Delaware Chancery Court Upholds Forum-Selection Bylaw Specifying Non-Delaware Jurisdiction

September 18, 2014

The Delaware Court of Chancery recently ruled that the board of directors of a Delaware corporation may amend its bylaws to specify a forum other than Delaware for litigating all intra-corporate disputes, such as stockholder claims alleging that officers or directors breached their fiduciary duties. In City of Providence v. First Citizens Bancshares, Inc., Cons. C.A. No. 9795-CB (Del. Ch. Sept. 8, 2014), the board of directors of First Citizens Bancshares, Inc., a Delaware corporation operating primarily in North Carolina, adopted and approved Amended and Restated Bylaws that included a forum selection bylaw naming the United States District Court for the Eastern District of North Carolina, or, if that court lacks jurisdiction, any state court in North Carolina, as the exclusive forum for litigating intra-corporate disputes.

The Court of Chancery found that, while Delaware might be the most obvious forum in which to litigate the intra-corporate disputes of a Delaware corporation, choosing the “second most obviously reasonable forum” where the corporation operates and is headquartered, “does not … call into question the facial validity of the Forum Selection Bylaw” and there was no showing that “the Board’s selection of North Carolina as the exclusive forum was irrational.” (Slip Op. at pp. 10, 14). The Court noted that there was no reason why a non-Delaware court could not address and rule on issues of Delaware law, and that the plaintiff had failed to rebut the business judgment rule with respect to adoption of the challenged bylaw.

Assuming that this decision is not reversed on appeal, at least one Delaware court is now on record as approving a forum selection bylaw requiring stockholders in a Delaware corporation to litigate disputes in courts outside of Delaware. Directors considering such a bylaw should carefully weigh the pros and cons of selecting a non-Delaware forum, including but not limited to: (i) an analysis of local procedural and substantive rights that may be implicated by litigating in the chosen jurisdiction; (ii) the quality of the local judiciary (who likely will be asked to apply Delaware law); (iii) the likelihood that the frequency of litigation will increase or decrease; and (iv) any cost savings that may result from mandating what might be a more convenient forum for the corporation and its officers and directors. As with any decision, directors also should be aware that they are subject to fiduciary duties as defined under Delaware law and, thus, should consider whether adopting such a bylaw is in the best interests of the corporation and its stockholders only after fully informing themselves on the implications of selecting a given forum.