Court Upholds Facial Validity of Board-Approved Bylaws

Roscoe Pound once wrote that “law must be stable and yet it cannot stand still.” The Delaware Supreme Court in Unocal v. Mesa Petroleum, 493 A.2d 946, 957 (Del. 1985), likewise noted that “our corporate law is not static.” Circumstances change and the law cannot be so inflexible as to require the law to stand still. Recently, the burden and expense of stockholder litigation in multiple forums, particularly in merger cases, has increased, creating the additional risk that a court other than the appellate court in the state of incorporation will resolve novel and fundamental questions affecting the internal affairs of a corporation. It is to address this threat that the directors of Chevron and FedEx (and 250 other public corporations) used the power conferred in their certificates of incorporation to adopt bylaws that made Delaware the exclusive forum to bring suit for matters involving the internal affairs of the corporation. In Boilermakers Local 154 Retirement Fund v. Chevron, Civil Action No. 7220-CS (Del. Ch., June 25, 2013), Chancellor Leo E. Strine Jr. echoed Cardozo and followed Unocal to find that the mere fact that Section 109(b) of the Delaware General Corporation Law had not previously been used to create binding forum-selection clauses for specified shareholder litigation did not preclude boards of a Delaware corporation from so acting today. In so holding, the court provides a useful primer on the standard applicable to facial challenges to bylaws, and a clear rationale for why a board-adopted forum-selection clause is valid statutorily and why it creates a contractual obligation binding on the stockholders even though they did not approve it.

Stockholders Bear Burden of Establishing Invalidity

Delaware law presumes the validity of bylaws. A plaintiff challenging the facial statutory and contractual validity of a bylaw bears the burden of showing “that the bylaws cannot operate lawfully or equitably under any circumstances.” To prevail, a plaintiff must show that the bylaw does not address a subject matter within the scope of Section 109(b) and can never operate consistently with law. The court emphasized that whether a bylaw that serves a legitimate purpose may also be used inequitably is irrelevant to its determination of facial statutory and contractual validity. Such a challenge can occur when there is a real-world, extant controversy over the enforcement of a forum selection clause. “By long-standing, settled law, such as-applied challenges are to be raised later, when real-world circumstances give rise to a genuine, concrete dispute requiring judicial resolution,” the opinion said.

Board-adopted Forum-Selection Bylaws are Statutorily Valid