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From Securities Regulation Daily, September 10, 2014

Forum bylaw skirting Delaware valid even if one shareholder rules

By Mark S. Nelson, J.D.

A Delaware corporation’s forum selection bylaw that opts for federal and state fora outside of Delaware is valid, said Chancellor Andre G. Bouchard. The case raised an issue of first impression about the scope of valid forum selection bylaw clauses that was partly left open by the chancery court’s Boilermakers opinion. As a result, a suit about a Delaware corporation’s intra-corporate affairs can be heard in non-Delaware fora specified in a bylaw forum selection clause despite worries about the timing of the bylaw’s adoption and the role played by a controlling shareholder (City of Providence v. First Citizens Bancshares, Inc., et al., September 8, 2014, Bouchard, A.).

Cloudy day. Chancellor Bouchard took up the bylaw claim first because it could be dispositive of the case, and the parties had agreed that it must be decided before other claims. Ultimately, the City of Providence’s claims disputing the merger of two bank holding companies united by a controlling shareholder group had to be dismissed because the bylaw forum selection clause was valid facially and as-applied.

FC North’s board adopted the forum selection bylaw at issue on the same day it announced that it would acquire First Citizens Bancorporation, Inc. (FC South) for a mix of cash and stock. The City of Providence held class A shares in First-Citizens Bank & Trust Company (a company held by FC North). The city objected to the “cloudy” day timing and effect of the bylaw forum selection provision.

Second most obvious forum. FC North’s forum selection bylaw mirrored the two bylaws then-Chancellor Leo E. Strine, Jr. upheld in Boilermakers, except that FC North specified the state and federal courts of North Carolina as the available fora, instead of those in Delaware. Chancellor Bouchard said this twist raised a question of first impression regarding whether a Delaware company’s board can adopt a bylaw that chooses fora outside Delaware to hear suits over the company’s intra-corporate affairs.

According to Chancellor Bouchard, former Chancellor Strine set the stage in Boilermakers for the facial validity answer here — Yes. Even though Boilermakersnoted that Delaware is the “most obviously reasonable forum,” that case did not bar other fora. Chancellor Bouchard characterized FC North’s choice as the “second most obviously reasonable forum,” though valid under Delaware law.

The chancellor then quickly rejected the City of Providence’s “exclusive jurisdiction” and “substantive right” arguments. Citing Vice Chancellor Laster’s Kloiberopinion, Chancellor Bouchard noted that other states could hear cases based on laws in which the Delaware legislature granted exclusive jurisdiction to Delaware courts. Likewise, a state law that grants a substantive right to bring a suit in Delaware may run afoul of the federal Constitution’s Supremacy Clause and federal rules governing diversity jurisdiction.

But Chancellor Bouchard said he need not deal with the constitutional issues that may impact FC North’s bylaw because the bylaw says it is valid to the fullest extent of the law. The chancellor concluded that this language left room for cases that could only be brought in the Delaware Chancery Court. The City of Providence, however, brought common law claims that can be heard in other fora.

The chancery court also rejected the City of Providence’s breach of fiduciary duty claims against FC North’s board for adopting the forum selection bylaw. The City of providence had claimed that the bylaw was “self-interested” because it was designed to protect the Holding Group (FC North’s majority shareholder) and to avoid Delaware courts.

Chancellor Bouchard found these claims too vacuous to rebut the business judgment review standard. He also said there were no allegations that state and federal courts in North Carolina would lack jurisdiction to hear suits about FC North. Moreover, the chancellor had earlier noted in his opinion that Delaware law lets a company give its board the authority to revise the company’s bylaws unilaterally as part of the wider contract between the company and its shareholders.

Bylaw valid as-applied. The City of Providence said FC North’s bylaw was invalid as-applied because Delaware has a stake in deciding “novel” claims regarding the FC North-FC South merger, the timing of the bylaw’s adoption to coincide with the merger announcement makes its enforcement unreasonable, and enforcement of the bylaw would be unjust because only the Holding Group can repeal it. The chancellor noted that the city never alleged fraud or overreaching regarding the bylaw’s adoption.

Chancellor Bouchard said that Boilermakers is just a guide for the City of Providence’s as-applied challenge because that case only looked at issues of facial validity. Instead, Bremen and Schnell provide the basis for judging a forum selection clause. These cases say that a bylaw generally will be valid unless it was procured by fraud, undue influence, very unfair bargaining power, or is unreasonable. A bylaw also may fail if its application results in inequitable, though lawful, acts.

As for the novelty argument, Chancellor Bouchard said the City of Providence’s “equity dilution” theory was hardly novel. He also said Delaware policy does not bar Delaware companies from choosing a foreign jurisdiction for intra-corporate suits. The chancellor said a truly novel question can still be certified to the Delaware Supreme Court by other state and federal courts.

Moreover, the City of Providence’s unreasonableness argument must fall because the broader contractual relationship between a company and its shareholders puts shareholders on notice that a company’s board can adopt a forum selection bylaw. Nor is application of the bylaw inequitable just because it was adopted on a “cloudy” instead of a “clear” day, without more detailed allegations on the timing of its adoption, or how the bylaw favors FC North’s controlling shareholder, or how North Carolina courts lack integrity to hear suits about the company. The chancellor also said the City of Providence’s “vested rights doctrine” arguments were likewise amiss.

Lastly, Chancellor Bouchard found the City of Providence’s unjustness argument about the lack of an effective means for shareholders to repeal the bylaw unavailing. He noted that Chancellor Strine in Boilermakers implied “in the abstract” that shareholder repeal is a powerful tool for keeping a company’s board honest (the Boilermakers scenario lacked a controlling shareholder).

By contrast, Chancellor Bouchard said the presence of a controlling shareholder who wanted a forum selection bylaw adopted does not make enforcement of the bylaw per se unreasonable. The chancellor suggested that Schnell could aid shareholders in apt cases. Said Chancellor Bouchard: “I do not interpret either the DGCL or Chevron [Boilermakers] to mandate that a board-adopted forum selection bylaw can be applied only if it is realistically possible that stockholders may repeal it.”

The case is No. 9795-CB.

Attorneys: Christine S. Azar (Labaton Sucharow LLP) and Jeremy Friedman (Friedman Oster PLLC) for City of Providence. Gregory P. Williams (Richards Layton & Finger PA) and Sandra C. Goldstein (Cravath Swaine & Moore LLP) for Frank B. Holding, Jr., John M. Alexander, Jr., Victor E. Bell, III, Hope Holding Bryant, H.M. Craig, III, H. Lee Durham, Jr., Daniel L. Heavner, Lucius S. Jones, Robert E. Mason, IV, Robert T. Newcomb, James M. Parker, Ralph K. Shelton, First Citizens Bancshares, Inc. Donald H. Tucker, Jr. (Smith Anderson Blount Dorsett Mitchell & Jernigan LLP) for John M. Alexander, Jr., Victor E. Bell, III, H.M. Craig, III, H. Lee Durham, Jr., Daniel L. Heavner, Lucius S. Jones, Robert E. Mason, IV, Robert T. Newcomb, and Ralph K. Shelton.

Companies: City of Providence; First Citizens Bancshares, Inc.; First-Citizens Bank & Trust Co.

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