Proposed Legislation Threatens Corporations' Ability to Select Forum
Current Delaware law permits a Delaware corporation to adopt a bylaw specifying an exclusive forum other than Delaware to litigate intra-corporate disputes, so long as there is a logical connection between the forum selected and the corporation, such as a corporate headquarters location or significant business operations.[1] However, the Delaware Corporation Law Council ("the Council") recently proposed legislation that would prohibit a Delaware corporation from selecting an exclusive forum other than Delaware.
The Council is a subgroup of the Delaware bar whose members are tasked with reviewing and proposing updates to the Delaware General Corporation Law (DGCL) on an annual basis. In-house general counsels are not well represented on the Council. In March, the Council proposed amendments to the DGCL focusing primarily on three areas: (1) prohibiting “fee-shifting” provisions in charters or bylaws, (2) revising certain aspects of the appraisal rights available to target stockholders in a merger and (3) explicitly authorizing forum selection provisions in charters and bylaws that require intra-corporate claims to be brought in Delaware courts, but prohibiting provisions that preclude such claims from being brought in Delaware courts. While the “fee-shifting” and appraisal rights' amendments have garnered the most attention, the forum selection provisions are tucked into the same piece of proposed legislation, which is intended to be brought to the Delaware legislature as a single package deal and was heavily influenced by the plaintiffs’ bar.
The Council’s proposal to eliminate the right of a Delaware corporation to specify an exclusive forum outside of Delaware, including the forum where the corporation is domiciled and has its principal place of business (as sanctioned by Delaware court decisions), raises significant concerns. This proposal unnecessarily restricts a corporation’s right to choose a jurisdiction for intra-corporate litigation that makes the most sense for the corporation and its stockholders. The Delaware Court of Chancery’s decision in First Citizens carefully articulated the rationale for allowing corporations flexibility to choose their preferred forum, confirmed the competence of other courts to apply Delaware law and found that such bylaws were entirely consistent with the DGCL and existing Delaware law. The Council’s approach represents a marked shift from precedent and would have the effect of overturning the Chancery Court’s well-reasoned decision in First Citizens.
The proposed amendment has not yet been introduced into the state legislature but that is expected following the recent approval of the Council’s recommendation by the Delaware Bar’s Executive Committee (which we understand was not unanimous). In order to become law, it would need to pass the state legislature and the governor. If the legislation makes it through that process, it would become effective on August 1, 2015.
While amendments recommended by the Council have been regularly adopted historically, the proposed amendment is a marked departure from the days where Council proposals were non-political improvements to Delaware law. This proposed legislation also goes beyond plaintiff v. corporation tensions of recent years by in effect mandating that Delaware corporations, wherever domiciled, must come to the courts of Delaware to litigate. As a result, Delaware corporations based outside of Delaware should take notice and monitor developments carefully. Those corporations, which now or in the future may want to designate a forum other than Delaware, should consider whether to express a view now. Our Firm is monitoring the situation closely.
If you have any questions about the proposed exclusive forum legislation or if you would like to learn more about the issues covered in this alert, please contact your Smith Anderson lawyer.
[1] City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014).
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