City of Providence v. First Citizens BancShares, Inc., C.A. No. 9795-CB (Del. Ch. Sept. 8, 2014) (Bouchard, C.)
In this consolidated opinion concerning the validity of a forum selection bylaw, the Court of Chancery affirmatively answered, among other things, an issue of first impression: “whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes.” The decision is also noteworthy because the forum selection bylaw upheld by the Court was adopted in connection with the merger challenged in the litigation.
Plaintiff, City of Providence (“Providence”), holds a minority interest in defendant, First Citizens BancShares, Inc. (“FC North”), a Delaware-incorporated bank holding company that primarily conducts its business in North Carolina. Providence challenged a forum selection bylaw for resolving intra-corporate disputes (the “Bylaw”), which FC North adopted on the same day it announced it had entered into a merger agreement to acquire First Citizens Bancorporation, Inc. (“FC South”), a bank holding company incorporated and based in South Carolina. FC North and FC South are allegedly controlled by the same group of affiliated investors. The Bylaw was materially identical to those deemed facially valid in Boilermakers Local 154 Retirement Fund v. Chevron Corp. except in two respects: (i) rather than selecting Delaware state or federal courts, the Bylaw selects as the forum the United States District Court for the Eastern District of North Carolina (or any North Carolina state court if the federal court lacks jurisdiction) and (ii) the Bylaw was expressly applicable only “to the fullest extent permitted by law.”
Providence filed two complaints (consolidated in this action) against FC North and its board, alleging: (i) the Bylaw is invalid under Delaware law or public policy (“Count I”); (ii) the adoption of the Bylaw was ultra vires and a breach of fiduciary duty (“Count II”); (iii) even if valid, the Court could still exercise jurisdiction over the present action and claims arising out of or related to the action (“Count III”); and (iv) various class and derivative claims for breach of fiduciary duty with regard to the proposed merger (the “Merger Claims”). Defendants moved to dismiss Counts I through III for failure to state a claim, and Count II and the Merger Claims for improper venue. The parties agreed that the Bylaw purported to govern the Merger Claims, so if the Bylaw were valid (both facially and “as applied” to the instant case), then the Court of Chancery would not be the proper venue to hear these claims.
First, the Court deemed the Bylaw facially valid and, consequently, granted defendants’ motion to dismiss Counts I and III for failure to state a claim upon which relief may be granted. In reaching this conclusion, the Chancellor noted the material distinction between the Bylaw and the bylaws challenged in Chevron, which distinction created an issue of first impression for the Court: “whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes.” The Chancellor held that the board of a Delaware corporation may adopt such a bylaw pursuant to the analysis first articulated in Chevron. In so holding, the Chancellor ruled that the fact that FC North’s board selected North Carolina rather than Delaware as the exclusive forum for intra-corporate disputes did not call into question the Bylaw’s validity. The Chancellor also rejected Providence’s argument that the Bylaw is invalid under Delaware law and public policy because it deprives the Court of Chancery of the “exclusive jurisdiction” vested upon it under various DGCL provisions (such as Section 203(e)). Citing Vice Chancellor Laster’s recent decision in IMO Daniel Kloiber Dynasty Trust, the Chancellor concluded that the General Assembly’s grant of “exclusive” jurisdiction to the Court of Chancery for certain claims was intended to address the interstate division of jurisdictions among Delaware courts, and did not preclude a party from asserting a claim arising under such a statute in a different jurisdiction. To hold otherwise, according to the Chancellor, would conflict with the United States Constitution’s Supremacy Clause and federal diversity jurisdiction. The Chancellor also noted that the Bylaw was enforceable only “to the fullest extent permitted by law.” Thus, if certain claims for relief may only be asserted in the Court of Chancery (which, according to the Chancellor, is not the case here), this carve-out would apply.
Second, the Chancellor dismissed Count II, holding that Providence failed to state a claim for breach of fiduciary duty in connection with the adoption of the Bylaw. In advancing Count II, Providence asserted that FC North’s board’s adoption of the Bylaw was motivated by the belief that FC North might receive more favorable treatment in North Carolina courts (as opposed to Delaware or other state courts), in tandem with the board’s self-interested and disloyal conduct in approving the merger with FC South. The Court rejected these arguments as wholly conclusory, stating that the Bylaw did not insulate the defendants from judicial review, and Providence did not provide any well-pled facts to call into question the integrity of the North Carolina courts or explain how defendants were advancing their self-interests by selecting North Carolina courts as their forum of choice.
Lastly, the Court dismissed the Merger Claims for improper venue. Having deemed the Bylaw facially valid, the Chancellor only needed to determine if the Bylaw is valid “as applied” to this case in order to dismiss the claims for improper venue. In support of its position that the Bylaw was invalid as applied here, Providence argued that (i) Delaware had an overriding interest in resolving the novel and substantial issues raised in the Merger Claims, (ii) the timing of the Bylaw’s adoption (i.e., simultaneous with the adoption of the merger agreement) rendered its application to the Merger Claims unreasonable, and (iii) enforcement of the Bylaw would be unjust because the Bylaw cannot be repealed without the support of FC North’s majority stockholder (i.e., the group of affiliated investors). The Chancellor rejected all three arguments. First, the Chancellor found no overarching public policy of Delaware that prevents directors from adopting forum selection bylaws. In the same vein, the Chancellor noted that Providence overstated the novelty of the Delaware law issues raised by the Merger Claims, noting that these claims are governed by well-established principles of Delaware law. As for Providence’s second “as applied” argument, the Chancellor indicated that the fact the Bylaw was adopted on an allegedly “cloudy” day was immaterial given the lack of well-pled allegations demonstrating any impropriety in this timing. Lastly, the Court found that neither the DGCL nor Chevron mandate that a board-adopted forum selection bylaw is valid only if it were realistically possible that stockholders may repeal it. According to the Chancellor, concluding otherwise would effectively call into question all board-adopted bylaws of controlled corporations.