Over the past several years, mergers and acquisitions have increasingly been subject to legal challenges by shareholders, with many near-identical lawsuits brought in multiple forums.1×1. See Matthew D. Cain & Steven Davidoff Solomon, A Great Game: The Dynamics of State Competition and Litigation, 100 Iowa L. Rev. 465, 468–69, 475–76 (2015). In 2011, 53% of the authors’ sample of litigated transactions were challenged in more than one state, with an average of five suits per transaction. Id. at 476. Widely attributed to “entrepreneurial plaintiffs’ attorneys,”2×2. See, e.g., Browning Jeffries, The Plaintiffs’ Lawyer’s Transaction Tax: The New Cost of Doing Business in Public Company Deals, 11 Berkeley Bus. L.J. 55, 56–58 (2014) (explaining that while merger litigation can police management and protect shareholders from harm in a deal, “in this new rash of suits, frequently entrepreneurial plaintiffs’ attorneys are filing boilerplate complaints . . . to hold up the transaction and . . . force a quick settlement,” id. at 57–58). multiforum lawsuits impose significant costs on the judicial system,3×3. See, e.g., Joseph A. Grundfest & Kristen A. Savelle, The Brouhaha over Intra-Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis, 68 Bus. Law. 325, 345 (2013) (“Defense counsel is forced to litigate the same case . . . in multiple courts. Judicial resources are wasted . . . . Worse[,] . . . two judges [might] . . . reach different outcomes, which would then leave the law in a confused state and pose full faith and credit problems . . . .” (quoting In re Allion Healthcare Inc. S’holders Litig., No. 5022-CC, 2011 WL 1135016, at *4 (Del. Ch. Mar. 29, 2011) (internal quotation marks omitted))). but deliver doubtful benefits to shareholders.4×4. A survey of recent lawsuits found that most resulted in a settlement “for the payment of attorneys’ fees and additional disclosure, . . . but no increase in purchase consideration for stockholders.” Claudia H. Allen, Conference Bd. Governance Ctr., Trends in Exclusive Forum Bylaws 2 (2014), http://www.conference-board.org/retrievefile.cfm?filename=TCB_DN-V6N2-141.pdf&type=subsite [http://perma.cc/5S4D-KZSW]. To avoid multiforum litigation, many corporations have adopted exclusive forum provisions in their charters or bylaws.5×5. See, e.g., id. Indeed, the Delaware Chancery Court encouraged this trend: in In re Revlon, Inc. Shareholders Litigation, 990 A.2d 940 (Del. Ch. 2010), Vice Chancellor Laster noted that corporations were “free to respond” to the problem of multiforum litigation “with charter provisions selecting an exclusive forum for intra-entity disputes.” Id. at 960. Under Delaware law, a board of directors generally cannot amend a corporate charter without a shareholder vote. Del. Code. Ann. tit. 8, § 242(b)(1) (2015). However, a board can amend corporate bylaws without a shareholder vote if the charter grants the board such authority, id. § 109(a), which charters often do, see Allen, supra note 4, at 2. In Boilermakers Local 154 Retirement Fund v. Chevron Corp.,6×6. 73 A.3d 934 (Del. Ch. 2013). then-Chancellor Strine upheld board-adopted forum selection bylaws7×7. “[A] forum selection bylaw is a provision in a corporation’s bylaws that designates a forum as the exclusive venue for certain stockholder suits against the corporation . . . .” Id. at 941–42. as statutorily and contractually valid.8×8. Id. at 939. The contemplated bylaws of the two defendant Delaware corporations had named Delaware as the exclusive forum for intracorporate disputes.9×9. Id. at 937. Intracorporate disputes, such as shareholder direct and derivative claims or claims arising under any provision of the Delaware General Corporation Law (DGCL), are those that relate to the internal affairs of a corporation. See City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014). Recently, in City of Providence v. First Citizens BancShares, Inc.,10×10. 99 A.3d 229. the Delaware Chancery Court upheld the validity of a Delaware corporation’s board-enacted forum selection bylaw designating North Carolina as its exclusive forum for intracorporate disputes.11×11. Id. at 230–31. First Citizens serves as an important model of how courts should employ Chevron’s reasoning when considering as-applied challenges to forum selection bylaws and reinforces the Chancery Court’s acceptance of corporations’ efforts to respond to multiforum litigation. However, the decision does not define the limits on selecting non-Delaware forums, which creates the possibility of risks that could result if fewer corporate law cases are decided in Delaware.
On June 10, 2014, the board of First Citizens BancShares, Inc. (FC North),12×12. “FC North is a holding company for First-Citizens Bank & Trust Company, which operates in seventeen states but [mostly] . . . in North Carolina.” Id. at 231 (footnote omitted). a company incorporated in Delaware and headquartered in North Carolina, adopted and approved revised bylaws,13×13. Id. “FC North’s charter grants the power to amend the bylaws to the Board.” Id. at 233. A corporation’s bylaws “may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” Id. (quoting Del. Code. Ann. tit. 8, § 109(b) (2014)) (internal quotation marks omitted). adding the Forum Selection Bylaw in question.14×14. The Forum Selection Bylaw is effectively the same as the bylaws that were upheld as facially valid in Chevron, with two exceptions: First, the board of FC North selected North Carolina as its exclusive forum. Id. at 234. “[S]econd, FC North’s Forum Selection Bylaw . . . is applicable only ‘to the fullest extent permitted by law.’” Id. FC North also announced its acquisition of First Citizens Bancorporation, Inc. (FC South) that day.15×15. Id. at 231–32. “FC South is a bank holding company incorporated and based in South Carolina.” Id. at 231. “Both FC North and FC South are allegedly controlled by the members and affiliates of the Holding family (the ‘Holding Group’),” which beneficially owns approximately 52.2% and 48.5% of the votes of FC North and FC South, respectively. Id. The transaction consisted of a mix of stock and cash for an aggregate value of between $636.9 million and $676.4 million. Id. at 232.
The City of Providence, a minority shareholder of FC North,16×16. See id. at 232. filed two complaints in the Delaware Chancery Court against FC North and its board.17×17. The two cases were consolidated. Id. The first complaint (Bylaw Complaint) alleged that the Forum Selection Bylaw was invalid (1) facially under Delaware law or public policy and (2) as applied because the board breached its fiduciary duty in adopting it.18×18. Id. The second complaint (“Merger Complaint”) asserted various claims against the board and the controlling shareholder relating to their approval of the merger.19×19. Id. (“Providence contends that the Holding Group, through its controlling interest, unfairly forced FC North to overpay for FC South to its own benefit and to the dilution of FC North’s minority stockholders.”). Defendants subsequently filed motions to dismiss for failure to state a claim and for improper venue.20×20. Id. The parties “stipulated . . . that the validity of the Forum Selection Bylaw . . . should be resolved before any other substantive issues.” Id. at 233.
Writing for the Delaware Chancery Court, Chancellor Bouchard found the Forum Selection Bylaw facially valid, a conclusion “compelled by the logic and reasoning” of then-Chancellor Strine’s Chevron decision.21×21. Id. at 231. “Under [Delaware’s] clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws.”22×22. Id. at 235 (quoting Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 956 (2013)) (internal quotation marks omitted). While Chevron easily found that Delaware, as “the state of incorporation, ‘was the most obviously reasonable forum’ for internal affairs cases,”23×23. Id. (quoting Chevron, 73 A.3d at 953). “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.”24×24. Id. Therefore, the board’s decision to choose North Carolina, “the second most obviously reasonable forum,” did not upset the facial validity of the Forum Selection Bylaw.25×25. Id. The court also found that Providence failed to allege facts sufficient to support an inference that the board’s adoption of the Forum Selection Bylaw was self-interested and in violation of its fiduciary duty.26×26. Id. at 236–37. Thus, the court dismissed the Bylaw Complaint for failure to state a claim.27×27. Id.
The court then turned to the question of whether to dismiss the Merger Complaint for improper venue, which would be required if it found the Forum Selection Bylaw to be valid as applied in this case.28×28. Id. at 232–33. Though Chevron did not reach this as-applied question,29×29. Id. at 237–38. Chancellor Bouchard noted that it was “nonetheless instructive on the proper framework” for analyzing Providence’s three challenges to the Forum Selection Bylaw.30×30. Id. at 238. Providence argued that Delaware had a policy interest in resolving the issues in the case, that the timing of the board’s adoption of the bylaw rendered it unreasonable, and that the bylaw was unjust because it could not be repealed without the support of the majority shareholder. Id. at 238–39. First, applying the legal test for forum selection provisions set forth by the U.S. Supreme Court in Bremen v. Zapata Off-Shore Co.,31×31. 407 U.S. 1 (1972). Under the rule of Bremen, forum selection provisions will be upheld if: (1) the forum selection clause was not induced by fraud or undue influence, see id. at 12; (2) trial in the selected forum will not “be so gravely difficult and inconvenient that [the plaintiff] will for all practical purposes be deprived of his day in court,” id. at 18; and (3) enforcement of the forum selection provision will not “contravene a strong public policy of the forum in which suit is brought,” id. at 15. Chancellor Bouchard found that Delaware has no public policy interest that prevents a Delaware corporation’s board “from adopting bylaws to require stockholders to litigate intra-corporate disputes in a foreign jurisdiction.”32×32. First Citizens, 99 A.3d at 240. While Providence characterized the issues raised in the Merger Complaint as “novel and substantial,” id. at 238 (internal quotation marks omitted), the court described them as “far from the type of unprecedented claims that might theoretically outweigh Delaware’s substantial interest in enforcing a facially valid forum selection bylaw,” id. at 240 (footnote omitted).
Second, the court reviewed whether the bylaw was inequitable under Schnell v. Chris-Craft Industries, Inc.33×33. 285 A.2d 437 (Del. 1971). Schnell instructs that “inequitable action does not become permissible simply because it is legally possible.” Id. at 439. It concluded that the board’s adoption of the Forum Selection Bylaw on the same day as the merger announcement did not upset the reasonable expectations of a stockholder.34×34. First Citizens, 99 A.3d at 240. Referencing Chevron’s articulation of the contractual framework for bylaws, Chancellor Bouchard held that the reasonable expectation of a stockholder should be that its board, “subject to challenge on an as-applied basis,” may “designate a court outside Delaware as the exclusive forum for intra-corporate disputes.”35×35. Id. The court rejected the allegation that this transaction was self-interested, citing a lack of well-pleaded facts.36×36. Id. at 241. Further, the Forum Selection Bylaw only regulates “where . . . , not whether the stockholder may file suit.”37×37. Id. (internal quotation mark omitted). Absent any facts calling into question the integrity of the North Carolina courts, the court found that the timing alone did not constitute an inequitable application of the Forum Selection Bylaw.38×38. See id.
Finally, the court found that nothing in the Delaware Code or Chevron required holding that a board-adopted forum selection bylaw is valid only if stockholders can realistically repeal it.39×39. Id. Indeed, for the court to conclude that the existence of a controlling shareholder renders a forum selection bylaw per se unreasonable would “be tantamount to rendering questionable all board-adopted bylaws of controlled corporations.”40×40. Id. at 241–42 (quoting Defendants’ Reply Brief in Support of Their Motions to Dismiss at 21, First Citizens, 99 A.3d 229 (No. 9795-CB), 2014 WL 4447125) (internal quotation marks omitted). Ultimately, the court found the bylaw valid and so dismissed the Merger Complaint.41×41. Id. at 242.
By upholding a board-adopted bylaw that selected a non-Delaware forum for intracorporate disputes, the court in First Citizens took an important step toward enabling corporations to restrict multiforum litigation. In so doing, the court set forth a model of how to extend Chevron’s reasoning to an as-applied challenge to board-adopted forum selection bylaws. By emphasizing deference to the board, minimizing state policy interests in maintaining sole jurisdiction over intracorporate disputes, and accentuating judicial comity, First Citizens promoted enforceability of forum selection bylaws. At the same time, First Citizens left important questions unanswered, risking problematic consequences stemming from an increased prevalence of bylaws selecting non-Delaware forums for intracorporate disputes.
Multiforum lawsuits impose significant costs on corporations and the judicial system without providing meaningful benefits to shareholders.42×42. See sources cited supra notes 3–4. By upholding a board-adopted forum selection bylaw against a facial attack, Chevron allowed corporations to adopt measures to mitigate these problems. The ruling was a strong step toward lessening the problem of multiforum lawsuits. Yet the Chevron court’s decision not to speculate about any “hypothetical” as-applied challenges to a forum selection bylaw43×43. Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 940 (Del. Ch. 2013). Indeed, a challenge of facial validity is a relatively undemanding inquiry that merely asks if the bylaw “can operate validly in any [one] conceivable circumstance.” Id. left questions unanswered: How should a state court consider whether a forum selection bylaw violates a strong public policy of its state under Bremen?44×44. See Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972). And at what point should a court find that a board of directors used a forum selection bylaw in a manner inconsistent with its fiduciary duties according to Schnell?45×45. See Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971).
After Chevron, state courts still retained considerable flexibility in reviewing as-applied challenges to forum selection bylaws. A recent Oregon state court case, Roberts v. Triquint Semiconductor, Inc.,46×46. No. 1402-02441, 2014 WL 4147465 (Or. Cir. Ct. Aug. 14, 2014). considered an as-applied challenge to a Delaware corporation’s forum selection bylaw designating Delaware as its exclusive forum. Under Bremen, the court determined that Oregon’s policy interest required shareholders to have “ample time” to accept or reject the bylaw before the company announced a merger47×47. Id. at *5. — a vague timing standard without precedent or support in Delaware law.48×48. See Theodore N. Mirvis, The Battle Against Multiforum Stockholder Litigation, Harv. L. Sch. F. on Corp. Governance & Fin. Reg. (Aug. 15, 2014, 12:17 PM), http://blogs.law.harvard.edu/corpgov/2014/08/25/the-battle-against-multiforum-stockholder-litigation [http://perma.cc/MD5S-6Z76]. Triquint exemplified the need to clarify the application of Chevron’s reasoning to an as-applied challenge.
First Citizens did just that. Three aspects of its reasoning in particular will help guide future courts faced with as-applied challenges to forum selection bylaws. First, First Citizens illustrated how deference to a board of directors should inform a court’s review of an as-applied challenge. Indeed, in his analysis of the as-applied challenge to the board’s timing in adopting the Forum Selection Bylaw on the same day as it announced a merger, Chancellor Bouchard interpreted section 109 of the Delaware General Corporation Law49×49. Del. Code Ann. tit. 8, § 109 (2015). broadly to give the board authority to unilaterally adopt bylaw provisions at any time.50×50. First Citizens, 99 A.3d at 240. Moreover, without any well-pleaded facts alleging impropriety regarding the timing of the bylaw adoption, Chancellor Bouchard refused to find that the timing rendered the bylaw inequitable under Schnell.51×51. Id. at 240–41. This interpretation is markedly different from that of the recent Oregon state court decision that found a forum selection bylaw invalid in part because the board adopted it in connection with a merger. See Triquint, 2014 WL 4147465, at *5. Though First Citizens is the first case “to uphold a forum selection bylaw adopted in connection with a merger,”52×52. Alison Frankel, Delaware Judge OKs Forum Selection Clause Adopted on Same Day as Deal, Reuters (Sept. 9, 2014), http://blogs.reuters.com/alison-frankel/2014/09/09/delaware-judge-oks-forum-selection-clause-adopted-on-same-day-as-deal [http://perma.cc/88NQ-GCNL]. the case is consistent with Chevron’s principle that a board action will not be invalidated “simply because it involves a novel use of statutory authority.”53×53. Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 953 (Del. Ch. 2013) (noting that Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985), upheld the first “poison pill” regardless of the fact that section 157 of the DGCL had never before been “used to authorize the issuance of rights for the purpose of defeating a hostile takeover”); see also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 957 (Del. 1985) (“[O]ur corporate law is not static. It must grow and develop . . . . Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited.”).
Second, First Citizens suggested that, when applying Bremen, courts should downplay the public policy interests of the state in which they sit. Delaware has a clear interest in having other state courts uphold a Delaware corporation’s forum selection bylaw that designates Delaware as its exclusive forum. However, other courts might apply Bremen in a way that finds such a forum selection bylaw contrary to the public policy interests of their own state. First Citizens addressed this issue by narrowly defining Delaware’s own policy interests.54×54. First Citizens, 99 A.3d at 239–40. According to Chancellor Bouchard, Delaware has no overarching policy interest in keeping intracorporate disputes in Delaware. Id.
Third, First Citizens respected the authority of other courts in hopes of reciprocal enforcement of bylaws designating Delaware as the exclusive forum. Not only did the court reason that North Carolina was the “second most obviously reasonable forum given that FC North is headquartered and has most of its operations there,”55×55. Id. at 235. but also the court found nothing in the reasoning of Chevron that foreclosed choosing a non-Delaware forum.56×56. Id. In addition to explicitly mentioning the important interest of judicial comity,57×57. Id. at 242 (“If 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.” (footnote omitted)). First Citizens’s reasoning implicitly confirmed this notion by arguing that a shareholder can receive the same remedy in North Carolina as there is no reason to “question the integrity of the . . . courts of North Carolina.”58×58. Id.
These three facets of the court’s reasoning lead in one direction: increased enforceability of forum selection bylaws. First Citizens thus took a major step toward decreasing multiforum litigation. Yet First Citizens did not reach the question of how courts will determine what forums are reasonable; rather, it left a large gap between the first and second most obviously reasonable forums — the state of incorporation and the state of headquarters and most major operations59×59. Id. at 235. — and a forum that is “irrational.”60×60. Id. at 237. What about forums that fall in between? Can a nationally operating Delaware corporation headquartered in Massachusetts choose California as its exclusive forum if ten percent of its stores are located there?
If Delaware corporations’ choices of non-Delaware exclusive forums for intracorporate disputes are found enforceable, there is reason to believe that firms will often opt for forums outside Delaware. Such a development could have significant consequences. Scholars have noted that Delaware is already losing its market share of corporate law cases.61×61. See, e.g., John Armour et al., Delaware’s Balancing Act, 87 Ind. L.J. 1345, 1347 (2012); John Armour et al., Is Delaware Losing Its Cases?, 9 J. Empirical Legal Stud. 605, 654 (2012). But see, e.g., Mark J. Roe, Delaware’s Competition, 117 Harv. L. Rev. 588, 594 (2003) (describing Delaware’s comparative advantages and status as a preferred forum for litigating corporate law disputes). While selecting any single forum may shield a firm from multiforum litigation, selecting a non-Delaware forum to apply Delaware law to the intracorporate disputes of a Delaware corporation fails to utilize fully the advantages of Delaware.62×62. See, e.g., Demetrios G. Kaouris, Is Delaware Still a Haven for Incorporation?, 20 Del. J. Corp. L. 965, 1004 (1995) (listing Delaware’s comparative advantages as a site of incorporation, including “a responsive legislature, a flexible statute, specialized courts, a wealth of precedents, an efficient Secretary of State’s Office, and efficient corporation service companies” (footnotes omitted)). As demonstrated in Triquint, non-expert judges might misapply Delaware law and wrongly decide cases. Though this problem is perhaps self-correcting, as corporations could change their exclusive forum after a bad decision, one could also imagine instances where defendant corporations or plaintiff shareholders might purposely seek out a non-expert forum. On the one hand, a board might hope that a court lacking corporate expertise will not closely scrutinize a complex transaction for lurking conflicts.63×63. Cf. Lynn M. LoPucki, Courting Failure (2005) (arguing that bankruptcy courts often compete for cases by developing lenient precedent). On the other hand, rather than a company using the forum selection bylaw as a shield against multiforum litigation, an activist investor might use it as a sword to designate a plaintiff-friendly forum.64×64. Many assume that Delaware judges favor corporate defendants. See Mark Lebovitch et al., Am. Bar Ass’n, Improving Multi-Jurisdictional, Merger-Related Litigation 1 (2011), http://www.blbglaw.com/news/publications/data/00132/_res/id=sa_File1/Lebovitch_Silk_Friedman_reprint.pdf [http://perma.cc/B7FZ-776Z]. Similar to defendant corporations, plaintiff shareholders might prefer a forum that is less expert and predictable. See Ted Mirvis, Anywhere but Chancery, M&A J., May 2007, at 17.
Moreover, losing cases that would otherwise determine novel issues could undermine the Delaware judiciary’s expertise and inhibit its ability to develop new precedents.65×65. See Armour et al., Is Delaware Losing Its Cases?, supra note 61, at 652. A diminished wealth of precedents might not only weaken Delaware’s comparative advantage as a forum,66×66. See id. at 606. but also impair the consistency of American corporate law.67×67. In fact, the Delaware legislature appears to be aware of these risks stemming from First Citizens, as evidenced by its recent proposed amendment that would effectively ban forum selection bylaws choosing another state “to the exclusion of Delaware.” William Chandler et al., Wilson Sonsini Discusses Proposed 2015 Amendments to the Delaware General Corporation Law, CLS Blue Sky Blog (Mar. 18, 2015), http://clsbluesky.law.columbia.edu/2015/03/18/wilson-sonsini-discusses-proposed-2015-amendments-to-the-delaware-general-corporation-law [http://perma.cc/C3RF-VT53].
Chevron was an important first step toward allowing corporations to react to the problem of multiforum litigation. First Citizens continued down that path by broadening Chevron’s reasoning to an as-applied challenge to board-adopted forum selection bylaws. At the same time, First Citizens did not define the scope of acceptable exclusive forums. If this uncertainty is resolved to permit Delaware corporations great leeway in choosing non-Delaware exclusive forums, the consistency of corporate law could be put at risk.