June 28, 2013

Delaware Chancery Court's Decision on Forum Selection Bylaws: Implications for Indiana Corporations

The recent Delaware Chancery Court decision holding that boards of directors of Delaware corporations may validly adopt bylaws without stockholder approval that limit the courts in which certain types of litigation can be brought is likely to result in the boards of many Delaware corporations considering the adoption of forum selection bylaws. Boilermakers Local 154 Ret. Fund v. Chevron Corp., C.A. (Del. Ch. June 25, 2013).

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 a state or federal court located 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 Indiana, public corporations formed under the Indiana Business Corporation Law (IBCL) may wish to consider adopting bylaws with a similar forum selection clause. We believe that an Indiana court that followed the reasoning of the Delaware Chancery Court would uphold such a clause under the IBCL and that such a clause offers similar benefits to Indiana corporations.

The IBCL, like the DGCL, permits bylaws to contain "any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation." Ind. Code §23-1-21-6(b). The Delaware Chancery Court stated that the forum selection clause plainly related to the business of the corporation and the conduct of its affairs. Indiana courts have also generally enforced contractual exclusive forum clauses if they are reasonable under the circumstances and there is no evidence of fraud or overreaching such that the bound party would be deprived of a day in court.

Chancellor Strine noted that Delaware bylaws are part of a "binding broader contract among the directors, officers and stockholders" of a corporation and rejected the claim that a bylaw adopted unilaterally by a board was any less binding than a bylaw approved by stockholders. While the DGCL permits corporations to include an optional charter provision granting the board the unilateral authority to adopt bylaws, the IBCL gives the board of directors the exclusive authority to amend or repeal bylaws, unless provided otherwise in the articles of incorporation. Ind. Code §§23-1-21-6(a) and 23-1-39-1. Accordingly, Indiana shareholders should understand that the binding broader contract they accept when they become shareholders includes the right of the board to adopt bylaws without shareholder action.

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

In considering whether to adopt a forum selection bylaw, corporations, whether incorporated in Delaware or Indiana, 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 an advisory shareholder proposal asking the board of directors to repeal that bylaw, we think it is likely that ISS would recommend a vote in favor of the proposal, notwithstanding its current position that it reviews proposals to adopt forum selection clauses on a case-by-case basis. However, as these bylaw 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 ultimate 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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