A great deal of attention has been paid over the past few years to efforts made by corporations to control in which courts fiduciary duty and other claims may be brought against directors and officers. Effective August 1, 2015, new Section 115 amends the Delaware General Corporation Law (the “DGCL”) specifically to authorize provisions that specify Delaware as the exclusive forum for internal corporate claims.
Recent cases have focused attention on provisions aimed at more effectively managing certain types of stockholder litigation as the frequency and cost of this litigation have continued to escalate, particularly when transactions or conduct are challenged in multiple states simultaneously. In Boilermakers Local 154 Retirement Fund v. Chevron Corporation, the Delaware Chancery Court upheld the validity of bylaws requiring that litigation relating to the internal affairs of the corporation be brought only in Delaware. In City of Providence v. First Citizens BancShares, the Court determined that it was not a per se violation of a board’s fiduciary duties to adopt exclusive forum bylaws in the context of an upcoming acquisition.
Now, consistent with the Court of Chancery’s decisions, new Section 115 confirms that the certificate of incorporation or bylaws of the corporation may specify that “internal corporate claims” (i.e., claims, including those brought in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which the DGCL confers jurisdiction upon the Court of Chancery) must be brought solely and exclusively in the Delaware courts. Specifically, new Section 115 of the DGCL now provides, in part, that:
The certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State…
Practical Considerations Under New Section 115
New Section 115 will not expressly prohibit charter or bylaw provisions that select a forum other than the Delaware courts as an additional forum in which an internal corporate claim may be brought. However, the new Section 115 will invalidate any provision selecting only non-Delaware courts, or any arbitral forum, to the extent the provision would prohibit litigation of internal corporate claims in the Delaware courts.
Delaware corporations that have not previously adopted a Delaware forum selection clause should consult counsel and consider whether adopting one at this time would be appropriate. The adoption of such a bylaw provision is becoming a routine part of public M&A practice, with one recent study noting that targets adopted exclusive forum bylaws prior to or at the time of the acquisition in approximately two-thirds of deals.