The Impact of Boilermakers’ Continues to be Felt: Utah Court Upholds Delaware Forum Selection Clause

In a recent decision (North v. McNamara, No. 1:13-cv-833 (S.D. Ohio Sept. 19, 2014)), the United States District Court for the Southern District of Ohio upheld a forum selection bylaw unilaterally adopted by the board of directors of Chemed Corp. after alleged wrongdoing but in advance of two suits seeking redress for such wrongdoing. In so doing, the court joined with courts in, among others, New York, Texas (Order Granting Defendants’ Motion to Dismiss Because of Mandatory Forum Selection Clause, Daugherty v. Ahn, Cause No. CC-11-06211), Illinois, Louisiana, and California that have ruled similarly.

The bylaw at issue Section 8.07 was adopted on August 2, 2013 and stated: 

• Unless the corporation consents in writing to the selection of an alternative forum, a state or federal court located within the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim for breach of a fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or the corporation's stockholders, (iii) any actions asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the certificate of incorporation or the by-laws of the corporation or (iv) any action asserting a claim governed by the internal affairs doctrine, in each such case subject to such court having personal jurisdiction over the indispensable parties named as defendants therein. 

On August 5, 2013, Chemed filed a Form 8-K stating in part, that "[o]n August 2, 2013, [Chemed] amended its bylaws by adding a new section 8.07 which provides Delaware courts are the exclusive forum for certain actions. The full text hereof is incorporated by reference."

Several months later, a Chemed stockholder filed a derivative suit in federal court in Delaware alleging misconduct dating back to 2010. Shortly thereafter, a different stockholder filed substantially similar litigation in Ohio federal court. Invoking the bylaw, defendants moved to transfer the case to the Delaware federal district court.

The stockholder objected to the transfer, arguing the forum selection bylaw should not be enforced because 1) she did not knowingly and willing consent to the bylaw; 2) the bylaw was adopted for an improper purpose; and 3) forcing her to litigate in the United States District Court for the District of Delaware would be "seriously inconvenient."

The heart of the opinion addresses the first of the stockholders claims and firmly rejects it. Relying on and further strengthening the import of Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) the court rejected the stockholders argument that she had not consented to the bylaw.

The court noted: 

• As in Boilermakers, the shareholders of Chemed consented to the Delaware corporate framework by buying shares in a Delaware corporation and agreeing to the certificate of incorporation that allowed the board to unilaterally adopt bylaws. The board acted in accordance with the contractual framework and the certificate of incorporation when it amended the bylaws to include the forum-selection clause. While the shareholders did not provide contemporaneous consent to the amendment, they previously chose to be bound by those bylaws adopted unilaterally by the board . . . . The fact that the shareholders are unsatisfied with the consequences of the application of the terms to which they agreed is an insufficient basis upon which to find the bylaw so inequitable that it should not be enforced.  

Similarly, Plaintiff's argument that she did not receive notice and was unaware of Bylaw 8.07 is unavailing. To the extent the notice argument is intended to address her ability to provide contemporaneous consent to the bylaw before its adoption, the prior analysis of this issue is equally relevant here. To the extent that she intends to further argue that she cannot be bound because she did not receive notice or become aware of Bylaw 8.07's existence before she filed her lawsuit, a plaintiff's personal failure to read or become aware of changes made to the bylaws does not make the enforcement of the bylaw inequitable or unjust. That is particularly true here given that Defendants have demonstrated that the corporation publicly disclosed the amendment to the bylaws just three days after its adoption and several months before Plaintiff filed her lawsuit, and Plaintiff has not shown otherwise. The Court finds that to be reasonable notice to the shareholders, including Plaintiff, of the adoption of Bylaw 8.07. 

In considering whether the fact that the alleged wrongdoing occurred before adoption of the forum-selection bylaw, the court noted: 

• [T]he forum-selection bylaw does not become unenforceable simply because it was adopted after the purported wrongdoing. The Court agrees with the Boilermakers court that a corporation may enact a forum-selection bylaw that is reasonable and fair, even in circumstances such as those presented here, for the purpose of consolidating litigation—particularly litigation brought on behalf of the corporation—into a single forum to reduce costs and prevent duplication. Not only would such consolidation be in the interests of the corporation, it also would be in the interests of shareholders to have the issues resolved efficiently and consistently. Moreover, as discussed above, binding a shareholder to such a bylaw is not unreasonable or unjust given that the shareholders were on notice at the time they purchased their shares in the Delaware corporation of the broad powers conferred upon the board to make, adopt, alter, amend, or repeal the bylaws from time to time. As such, the Court does not find the fact that the claims arose primarily before the adoption of the bylaw to render that bylaw unenforceable.  

The court then made quick work of dismissing the stockholders remaining objections to the bylaw and ordered transfer of the action to Delaware. 

This decision, in combination with the fee-shifting bylaw cases in Delaware and elsewhere (discussed here and here) show the power of boards to have their say as to where intra-corporate litigation will take place and who will pay for it.