Kyle Wu
In the beginning, there was New Jersey. New Jersey dominated the corporate law world at the turn of the twentieth century and was able to boast that the state was home to most of the largest corporations in the country. Delaware, New Jersey’s next-door neighbor, did not sit back and watch New Jersey reap all the benefits that come with being the corporate law capital. In 1899, the General Assembly amended Delaware’s incorporation statute to reflect New Jersey’s statute with two important changes: (1) incorporation in Delaware cost three-quarters the price of incorporating in New Jersey, and (2) Delaware’s annual franchise taxes were half that of New Jersey. Since Delaware adopted the new incorporation statute and New Jersey passed the “seven sisters” laws, Delaware has become the preeminent home for corporations and, by extension, corporate litigation.
Accordingly, it comes as no surprise that Delaware is an oft chosen forum for corporate litigation. Delaware is now home to many Fortune 500 corporations and a judicial forum uniquely tailored to hear corporate matters: the Delaware Court of Chancery. Delaware is not likely willing to give up lightly its century-long dominance in corporate litigation, yet recent decisions by the Chancery Court have seemingly left the door open for corporations to litigate elsewhere.
In Boilermakers Local 154 Retirement Fund v. Chevron Corp., then Chancellor, now Chief Justice, Leo E. Strine ruled that a forum selection clause in a corporation’s bylaws designating Delaware courts as the exclusive forum for disputes related to the internal affairs of the corporation is valid and enforceable under the Delaware General Corporation Law (the “DGCL”). A little over one year after Boilermakers was decided, Chancellor Bouchard decided City of Providence v. First Citizens Bancshares, Inc. In his opinion, Chancellor Bouchard applied the same analysis then-Chancellor Strine used in Boilermakers to validate the forum selection bylaw at issue and stated that “nothing in the text or reasoning of [Boilermakers] can be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws.” Thus, the door was officially open for Delaware corporations to choose an exclusive forum other than Delaware.
In the wake of the Chancery Court’s rulings in Boilermakers and City of Providence, the Council of the Delaware State Bar Association’s Corporation Law (the “Council”) has proposed an amendment to the DGCL dealing specifically with forum selection clauses contained within a corporation’s certificate of incorporation or bylaws. The proposed amendment is two-fold: (1) a Delaware corporation’s certificate of incorporation or bylaws may designate Delaware courts as the exclusive forum for any or all intra-corporate claims, and (2) a certificate of incorporation or bylaws may not prohibit bringing intra-corporate claims in the courts of Delaware. Put differently, a Delaware corporation may designate a forum other than Delaware in a forum selection clause, but it must also leave (or be read to leave) the Delaware courts as a permissible forum.
Practically, the impact of the proposed amendment will be very limited. As one scholar has already noted, “[w]e already have a national corporation law. It’s called the Delaware corporation law.” Corporations choose Delaware largely for the benefits the DGCL provides to their directors, officers, and shareholders, and the experience Delaware courts have in handling intra-corporate disputes. What makes the DGCL work is that it is interpreted and enforced by those best suited to do so: the Delaware courts. Absent a drastic change in the landscape of corporate law in Delaware, businesses incorporated within the State are unlikely to bring their intra-corporate disputes to other less well-suited fora, unless Delaware is precluded by some other law.
The impact of codifying the ruling in Boilermakers merely gives statutory force to the ruling, as opposed to precedential force. Many non-Delaware courts already respect and enforce the ruling in Boilermakers, and the proposed amendment, if adopted, will provide non-Delaware courts with even more reason to enforce a forum selection clause that selects Delaware as the exclusive forum. Statutory prescription for the validity of such forum selection clauses will provide stronger grounds for those courts that have not previously enforced such clauses to enforce them in future decisions. Further, while the ruling in Boilermakers is largely viewed favorably and in no immediate danger of being overturned, its codification in the DGCL precludes the possibility of it being overturned in future judicial decisions securing Delaware’s position as the dominant forum for intra-corporate disputes.
The latter half of the proposed amendment provides that a forum other than Delaware cannot be the exclusive forum for a Delaware corporation. The proposed amendment does not prevent other states from ever being the forum of intra-corporate disputes; rather, it simply states Delaware must be an option and it is up to the parties to decide where to litigate. This provision does two things: (1) it overturns the ruling in City of Providence, and (2) ensures that Delaware courts will always remain an option for intra-corporate disputes of a corporation incorporated in the state of Delaware. This portion of the proposed amendment is also logically sound. If a corporation incorporates in a specific state, the corporation’s constituents should always be able to utilize the courts of that state as a litigation forum.
The natural question that follows asks, “why can Delaware be the exclusive forum but another forum cannot, and what are the ramifications?” The answer is simple: the purpose of incorporating in Delaware is to take advantage of the DGCL. Allowing an exclusive forum other than Delaware effectively turns the purpose of incorporating in Delaware on its head, and deprives a corporation’s constituents of the benefits they were intended to have by choosing to incorporate in Delaware. Thus, allowing Delaware as an exclusive forum and disallowing other fora exclusivity achieves the purpose sought by corporations who incorporate in Delaware
In his opinion in City of Providence, Chancellor Bouchard hints at the notion that other courts will be reluctant to enforce bylaws selecting Delaware as the exclusive forum, pursuant to the ruling in Boilermakers, if Delaware does not allow for other non-Delaware fora to be designated as the exclusive forum for intra-corporate disputes. This concern, however, seems tenuous as numerous other courts have enforced bylaws such as those in Boilermakers since the case was decided and before knowing the Chancellor would rule in favor of an exclusive non-Delaware forum in City of Providence. There is no inclination that those courts, which have enforced forum selection clauses of the Boilermaker-type, will soon change their minds. Additionally, courts throughout the country are well aware of the fact that Delaware courts, specifically the Delaware Court of Chancery, are extremely well-versed in dealing with intra-corporate disputes and the various provisions of the DGCL. Non-Delaware courts, in the interest of justice and judicial efficiency, would be doing the parties a disservice by not enforcing forum selection clauses that select Delaware as the exclusive forum for intra-corporate disputes.
Notably, the ruling in City of Providence will have very little impact even if the proposed amendment is not adopted for the reasons already discussed. The purpose of incorporating in Delaware, for many corporations, is to take advantage of the DGCL. The best way for corporations to do so is for the Delaware courts, who are charged with interpreting and enforcing the provisions of the DGCL, to be the exclusive forum or to always be an option as a forum. Corporations and their attorneys who mean to take advantage of the DGCL are not blind to this fact. Until other jurisdictions can lure corporations away from Delaware with more favorable corporate laws, City of Providence will not have as much of an impact as feared. The Council has nevertheless recommended addressing the issue before it can ever come to fruition.
Ultimately, if adopted, the proposed amendment will give Boilermakers statutory force and guarantee the logical result that constituents of a Delaware corporation will always have the option to choose Delaware as a forum to litigate intra-corporate disputes. And if the proposed amendment is not adopted, the ruling in City of Providence will remain a minimal threat to Delaware’s preeminence in corporate litigation because the majority of intra-corporate disputes among Delaware corporations will select Delaware as the forum for litigation in light of the protections the DGCL provides and the judiciary’s experience and expertise in deciding intra-corporate disputes. Thus, regardless of whether the proposed amendment is passed or not, Delaware will prevail.
Kyle Wu serves as a Judicial Extern to the Honorable Sherry R. Fallon of the United States District Court for the District of Delaware, and he is currently completing the Business Organizations Law Certificate Program.
Suggested Citation: Kyle Wu, Proposed Forum Selection Amendment Reinforces Boilermakers, Spells Waterworks for City of Providence and, As Always, Delaware Prevails, Del. J. Corp. L (May 11, 2015), www.djcl.org/blog.