ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, June 28, 2013

“Forum Selection Bylaws” Statutorily and Contractually Valid: Shareholders Assented to Not Have to Assent

While the nation was preoccupied with SCOTUS decision days, the Delaware Chancery Court upheld the “forum selection bylaws” of FedEx and Chevron.  Those clauses in the corporations’ bylaws provided that litigation relating to the companies’ internal affairs should be conducted in Delaware, the state of incorporation of both companies.

First, the Chancery Court (Chancellor Strine) held that the bylaws were statutorily valid under the Delaware General Corporation Law (“DGCL”).  Second, the Chancery Court held that the bylaws were contractually valid even though they were adopted unilaterally by the boards of FedEx and Chevron rather than the shareholders of those corporations.  The court reasoned (citations and footnotes omitted):

Our corporate law has long rejected the so-called “vested rights” doctrine. That vested rights view, which the plaintiffs have adopted as their own, “asserts that boards cannot modify bylaws in a manner that arguably diminishes or divests pre-existing shareholder rights absent stockholder consent.” As then-Vice Chancellor, now Justice, Jacobs explained in the Kidsco case, under Delaware law, where a corporation’s articles or bylaws “put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment.”

In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders.  Stockholders are on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects.  Such a change by the board is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own.  In other words, the Chevron and FedEx stockholders have assented to a contractual framework established by the DGCL and the certificates of incorporation that explicitly recognizes that stockholders will be bound by bylaws adopted unilaterally by their boards. Under that clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws. The plaintiffs’ argument that stockholders must approve a forum selection bylaw for it to be contractually binding is an interpretation that contradicts the plain terms of the contractual framework chosen by stockholders who buy stock in Chevron and FedEx. Therefore, when stockholders have authorized a board to unilaterally adopt bylaws, it follows that the bylaws are not contractually invalid simply because the board-adopted bylaw lacks the contemporaneous assent of the stockholders.

The court went on to hold that the forum selection clauses would be evaluated just as any other forum selection clauses under the standard enunciated by SCOTUS:

In Bremen, the [U.S. Supreme] Court held that forum selection clauses are valid provided that they are “unaffected by fraud, undue influence, or overweening bargaining power,” and that the provisions “should be enforced unless enforcement is shown by the resisting party to be “unreasonable.”  In Ingres, our Supreme Court explicitly adopted this ruling, and held not only that forum selection clauses are presumptively enforceable, but also that such clauses are subject to as-applied review under Bremen in real-world situations to ensure that they are not used “unreasonabl[y] and unjust[ly].”  The forum selection bylaws will therefore be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable.

Boilermakers Local 154 Retirement Fund v. Chevron Corp., Del. Ch., Civil Action No. 7220-CS, 6/25/13; ICLUB Investment Partnership v. FedEx Corp., Del. Ch., Civil Action No. 7238-CS, 6/25/13.

[Meredith R. Miller]

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