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The Delaware Court of Chancery has recently upheld
the statutory and contractual validity of corporate bylaws that designate one
court, usually the Delaware court, as the exclusive forum for disputes relating
to the corporation’s internal affairs.
These provisions are aimed at reducing multi-forum stockholder and
derivative litigation, and gaining the benefit of the perceived pro-management
perspective of the Delaware courts. Such provisions, adopted by over 250 public
companies in the United States over the past few years, have been controversial. There have been legal challenges in different
states, criticism from proxy advisory firms and widespread shareholder
opposition. Most of those over 250
firms subsequently repealed their provisions, but two did not: Chevron and Fed
Ex.
In Boilermakers Local 154 Retirement Fund v. Chevron Corp. C.A. No. 7220-CS and in Iclub v FedEx Corp. C.A. No. 7238-CS,
the Court of Chancery held that such clauses are statutorily and contractually
valid. The court said that to find them invalid,
statutorily and contractually, the plaintiff would have had to show that the
bylaws cannot operate in compliance with the statute under any circumstances;
it would not be enough for the plaintiff to show a fact-specific instance where
the bylaw is at odds with the statute. However,
the court also said this finding of statutory and contractual validity does not
bar legal challenges from persons who are affected by the actual operation of
the clause, if they have an unreasonable or unlawful effect in that situation.
As well, the clauses remain subject to challenge as inconsistent with a board’s
fiduciary duties.
Such clauses, uncommon
in Canada, have not been tested in
Canadian courts so far as this author is aware.
