Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220-CS
(Del. Ch. June 25, 2013) [an enhanced version of this opinion is available to lexis.com
Enforceability of bylaws adopted by the Board of Directors providing that
litigation relating to the internal affairs of the corporation must be filed
only in Delaware.
Enforceability upheld. See, e.g., 8 Del. C. §
This momentous decision will undoubtedly result in an
increase in the number of companies that amend their bylaws to require lawsuits
regarding internal affairs of Delaware companies to be brought only in Delaware
courts. The number of companies that currently have similar bylaws is
likely to rise sharply. This opinion noted that over 250 publicly held
companies currently have similar provisions. (The sketch above is a likeness of
the Court of Chancery Building in Georgetown, Delaware, from the Court's
This case challenged the bylaws of Chevron and was
consolidated with a suit challenging similar bylaws of FedEx Corporation.
Both cases were filed at about the same time as complaints against ten other
companies with similar bylaws. The opinion was decided on a motion for
judgment on the pleadings relating to the statutory and contractual validity of
the bylaws amended by the Board of Directors to require suits regarding the
internal affairs of the Delaware corporations involved to be brought in
Delaware, when all indispensable parties are within the jurisdiction of the
The court's analysis can be divided primarily into two
parts. The first part was the power of the Board of Directors under the
Delaware General Corporation Law Section 109 to amend the bylaws, as part of
the contract between the stockholders and the corporation. The second
category of analysis was the enforceability generally of forum selection
clauses in contracts.
The following syllogism summarizes the reasoning of the
court. First, the bylaws were properly amended pursuant to statutory
authority to include a forum selection clause. Second, forum selection
clauses are enforceable generally. Therefore, the bylaw amendment providing
for a forum selection clause is enforceable.
In its ruling, the Court of Chancery relies heavily on
decisions of the United States Supreme Court recognizing the internal affairs
doctrine, as well as the general validity of forum selection clauses in
contracts. In addition, the court relies on the scholarship of Professor
Joseph Grundfest who is one of the leading scholars advocating forum selection
clauses as part of the organic documents of a corporation.
The court engaged in an extensive discussion of DGCL
Section 109 to support its reasoning that the board was within its authority to
amend the bylaws in the manner that it did, and that stockholders buying stock
in a Delaware corporation are on notice that the board has the authority to
amend the bylaws in such a manner.
The stated purpose of the forum selection bylaws was to
avoid the chaos and the expense of duplicative and multiple derivative and
similar corporate lawsuits against directors filed in multiple fora around the
country, often on the same day.
The Court of Chancery explained that:
"... an unbroken line of decisions dating back several
generations, [by] our Supreme Court has made clear that the bylaws constitute a
binding part of the contract between the Delaware corporation and its stockholders.
Stockholders are on notice that, as to those subjects that are the subject of
regulation by bylaw under 8 Del. C. § 109(b), the board itself may act
unilaterally to adopt the bylaws addressing those subjects." See
footnotes 97 and 98.
The court also emphasized the limited nature of the forum
selection clause in this matter to the extent that it does not foreclose a
plaintiff from exercising any statutory right of action created by the federal
government. Rather, the forum selection bylaws focus on claims covered by
the internal affairs doctrine which applies the law of the state of
The court concluded that its ruling was based on merely a
facial challenge, and did not address how it would rule if a concrete factual
situation developed in which a plaintiff believed that the board was operating
in an unreasonable or unlawful manner, and whether the plaintiff could
challenge the use of the board's power under the bylaws as being inconsistent
with its fiduciary duties in some future dispute. See footnote
It is also noteworthy to clarify and emphasize what this
decision did not address and did not opine on. For example, this opinion
did not rule on the validity of a forum selection clause in a certificate of
incorporation. Nor does the decision specifically address the fiduciary
obligations of boards in adopting such provisions. It also remains to be
seen whether courts outside of Delaware addressing the same issue will follow
Postscript: In the short time
since its publication, predictably, this opinion has already generated
substantial commentary. For example, Peg
Brickley wrote an article for The Wall Street Journal in which she
quoted yours truly.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Eckert Seamans.
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