June 28, 2013

Delaware Chancery Court's Decision on Forum Selection Clauses: Implications for Minnesota Corporations

In Boilermakers Local 154 Ret. Fund v. Chevron Corp., C.A. (Del. Ch. June 25, 2013), the Delaware Chancery Court held that boards of directors of Delaware corporations may validly adopt bylaws limiting the courts in which certain types of shareholder litigation can be brought. This decision is likely to result in the boards of many Delaware corporations adopting forum selection bylaws.

The bylaw provision validated by the Delaware Chancery Court specified that unless the corporation consented in writing to the selection of an alternative forum, the sole and exclusive forum for the following four types of suits is in a state or federal court within the State of Delaware:

  • Derivative suits
  • Fiduciary duty suits
  • Suits under the Delaware General Corporation Law (DGCL)
  • "Internal affairs" suits – those matters peculiar to the relationship among or between the corporation and its officers, directors and stockholders

Although this issue has not been litigated in Minnesota, we believe that a Minnesota court that followed the reasoning of the Delaware Chancery Court would uphold such a provision under the Minnesota Business Corporation Act (MBCA). Because these provisions offer similar benefits to Minnesota corporations, corporations incorporated in Minnesota may wish to consider adopting bylaws with a similar forum selection clause.

The MBCA, like the DGCL, gives corporate boards broad authority to adopt, amend or repeal bylaws. Section 302A.181 says that bylaws may contain any provision not inconsistent with law or the articles of incorporation related to (1) the management of the business of the corporation or (2) the regulation of the affairs of the corporation. The Delaware Chancery Court stated that the forum selection clause plainly related to the business of the corporation and the conduct of its affairs. The MBCA, like the DGCL, empowers shareholders to re-amend the bylaws to do away with the exclusive forum provision (a significant factor in the Chancery Court's analysis). While the MBCA requires that any shareholder proposal to amend the bylaws be made by shareholders holding three percent or more of the voting power, this three percent threshold should not color the analysis. Minnesota courts have also generally enforced contractual exclusive forum clauses.

The principal reason that corporations are adopting these forum selection clauses is the proliferation and burden of multi-jurisdictional litigation. Although Minnesota corporations are less likely to have a principal place of business elsewhere, multi-jurisdictional litigation remains a concern. Moreover, it is possible that a Minnesota corporation with operations outside the state might be sued elsewhere on a matter relating to the internal affairs of the corporation. We believe that in many instances, Minnesota corporations (and courts) will conclude that Minnesota courts are the best place to resolve internal affairs issues.

In considering whether to adopt a forum selection clause, corporations, whether incorporated in Delaware or Minnesota, should consider both the benefits and possible downside to adopting such a provision, including the possible reaction of shareholders. If a forum selection clause is adopted and there is a shareholder proposal to repeal that bylaw, we think it is likely that ISS would recommend a vote in favor of repeal of the bylaw, notwithstanding its current position that it reviews proposals to adopt forum selection clauses on a case-by-case basis. However, as these provisions become more common, the benefits of limiting the proliferation of multi-jurisdictional lawsuits may also be more widely recognized.

In addition, while the Delaware Chancery Court found forum selection bylaws presumptively valid, the enforceability of such a provision will still ultimately depend upon the specific circumstances involved and the impact on the party bringing suit. 

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