Corporate > AG Deal Diary > Delaware Court of Chancery Reaffirms Enforceability of Forum Selection Bylaws
23 Sep '14

In City of Providence v. First Citizens BancShares, Inc. (Del. Ch. September 8, 2014), the Delaware Court of Chancery upheld a forum selection bylaw that designated North Carolina as the exclusive forum for certain stockholder litigation and was adopted by the board of directors on the same day the company entered into a merger agreement.  This decision provides additional support for the validity of forum selection bylaws, which have become increasingly popular ever since the Delaware Court of Chancery rendered its important Chevron decision in 2013, holding that such bylaw provisions are within the power of the board of directors to adopt under Delaware law.  Since Chevron, several courts in other jurisdictions have honored forum selection bylaws and more and more companies are adopting them. 

In First Citizens, First Citizens BancShares, Inc., a Delaware corporation headquartered in North Carolina, adopted a forum selection bylaw designating North Carolina courts as the exclusive forum for certain intra-corporate disputes.  The board of directors adopted this bylaw on the same day that it entered into a merger agreement.  The City of Providence filed a suit in the Delaware Court of Chancery challenging the validity of the bylaw and asserting certain other claims in connection with the merger. 

Applying the logic and reasoning of the Chevron decision, the Court dismissed the lawsuit, rejecting the plaintiff’s challenge as to the facial validity of the forum selection bylaw.  The fact that the board of directors did not select Delaware as the exclusive forum, but instead selected North Carolina, the state where First Citizens is headquartered and has most of its operations, did not, in the Court’s view, call into question the facial validity of the bylaw.

The Court also rejected the plaintiff’s argument that enforcing the forum selection bylaw would be unjust because the bylaw was adopted simultaneously with the announcement of the merger.  The Court noted that the plaintiff did not allege any well-pled facts calling into question the integrity of North Carolina courts or explaining how having claims adjudicated by North Carolina courts advanced First Citizens’ self-interests.  The Court stated that the board’s adoption of the forum selection bylaw on “an allegedly cloudy day when it entered into the merger agreement” rather than a “clear” day is immaterial because the bylaw merely regulates where, not whether, a stockholder may file suit.  This conclusion is contrary to a recent decision by an Oregon court in Roberts v. TriQuint SemiConductors, Inc. (Or. Cir. Ct. August 14, 2014), where the court decided that a forum selection bylaw adopted by the board of directors at the same time as it entered into a merger agreement was unenforceable as against public policy.

The Court’s decision in First Citizens reaffirms the enforceability of forum selection bylaws in Delaware and provides additional clarity on bylaws that designate a forum other than Delaware, and in situations where the bylaw is adopted in connection with a merger.  While we expect that this opinion will be persuasive precedent in future cases, it remains to be seen how courts in other jurisdictions may react to forum selection bylaws and the circumstances surrounding their adoption.  As shown by the Roberts decision, the timing of a board’s adoption of a forum selection bylaw may be an important factor for some courts when assessing enforceability.   In light of the risk of potential litigation, boards of directors should consider adopting these bylaws on a “clear” day prior to any wrongdoing that could be alleged.  Boards of directors should also make sure that the board minutes accurately and fully reflect the board’s deliberations and the reasons why the board believes the provision is in the best interests of the corporation and its stockholders.