The primary issue of the case, which was the consolidation of nearly identical complaints filed by plaintiff stockholders of both Chevron and Fed Ex, was the validity of a bylaw provision adopted by the board of directors of each corporation without stockholder approval that requires litigation relating to the internal affairs of the corporation be conducted in Delaware.
The decision was important not only to Chevron and Fed Ex, but to all Delaware corporations. In 2012, the boards of many Delaware corporations adopted forum selection bylaws. Following an attack on such provisions by plaintiff stockholder firms, many of those boards repealed the forum selection bylaws.
In granting the defendants' motion for judgment on the pleadings, Chancellor Strine found that (1) the bylaws are valid under Delaware law and (2) the bylaws are valid and enforceable contractual forum selection clauses.
With respect to the first finding, the court held that forum selection bylaws easily meet the requirements of § 109(b) of the DGCL, which provides that the bylaws of a corporation may contain any provision, not inconsistent with law or with the certificate of incorporation, relating 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.
As to the second finding, the court stated that “the bylaws of a Delaware corporation constitute part of a binding broader contract among the directors, officers, and stockholders formed within the statutory framework of the DGCL. This contract is, by design, flexible and subject to change in the manner that the DGCL spells out and that investors know about when they purchase stock in a Delaware corporation. The DGCL allows the corporation, through the certificate of incorporation, to grant the directors the power to adopt and amend the bylaws unilaterally. The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew (i) that consistent with [§ 109(a) of the DGCL], the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that [§ 109(b) of the DGCL] allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board’s authority to adopt binding bylaws consistent with [§ 109 of the DGCL].”
Chancellor Strine was not persuaded by an array of hypothetical situations that the plaintiffs’ argued might result in the forum selection bylaws operating unreasonably: “By challenging the facial statutory and contractual validity of the forum selection bylaws, the plaintiffs took on the stringent task of showing that the bylaws cannot operate validly in any conceivable circumstance. The plaintiffs cannot evade this burden by conjuring up imagined future situations where the bylaws might operate unreasonably, especially when they acknowledge that in most internal affairs cases the bylaws will not operate in an unreasonable manner.” The court explained that "challenges to the reasonableness of a forum selection clause should be made by a real plaintiff whose real case is affected by the operation of the forum selection clause," and that in addition, "if a plaintiff-stockholder believes that a board is breaching its fiduciary duties by applying a forum selection clause to obtain dismissal of an actual case filed outside the forum designated by the bylaws, it may sue at that time."