to the validity of forum selection bylaws adopted without stockholder approval by the boards of directors of Chevron Corporation and FedEx Corporation. The Court determined that the forum selection bylaws—which may benefit a company by limiting its exposure to litigation in a disfavored forum and the increased costs and other burdens associated with multi-jurisdiction litigation—are statutorily valid under the Delaware General Corporation Law (“DGCL”) because they regulate only the forum in which a stockholder in its capacity as a stockholder may bring certain internal affairs claims against the corporation and not whether the stockholder may file suit or the remedy available. Observing that the bylaws long have been held to be part of a flexible contract between the company and its stockholders, the Court also held that the board of directors, if empowered in the certificate of incorporation to adopt bylaws, has the authority to adopt a valid and binding forum selection clause in the bylaws. The Court made clear that its decision addressed only the facial validity of the bylaw and reiterated that the enforceability of the bylaw with respect to any particular dispute must be assessed on a case-by-case basis under the reasonableness standard applicable to any contractual choice of forum clause as set forth in the United States Supreme Court’s opinion in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Likewise, the Court observed that a stockholder may challenge as a breach of fiduciary duty any particular adoption or application of a forum selection bylaw by the board of directors.