Corporate Governance

Shearman & Sterling LLP 44 | Federal Forum-Selection Provisions in the Wake of Cyan and Salzberg REMAINING UNCERTAINTIES Enforceability Outside of Delaware Certificates of Incorporation vs. Bylaws Courts throughout the country typically (1) abide by the "internal affairs" doctrine and apply the law of the state of incorporation to internal corporate matters and (2) enforce forum-selection clauses in contracts. 8 Forum- selection provisions in bylaws and certificates of incorporation In Salzberg, the Delaware Supreme Court upheld federal forum-selection provisions in the certificates of incorporation of three corporations as facially valid under Delaware General Corporation Law (DGCL) Section 102(b)(1), which addresses permissible provisions in Delaware certificates of incorporation. The reasoning and language of Salzberg and other Delaware decisions — as well as the analogous nature of DGCL statutory provisions addressing bylaws — suggest that FFPs would also be effective if adopted as bylaws, including by boards of directors with authority under the company's certificate of incorporation to adopt, amend or repeal bylaws. In Salzberg, the Delaware Supreme Court found that federal forum- selection provisions address "intra-corporate litigation" and could "easily fall" into categories of permitted provisions under DGCL Section 102(b)(1), including (i) the "management of the business" with respect to stockholder derivative claims have also been enforced. Moreover, at least one state court in California has already enforced an FFP in favor of a Delaware corporation and its officers and directors. Nevertheless, there remains some uncertainty as to whether a particular state court outside of Delaware would enforce and "conduct of the affairs of the corporation" and (ii) "creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders… ." 9 DGCL Section 109(b) uses nearly identical language for categories of permitted bylaws. 10 Moreover, Salzberg relied in part on the decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 11 which upheld a different forum-selection provision (requiring internal affairs claims to be litigated in Delaware) adopted in a corporation's bylaws. Indeed, the Salzberg court concluded by quoting Boilermakers and noting that the "DGCL was intended to provide directors and stockholders with flexibility and wide discretion for private ordering and adaptation to new situations. '[T]hat a board's action might involve a new use of plain statutory authority does not make it invalid under our law, and the boards of Delaware corporations have the flexibility to respond to changing dynamics in ways that are authorized by our statutory law.'" 12 Further, the Delaware Supreme Court noted that historically "forum selection provisions . . . were valid under Section 102(b) [i.e., certificates] and Section 109(b) [i.e., bylaws]." 13 Likewise, the court seemed to equate bylaws with certificate provisions in stating that "a bylaw that seeks to regulate the forum in which such 'intra-corporate' litigation can occur is . . . facially valid under Section 102(b)(1)." 14 Nevertheless, Salzberg noted that "FFPs, as charter provisions, must be subjected to, and approved by a vote of the stockholders" and "[t]he logic underlying the validity of traditional contractual forum-selection clauses has some force in this stockholder-approved charter context." 15 The court also highlighted that "stockholder- approved charter amendments are given great respect under our law." 16 8 See, e.g., Salzberg, 227 A.3d at 132, 135–36. 9 Id. at 113–14. 10 See 8 Del. Code § 109(b). 11 73 A.3d 934 (Del. Ch. 2013). 12 227 A.3d at 137–38 (emphasis added). 13 Id. at 120. 14 Id. at 114 (emphasis added). 15 Id. at 133. 16 Id. at 116. an FFP in a corporation's certificate of incorporation or bylaws and divest itself of jurisdiction over federal Securities Act claims.

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