Thursday, 7 November 2013

Validity of Exclusive Forum Selection Clauses in Corporate Bylaws

            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   Most of those over 250 firms subsequently repealed their provisions, but two did not: Chevron and Fed Ex.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.


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