Delaware Chancery Court Upholds Chevron’s, FedEx’s Forum Selection Bylaws
By Jimmy H. Koo
Addressing two separate, but related lawsuits by shareholders of Chevron Corp.(CVX) and FedEx Corp.(FDX), the Delaware Chancery Court June 25 upheld the two companies’ similar “forum selection bylaws,” which provide that litigation relating to the companies’ internal affairs should be conducted in Delaware, the companies’ state of incorporation (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).
Chancellor Leo E. Strine Jr. held that the challenged bylaws are statutorily and contractually valid.
Claudia H. Allen, a Chicago-based partner at Neal, Gerber & Eisenberg LLP, told BNA that the opinion was a “broad endorsement of forum selection clauses adopted by the boards.” Noting that both parties indicated, during oral argument, that the chancellor’s decisions would be appealed, Allen explained that if the Chancery Court’s decision is affirmed by the Delaware Supreme Court, “you can expect to see many more public companies adopt similar forum selection bylaws.”
The court recounted that Chevron’s board adopted a bylaw providing that litigation relating to its internal affairs should be conducted in Delaware–Chevron’s state of incorporation and whose substantive law governs the corporation’s internal affairs. Similarly, the court said, FedEx’s board adopted a similar bylaw providing that issues related to its internal affairs should be litigated in the Chancery Court.
In response, the court continued, Chevron and FedEx shareholders sued their respective boards, challenging the forum-selection bylaws. In particular, the plaintiffs asserted that the bylaws are “statutorily invalid” because they go beyond the boards’ authority under the Delaware General Corporation Law and also that the bylaws are “contractually invalid.” The court disagreed.
Statutorily and Contractually Valid
Rejecting the plaintiffs’ challenges, the court held that Chevron and FedEx’s bylaws are statutorily valid. It explained that “8 Del. C. § 109(b) provides that the bylaws of a corporation ‘may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to … the conduct of its affair ….” The challenged forum selection bylaws, which govern disputes related to the corporations’ internal affairs, “easily meet these requirements,” the court said. Since Delaware law, like federal law, respects and enforces forum selection clauses, the court concluded that the challenged bylaws are “not facially invalid as a matter of statutory law.”
Similarly, the court held that the challenged bylaws are contractually valid and enforceable forum selection clauses. The Delaware Supreme Court clearly explained that “the bylaws of a Delaware corporation constitute part of a binding broader contract … formed within the statutory framework of the DGCL,” the court said
Additionally, the DGCL allows a corporation, through its certificate of incorporation, to grant its directors the authority to unilaterally amend and adopt its bylaws, it continued. “In other words,” the court concluded, “an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board’s authority to adopt binding bylaws.”
The plaintiffs were represented by Michael Hanrahan, Paul A. Fioravanti Jr., Tanya E. Pino, and Kevin H. Davenport of Prickett, Jones & Elliott PA, Wilmington, Del.; Marc A. Topaz, Lee D. Rudy, Eric L. Zagar, Michael C. Wagner, and James H. Miller of Kessler Topaz Meltzer & Check LLP, Radnor, Pa.; and Robert D. Klausner and Stuart A. Kaufman of Klausner, Kaufman, Jensen & Levinson, Plantation, Fla.
Chevron was represented by William B. Chandler III, Tamika R. Montgomery, Ryan A. McLeod, and Ian R. Liston of Wilson Sonsini Goodrich & Rosati PC, Georgetown, Del.; and David J. Berger of Wilson Sonsini Goodrich & Rosati PC, Palo Alto, Cal.
FedEx was represented by A. Gilchrist Sparks III, Kenneth J. Nachbar, and Bradley D. Sorrels of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Del.
To see the opinion, go to http://about.bloomberglaw.com/files/2013/06/boilermakers-local-v-chevron-opinion.pdf.