(Article from Securities Law Alert, January 2016)
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On December 10, 2015, the Oregon Supreme Court enforced a forum selection bylaw designating Delaware as the exclusive forum for derivative suits brought by shareholders of TriQuint Semiconductor (“TriQuint”) even though TriQuint’s directors had adopted the bylaw just days before the company announced a merger with RF Micro Devices, and the shareholders had no practical opportunity to repeal or amend the bylaw. Roberts v. TriQuint Semiconductor, 2015 WL 8539902 (Or. 2015) (Kistler, J.) (TriQuint).
Background
TriQuint’s certificate of incorporation empowers its board of directors to “adopt, amend, or repeal” TriQuint’s bylaws unilaterally. In late February of 2014, TriQuint’s directors “amended the company’s bylaws to designate the Delaware Court of Chancery as the exclusive forum for resolving internal corporate disputes, including shareholder derivative suits.” Two days later, TriQuint announced its plan to merge with RF Micro Devices.
TriQuint’s shareholders subsequently brought derivative suits in both Oregon and Delaware; the Oregon suits were consolidated. TriQuint and its directors (collectively, “defendants”) moved to dismiss the Oregon suits based on the forum selection bylaw.
The Oregon trial court declined to enforce the forum selection bylaw and denied defendants’ motion to dismiss. While the court “recognized that Delaware law authorized TriQuint’s board to unilaterally adopt a binding forum-selection bylaw,” the court found “that Delaware law also authorized TriQuint’s shareholders to modify or repeal the company’s bylaws.” The court “reasoned that adopting the forum-selection bylaw contemporaneously with the merger effectively deprived TriQuint’s shareholders of their statutory right to repeal the forum selection bylaw.”
Defendants petitioned the Oregon Supreme Court for an alternative writ of mandamus to address the enforceability of TriQuint’s forum selection bylaw, which the court issued.
Oregon Supreme Court Finds TriQuint’s Forum Selection Bylaw Valid as Applied Based on the Delaware Chancery Court’s Decisions in Chevron and First Citizens
On appeal, plaintiffs conceded that TriQuint’s forum selection bylaw was facially valid under Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). Plaintiffs claimed, however, that “the bylaw [was] invalid as applied in this case because it ‘[was] being used for improper purposes inconsistent with the directors’ fiduciary duties’” (quoting Chevron, 73 A.3d 934).
In considering plaintiffs’ claims, the Oregon Supreme Court found instructive the Delaware Chancery Court’s decision in City of Providence v. First Citizens BancShares, 99 A.3d 229 (Del. Ch. 2014) (First Citizens),[1] which was decided after the trial court issued its opinion in this case. In First Citizens, the directors of a North Carolina bank incorporated in Delaware adopted a forum selection bylaw designating North Carolina as the exclusive forum for shareholder derivative suits. On the same day that the bank’s directors adopted the bylaw, the bank announced its plan to merge with a bank holding company. A shareholder subsequently brought a derivative action in Delaware “challenging both the forum-selection bylaw and the merger.” TriQuint, 2015 WL 8539902 (discussing First Citizens, 99 A.3d 229). Plaintiff contended that “the [bank’s] board had breached its fiduciary duty to the shareholders in adopting the forum-selection bylaw” because the bylaw was designed to “‘insulate [the bank’s directors] from the jurisdiction of Delaware courts’” (quoting First Citizens, 99 A.3d 229).
The Delaware Chancery Court in First Citizens “rejected the plaintiff’s breach of fiduciary duty claim,” TriQuint, 2015 WL 8539902. The court noted “the absence of any ‘well-pled facts to call into question the integrity of the . . . courts of North Carolina’” (quoting First Citizens, 99 A.3d 229). The court further found that “the plaintiff had failed to rebut the board’s exercise of its business judgment in adopting the forum-selection bylaw or to show that the board’s ‘selection of North Carolina as the exclusive forum was irrational’” (quoting First Citizens, 99 A.3d 229).
The Oregon Supreme Court determined that First Citizens was the most “applicable precedent” to the facts at hand. As was the case in First Citizens, “the TriQuint board [had] adopted the forum-selection bylaw making Delaware the exclusive forum for resolving disputes contemporaneously with its approval of the merger” with RF Micro Devices. Following the Chancery Court’s “reasoning in First Citizens,” the Oregon Supreme Court found that TriQuint’s “forum-selection bylaw [did] not prevent its shareholders from challenging the merger” but “only provide[d] where they may do so.” The court noted that the forum-selection bylaw kept “TriQuint’s assets from being diluted by a multiplicity of suits in various states.” Moreover, the court underscored that “Delaware, the state in which TriQuint is incorporated, is the ‘most obviously reasonable forum [for internal affairs cases because those cases] . . . will be decided in the courts whose Supreme Court has the authoritative final say as to what the governing law means’” (quoting Chevron, 73 A.3d 934).
The Oregon Supreme Court therefore concluded that TriQuint’s forum-selection bylaw was neither “invalid [n]or unenforceable under Delaware law as a breach of the board’s fiduciary duty.”
Oregon Supreme Court Finds TriQuint’s Forum Selection Bylaw Enforceable Even Though TriQuint’s Shareholders Could Not Realistically Modify or Repeal the Bylaw
Plaintiffs alternatively contended that TriQuint’s forum selection bylaw was “unenforceable or unfair” under the Supreme Court’s test in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) “because giving effect to the bylaw would deprive TriQuint’s shareholders of their statutory right to amend the bylaws.”
The Oregon Supreme Court found that “[t]he Delaware Chancery Court [had] addressed a similar issue in First Citizens.” The First Citizens court stated that it did “‘not interpret either the [Delaware General Corporate Law] or Chevron to mandate that a board-adopted forum selection bylaw can be applied only if it is realistically possible that stockholders may repeal it’” (quoting First Citizens, 99 A.3d 229). Rather, the First Citizens court found that “a shareholder’s remedy against enforcing a board-adopted forum-selection bylaw lies primarily in arguing” that it would be inequitable to apply the bylaw under Schnell v. Chris-Craft Industries, 285 A.2d 437 (Del. Ch. 1971).[2]
The Oregon Supreme Court determined that “as a matter of Delaware law, a board-adopted bylaw will be given effect until the shareholders modify or repeal it, unless the board lacked authority to adopt it or the board breached its fiduciary duty in adopting it.” The court reasoned that holding otherwise “would effectively read out of Delaware law a corporate board’s authority to adopt bylaws unilaterally because there will always be a gap between the time that a board adopts a bylaw and the time that shareholders have an opportunity to modify or repeal it.”
The Oregon Supreme Court held that TriQuint’s forum selection bylaw was not unenforceable as applied, and directed the trial court to grant defendants’ motion to dismiss the Oregon shareholder derivative suits.
[1] Please click here to read our prior discussion of the First Citizens decision.
[2] The TriQuint court noted that in Schnell, the Delaware Supreme Court had found a bylaw amendment unenforceable where “the board had used the ‘corporate machinery and the Delaware Law for the purpose of perpetuating itself in office’” (quoting Schnell, 285 A.2d 437). The TriQuint court observed that in Schnell, the board’s “inequitable conduct rendered what otherwise would have been a valid bylaw inequitable and unenforceable.”