(Article from Securities Law Alert, December 2014)
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Delaware Supreme Court Holds Board-Adopted Litigation Fee-Shifting Bylaws May Be Permissible Under Delaware Law
On May 8, 2014, the Delaware Supreme Court responded to certified questions from the District of Delaware “concerning the validity of a [board adopted] fee-shifting provision in a Delaware non-stock corporation’s bylaws” pursuant to which unsuccessful plaintiffs in intra-corporate litigation would be held responsible for all attorneys’ fees and costs incurred by the corporation. ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) (Berger, J.). The Delaware Supreme Court held that a board-adopted fee-shifting bylaw is “facially valid” under Delaware law. The Delaware Supreme Court determined that “[n]either the [Delaware General Corporation Law (‘DGCL’)] nor any other Delaware statute forbids the enactment of fee-shifting bylaws.” Moreover, the court found that a fee-shifting bylaw “appear[s] to satisfy the DGCL’s requirement that bylaws must ‘relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees’” (quoting 8 Del. C. § 109(b)). The court also noted that a “corporate charter could permit fee-shifting provisions, either explicitly or implicitly by silence.”
Having determined that board-adopted fee-shifting bylaws are “facially valid,” the Delaware Supreme Court then clarified that the enforceability of any particular fee-shifting bylaw “depends on the manner in which it was adopted and the circumstances under which it was invoked.” The court stated that “[b]ylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.” Notably, the Delaware Supreme Court found that an “intent to deter litigation … is not invariably an improper purpose” and “would not necessarily render the bylaw unenforceable in equity.”
Delaware Chancery Court Upholds Forum Selection Bylaw Providing That Intra-Corporate Disputes May Be Heard Only in North Carolina Courts
On September 8, 2014, the Delaware Chancery Court addressed “an issue of first impression: whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes.” City of Providence v. First Citizens BancShares, Inc., 2014 WL 4409816 (Del. Ch. 2014) (Bouchard, C.). In the case before it, the board of First Citizens BancShares, Inc. (“FC North”), a Delaware corporation headquartered in North Carolina, had adopted a forum selection bylaw providing that intra-corporate disputes may be brought only in the federal and state courts of North Carolina. The Chancery Court found the bylaw “facially valid as a matter of law.”
The Chancery Court determined that “the same analysis of Delaware law outlined in” Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) “validates” the forum selection bylaw adopted by FC North’s board. In Chevron, the Chancery Court rejected shareholder challenges to forum selection bylaws adopted by the boards of Chevron Corporation and FedEx Corporation requiring that litigation relating to each company’s “internal affairs” be conducted in Delaware courts. The Chevron court found that the bylaws were both “statutorily valid under Delaware law” and “contractually valid and enforceable.” Chevron, 73 A.3d 934.
The
City of Providence court determined that “the fact that the [FC North] Board selected the federal and state courts of North Carolina—the second most obviously reasonable forum given that FC North is headquartered and has most of its operations there—rather than those of Delaware as the exclusive forums for intra-corporate disputes [did] not . . . call into question the facial validity of” FC North’s forum selection bylaw. Moreover, the Chancery Court found that “important interests of judicial comity” supported the validity of FC North’s forum selection bylaw. The court explained that, “[i]f Delaware corporations are to expect, after
Chevron, that foreign courts will enforce valid bylaws that designate Delaware as the exclusive forum for intra-corporate disputes, then, as a matter of comity, so too should this [c]ourt enforce a Delaware corporation’s bylaw that does not designate Delaware as the exclusive forum.”
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