City of Providence v. First Citizens Bancshares, Inc. ( 2014 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF PROVIDENCE, on behalf of itself )
and all others similarly situated, )
)
Plaintiff, )
)
v. ) CONSOLIDATED
) C.A. No. 9795-CB
FIRST CITIZENS BANCSHARES, INC., )
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, and RALPH K. )
SHELTON, )
)
Defendants. )
OPINION
Date Submitted: September 4, 2014
Date Decided: September 8, 2014
Christine S. Azar and Ned C. Weinberger of Labaton Sucharow LLP, Wilmington,
Delaware; Christopher J. Keller, Eric J. Belfi and Michael W. Stocker of Labaton
Sucharow LLP, New York, New York; Jeremy Friedman and Spencer Oster of Friedman
Oster PLLC, New York, New York, Attorneys for Plaintiff.
Gregory P. Williams, John D. Hendershot and Christopher H. Lyons of Richards, Layton
& Finger, P.A., Wilmington, Delaware; Sandra C. Goldstein, J. Wesley Earnhardt, and
Rory A. Leraris of Cravath, Swaine & Moore LLP, New York, New York, Attorneys for
Defendants 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 and
Nominal Defendant/Defendant First Citizens Bancshares, Inc.
Donald H. Tucker, Jr. and Clifton L. Brinson of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P., Raleigh, North Carolina, Attorneys for Defendants 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.
BOUCHARD, C.
I. INTRODUCTION
This action involves a challenge by plaintiff City of Providence (“Providence”) to
a forum selection bylaw (the “Forum Selection Bylaw”) adopted by defendant First
Citizens BancShares, Inc., (“FC North”), a bank holding company incorporated in
Delaware and based in Raleigh, North Carolina. The Forum Selection Bylaw is virtually
identical to the ones that then-Chancellor, now Chief Justice, Strine found to be facially
valid in Boilermakers Local 154 Retirement Fund v. Chevron Corporation (“Chevron”) 1
except in one respect: it selects as the forum the United States District Court for the
Eastern District of North Carolina, or, if that court lacks jurisdiction, any North Carolina
state court with jurisdiction, instead of the state or federal courts of Delaware.
FC North adopted the Forum Selection Bylaw 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. Providence
filed two separate complaints that have since been consolidated into this action. The first
complaint challenges the facial validity of the Forum Selection Bylaw and asserts a claim
for breach of fiduciary duty in connection with its adoption. The second complaint
asserts claims against the FC North board of directors concerning the proposed merger.
In this opinion, I conclude that Providence has not stated a claim as to the facial
validity of the Forum Selection Bylaw. This conclusion is compelled by the logic and
reasoning of the Chevron decision. I also conclude that Providence has failed to state a
1
73 A.3d 934 (Del. Ch. 2013).
1
claim for breach of fiduciary duty in connection with the adoption of the Forum Selection
Bylaw and, further, that Providence has failed to demonstrate that it would be
unreasonable, unjust, or inequitable to enforce the Forum Selection Bylaw here.
Therefore, I grant the defendants’ motions to dismiss both of the complaints in this
action.
II. BACKGROUND 2
FC North is a Delaware corporation that is headquartered in Raleigh, North
Carolina. FC North is a holding company for First-Citizens Bank & Trust Company,
which operates in seventeen states 3 but has most of its banking operations—over 70% of
its total deposits and over 60% of its branches—in North Carolina. 4 FC North has two
classes of common stock: Class A shares that are entitled to one vote per share and Class
B shares that are entitled to sixteen votes per share. Providence is a holder of Class A
shares.
FC South is a bank holding company incorporated and based in South Carolina.
FC South has voting and non-voting common stock.
2
Unless otherwise noted, the facts recited in this Opinion are based on the well-pled
allegations of the relevant complaint.
3
Bylaw Compl. ¶ 9.
4
First Citizens BancShares, Inc., Annual Report (Form 10-K), at 4 (Feb. 26, 2014). I
may consider these publicly available facts at the motion to dismiss stage because they
are not subject to reasonable dispute. See In re Gen. Motors (Hughes) S’holder Litig.,
897 A.2d 162, 170-71 (Del. 2006).
2
Both FC North and FC South are allegedly controlled by the members and
affiliates of the Holding family (the “Holding Group”). The Holding Group beneficially
owns shares representing approximately 52.2% of the votes of FC North and
approximately 48.5% of the votes of FC South. 5 As between the two, the Holding
Group’s economic interests are allegedly greater in FC South than FC North.
On June 10, 2014, the FC North board adopted and approved Amended and
Restated Bylaws, which revised numerous aspects of FC North’s bylaws and added the
Forum Selection Bylaw. 6 That same day, FC North announced that it had entered into a
merger agreement to acquire FC South for a mix of stock and cash. The aggregate value
of the proposed transaction is alleged to be between $636.9 million and $676.4 million.
On June 19, 2014, Providence filed a complaint (the “Bylaw Complaint”) against
FC North and the twelve members of its board of directors (the “Board”) challenging the
Forum Selection Bylaw as invalid as a matter of Delaware law or public policy (Count I)
and seeking a declaratory judgment that the Forum Section Bylaw is invalid or,
alternatively, that this Court “may nonetheless exercise jurisdiction over this action and
5
Bylaw Compl. ¶¶ 24, 26; Merger Compl. ¶¶ 32, 36. Providence further alleges that,
when the holdings of other entities in which members of the Holding family are
stockholders and serve as directors and/or officers are included, these voting percentages
increase to approximately 58.2% of votes of FC North and 60.8% of FC South. Merger
Compl. ¶¶ 34, 38.
6
Bylaw Compl. ¶ 35; see also First Citizens BancShares, Inc., Current Report (Form 8-
K), at Item 5.03 (June 10, 2014) (summarizing material changes made in FC North’s
Amended and Restated Bylaws).
3
any action arising out of or relating to the [proposed merger]” (Count III). 7 In the Bylaw
Complaint, Providence also asserts that the adoption of the Forum Selection Bylaw was
ultra vires and a breach of fiduciary duty (Count II).
On July 10, 2014, defendants moved to dismiss the Bylaw Complaint in its
entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim. They also
moved to dismiss Count II under Rule 12(b)(3) for improper venue.
On August 1, 2014, Providence filed its second complaint (the “Merger
Complaint”). In the Merger Complaint, Providence asserts various class and derivative
claims for breach of fiduciary duty against the Board, as well as for breach of fiduciary
duty as a controlling stockholder and for unjust enrichment against certain directors in
their capacity as members of the Holding Group. In essence, Providence contends that
the Holding Group, through its controlling interest, unfairly forced FC North to overpay
for FC South to its own benefit and to the dilution of FC North’s minority stockholders. 8
On August 4, 2014, the defendants moved to dismiss the Merger Complaint under
Rule 12(b)(3) for improper venue. On August 7, 2014, the two cases were consolidated.
Providence has not filed a consolidated complaint or designated an operative complaint.
Thus, within this consolidated action, there are two complaints containing discrete
claims, as described above.
7
Bylaw Compl. ¶ 69.
8
There is no claim challenging the Forum Selection Bylaw in the Merger Complaint.
Rather, Providence’s allegations in the Merger Complaint about the Forum Selection
Bylaw simply rehash its allegations in the Bylaw Complaint. See Merger Compl. ¶¶ 12,
100-03, 114.
4
On the evening of August 28, Providence filed a motion to expedite and for a
preliminary injunction to enjoin a September 16 vote by FC North stockholders on
several proposals related to the proposed merger, including a charter amendment to
increase the number of authorized shares. 9 The parties do not dispute that the Forum
Selection Bylaw purports to govern the claims Providence asserts in the Merger
Complaint. 10 Were the Forum Selection Bylaw valid, then this Court would not be the
proper venue to hear Providence’s request for injunctive relief.
As to the timing between the preliminary injunction motion and the pending
motions to dismiss, the parties previously stipulated that the motions to dismiss would be
heard on or as soon as possible after September 3. They stipulated further that the
validity of the Forum Selection Bylaw, including whether it may bar the claims
Providence asserts in the Merger Complaint, should be resolved before any other
substantive issues. 11
9
Providence was aware of the September 16 stockholder meeting since at least August 6,
2014, when FC North filed an amendment to its registration statement with the Securities
and Exchange Commission, but it did not file its motion for expedition until twenty-two
days later (shortly before the Labor Day weekend) and just nineteen days before the date
of the meeting. The timing of its filing displays a glaring lack of alacrity with which it
seeks to act as class counsel.
10
The claims against the members of the Board in their capacity as directors of FC North
plainly fall within part (2) of the Forum Selection Bylaw, and, to the extent they are
derivative, part (1). See n. 18, below. Providence did not argue that its claims against
members of the Board in their capacity as members of the Holding Group (an alleged
controlling stockholder) are outside the ambit of the Forum Selection Bylaw.
11
Stip. Regarding Consolidation and Briefing on Defs.’ Mots. to Dismiss ¶ 1 (Aug. 7,
2014) (“The Parties agree that the issue of the validity of the Bylaw, including as applied
to the Merger Litigation, should be decided before any other substantive issue raised in
5
In accordance with the parties’ own stipulation, before I consider the merits of
Providence’s motion to expedite to schedule a hearing on its preliminary injunction
motion, I will address the potentially dispositive motions regarding the Forum Selection
Bylaw.
III. LEGAL ANALYSIS
A. The Standard of Review under Rule 12(b)(6)
A motion to dismiss pursuant to Rule 12(b)(6) for failure to state a claim must be
denied unless, assuming the well-pled allegations to be true and viewing all reasonable
inferences from those allegations in the plaintiff’s favor, I do not find there to be a
“reasonably conceivable set of circumstances” in which the plaintiff could recover. 12 In
this analysis, I do not accept as true any “conclusory allegations unsupported by specific
facts.” 13
B. The Statutory Framework for Corporate Bylaws
“[T]he bylaws of a Delaware corporation constitute part of a binding broader
contract among the directors, officers, and stockholders formed within the statutory
framework of the [Delaware General Corporation Law (the “DGCL”)].” 14 Under 8 Del.
the Merger Litigation is decided by the Court, and that Defendants are not required to
submit an opposition to any expedition or injunction motion submitted by Plaintiff before
the Court rules on Defendants’ motions to dismiss[.]”).
12
See Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011).
13
Gantler v. Stephens, 965 A.2d 695, 704 (Del. 2009).
14
Chevron, 73 A.3d at 939.
6
C. § 109(a), a corporation may “confer the power to adopt, amend or repeal bylaws upon
the directors.” A corporation’s bylaws, under 8 Del. C. § 109(b), “may contain any
provision, not inconsistent with law or with the certificate of incorporation, relating to the
business of the corporation, the conduct of its affairs, and its rights or powers or the rights
or powers of its stockholders, directors, officers or employees.” I evaluate the validity of
the Forum Selection Bylaw, as a bylaw of a Delaware corporation, under Delaware law. 15
C. FC North’s Forum Selection Bylaw is Facially Valid
FC North’s charter grants the power to amend the bylaws to the Board. 16 Chevron
explains the expectation that investors in corporations like FC North should therefore
have: “[s]tockholders are on notice that, as to those subjects that are subject of regulation
by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws
addressing those subjects.” 17
In all but two respects, the Forum Selection Bylaw is functionally identical to the
bylaws of Chevron Corporation and FedEx Corporation challenged in Chevron. All three
seek to regulate the proper forum for lawsuits against the corporation and its directors,
15
See id. at 938.
16
Restated Certificate of Incorporation of First Citizens BancShares, Inc., art. V (“[T]he
Board of Directors shall have the power to make, adopt, alter, amend and repeal, from
time to time, the Bylaws of the corporation, subject to the rights of the shareholders
entitled to vote with respect thereto to alter or repeal Bylaws made by the Board of
Directors.”). I take judicial notice of this provision of FC North’s charter because
Providence does not contest its existence or authenticity. See Malpiede v. Townson, 780
A.2d 1075, 1090-92 (Del. 2001).
17
Chevron, 73 A.3d at 955-56.
7
officers, and employees asserting (i) any derivative claim; (ii) any claim for breach of
fiduciary duty owed by a director, officer, or employee of the corporation; (iii) any claim
arising under any provision of the DGCL; and (iv) any claim governed by the internal
affairs doctrine. 18 The two distinctions are as follows: first, whereas the boards of
Chevron and FedEx selected Delaware courts as their exclusive forums, the Board of FC
North selected North Carolina courts; and second, FC North’s Forum Selection Bylaw,
unlike that of Chevron or FedEx, is applicable only “to the fullest extent permitted by
law.” These distinctions frame 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.
18
FC North’s Forum Selection Bylaw provides:
Exclusive Forum for Certain Disputes: Unless the corporation consents in
writing to the selection of an alternative forum, the United States District
Court for the Eastern District of North Carolina or, if such court lacks
jurisdiction, any North Carolina state court that has jurisdiction, shall, to the
fullest extent permitted by law, be the sole and exclusive forum for (1) any
derivative action or proceeding brought on behalf of the corporation, (2)
any action asserting a claim of breach of a fiduciary duty owed by any
director, officer or other employee of the corporation to the corporation or
the corporation’s shareholders, (3) any action asserting a claim arising
pursuant to any provision of the General Corporation Law of the State of
Delaware, and (4) any action asserting a claim governed by the internal
affairs doctrine. Any person or entity purchasing or otherwise acquiring or
holding any interest in shares of capital stock of the Corporation shall be
deemed to have notice of and consented to the provisions of this Section 8.
Bylaw Compl. ¶ 37.
8
After carefully interpreting the relevant Delaware statutes and case law implicated
by board-adopted forum selection bylaws, then-Chancellor Strine concluded in Chevron
that these types of bylaws are statutorily and contractually valid under Delaware law:
As a matter of easy linguistics [in interpreting 8 Del. C. § 109(b) for the
proper scope of corporate bylaws], the forum selection bylaws address the
“rights” of the stockholders, because they regulate where stockholders can
exercise their right to bring certain internal affairs claims against the
corporation and its directors and officers. . . . That is, because the forum
selection bylaws address internal affairs claims, the subject matter of the
actions the bylaws govern relates quintessentially to “the corporation’s
business, the conduct of its affairs, and the rights of its stockholders [qua
stockholders].”
...
In an unbroken line of decisions dating back several generations, our
Supreme Court has made clear that the bylaws constitute a binding part of
the contract between a Delaware corporation and its stockholders. . . . [A]
change by the board [to the bylaws pursuant to 8 Del. C. § 109(a)] is not
extra-contractual simply because the board acts unilaterally; rather it is the
kind of change that the overarching statutory and contractual regime the
stockholders buy into explicitly allows the board to make on its own. In
other words, the Chevron and FedEx stockholders have assented to a
contractual framework established by the DGCL and the certificates of
incorporation that explicitly recognizes that stockholders will be bound by
bylaws adopted unilaterally by their boards. Under that clear contractual
framework, the stockholders assent to not having to assent to board-adopted
bylaws. 19
In my opinion, the same analysis of Delaware law outlined in Chevron validates the
Forum Selection Bylaw here. Although then-Chancellor Strine in Chevron commented
that Delaware, as the state of incorporation, “was the most obviously reasonable forum”
for internal affairs cases because those “cases will be decided in the courts whose
19
Chevron, 73 A.3d at 950-51, 955-56.
9
Supreme Court has the authoritative final say as to what the governing law means,” 20
nothing in the text or reasoning of Chevron can be said to prohibit directors of a
Delaware corporation from designating an exclusive forum other than Delaware in its
21
bylaws. Thus, the fact that the Board selected the federal and state courts of North
Carolina—the second most obviously reasonable forum given that FC North is
headquartered and has most of its operations there—rather than those of Delaware as the
exclusive forums for intra-corporate disputes does not, in my view, call into question the
facial validity of the Forum Selection Bylaw. 22
Providence also challenges the facial validity of the Forum Selection Bylaw on the
theory that it improperly deprives this Court of the “exclusive jurisdiction” vested upon it
by the General Assembly under various provisions of the DGCL. For example,
Providence argues that because 8 Del. C. § 203(e) vests this Court with “exclusive
jurisdiction to hear and determine all matters with respect to [that] section [i.e., 8 Del. C.
§ 203],” the Forum Selection Bylaw must be contrary to Delaware law and public policy
20
Id. at 953.
21
See also In re IBP, Inc. S’holders Litig., 2001 WL 406292, at *9 n.21 (Del. Ch. Apr.
18, 2001) (“Delaware courts have not hesitated to enforce forum selection clauses that
operate to divest the courts of this State of the power they would otherwise have to hear a
dispute.”).
22
Nothing in this Opinion should be construed as taking any position on the wisdom of
selecting the forums designated in the Forum Selection Bylaw. See CA, Inc. v. AFSCME
Emps. Pension Plan, 953 A.2d 227, 240 (Del. 2008) (“[W]e express no view on whether
the Bylaw as currently drafted, would create a better governance scheme from a policy
standpoint. We decide only what is, and is not, legally permitted under the DGCL.”).
10
because it would improperly strip this Court of that jurisdiction. 23 In addition,
Providence contends that the Board’s designation of an exclusive forum other than this
Court was unlawful because it has a substantive right to assert in this Court certain claims
arising under 8 Del. C. § 111 and other provisions of the DGCL.
As an initial matter, I question Providence’s interpretation of these provisions of
the DGCL. Vice Chancellor Laster recently, and quite thoroughly, addressed a similar
jurisdictional question and concluded that a grant by the General Assembly of
“exclusive” jurisdiction to this Court for claims arising under a particular statute does not
preclude a party from asserting a claim arising under that statute in a different
jurisdiction. 24 He further concluded that any attempt by the General Assembly to bestow,
23
Providence raises this or similar arguments with respect to a litany of other DGCL
provisions that vest jurisdiction in the Court of Chancery, some of which use the phrase
“exclusive jurisdiction” and others of which do not: 8 Del. C. §§ 168, 205, 211, 219, 220,
223, 225, 226, 227, 231, 262, 283, 291, 322. The primary case upon which Providence
relies, Datapoint Corp. v. Plaza Sec. Co., 496 A.2d 1031 (Del. 1985), is clearly
distinguishable. In Datapoint, the Delaware Supreme Court affirmed the issuance of a
preliminary injunction enjoining the board’s ability to enforce a bylaw that regulated the
effective time of action taken by stockholder written consent because the bylaw was
“clearly in conflict with the letter and intent” of 8 Del. C. § 228. Id. at 1035-36. Nothing
in Datapoint concerns the jurisdiction of this Court or controls the validity of a forum
selection bylaw.
24
See IMO Daniel Kloiber Dynasty Trust, — A.3d —, 2014 WL 4071326, at *13 (Del.
Ch. Aug. 6, 2014) (“When a Delaware state statute assigns exclusive jurisdiction to a
particular Delaware court, the statute is allocating jurisdiction among the Delaware
courts. The state is not making a claim against the world that no court outside of
Delaware can exercise jurisdiction over that type of case. Nor, as a matter of power
within our federal republic, could the State of Delaware arrogate that authority to itself. . .
. In my view, Delaware also cannot unilaterally preclude a sister state from hearing
claims under its laws.”); see also Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 295
(Del. 1999) (“For the purpose of designating a more convenient forum, we find no reason
11
in Providence’s words, a “substantive right” to bring a claim only in this Court would
conflict with the Supremacy Clause of the United States Constitution and federal
diversity jurisdiction. 25
I need not decide these questions, however. In Chevron, then-Chancellor Strine
declined to resolve each of the plaintiffs’ “hypothetical as-applied challenges” in finding
the Chevron and FedEx forum bylaws to be facially valid. 26 Similarly, it is not necessary
for me to resolve Providence’s “exclusive jurisdiction” or “substantive right” arguments
to determine the facial validity of the Forum Selection Bylaw because they are purely
hypothetical. Providence has not asserted a claim in either of its complaints under any of
the statutes it has identified.
Moreover, the Forum Selection Bylaw, by its terms, is only enforceable “to the
fullest extent permitted by law.” This qualification appears to carve out from the ambit
of the Forum Selection Bylaw a claim for relief, if any, that may be asserted only in the
Court of Chancery. Here, all of the claims pled in the Merger Complaint (i.e., breach of
fiduciary duty and unjust enrichment) are Delaware common law claims that can be (and
frequently have been) asserted in non-Delaware forums, including North Carolina courts.
why the members [of an LLC] cannot alter the default jurisdictional provisions of the
statute and contract away their right to file suit in Delaware”).
25
See Kloiber, 2014 WL 4071326, at *13.
26
See Chevron, 73 A.3d at 958-63; see also XL Specialty Ins. Co. v. WMI Liquidating
Trust, 93 A.3d 1208, 1217 (Del. 2014) (“Delaware courts do not render advisory or
hypothetical opinions.”).
12
For the foregoing reasons, I conclude that the Forum Selection Bylaw is facially
valid as a matter of law and, thus, that Counts I and III of the Bylaw Complaint should be
dismissed for failure to state a claim upon which relief may be granted.
D. Providence Has Failed to State a Claim for Breach of Fiduciary Duty
in Connection with the Adoption of the Forum Selection Bylaw
Count II of the Bylaw Complaint asserts that “[t]he self-interested adoption of the
Forum Selection Bylaw” was a breach of fiduciary duty. In this regard, Providence
argues that the Board’s adoption of the Forum Selection Bylaw was part and parcel of its
self-interested, disloyal conduct in approving the merger with FC South. It also implies
that the Board selected courts in North Carolina (as opposed to courts in Delaware or any
other State) because the directors thought they might receive favorable treatment there.
In support of its position, Providence cites two allegations of the Bylaw Complaint: (i)
the Forum Selection Bylaw “was motivated by a desire to protect the interests of the
individual members of the Board and other affiliates of the Holding Group, including
officers of the Company”; and (ii) the Board adopted the Forum Selection Bylaw “to
insulate itself from the jurisdiction of Delaware courts.”
These allegations are wholly conclusory. They provide no basis to infer, even
under the reasonable conceivability standard, that the Forum Selection Bylaw was the
product of a breach of fiduciary duty.
The Forum Selection Bylaw plainly does not insulate the Board’s approval of the
proposed merger from judicial review. It simply requires that such review take place in a
court based in North Carolina. In that regard, Providence has not provided any well-pled
13
facts to call into question the integrity of the federal and state courts of North Carolina or
to explain how the defendants are advancing their “self-interests” by having claims
arising from their approval of the proposed merger adjudicated in those courts as opposed
to the courts of Delaware. Nor has Providence alleged that the relevant federal or state
courts in North Carolina would not have jurisdiction over FC North, the Board, or the
company’s officers and employees. 27 Given the absence of any such facts and the wholly
conclusory allegations upon which Count II of the Bylaw Complaint is predicated,
Providence has failed to rebut the presumption of the business judgment standard of
review that attaches to the Board’s adoption of the Forum Selection Bylaw 28 or to show
that the Board’s selection of North Carolina as the exclusive forum was irrational.
Accordingly, Count II of the Bylaw Complaint fails to state a claim upon which
relief may be granted.
E. The Standard of Review under Rule 12(b)(3)
A stockholder plaintiff’s claims that are governed by a valid forum selection
bylaw designating an exclusive jurisdiction other than this Court may be dismissed under
27
Separately, the defendants represented that FC North’s directors and executive officers
all live in North Carolina. Defs.’ Reply Br. 3, 7.
28
See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by
Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
14
Rule 12(b)(3) for improper venue. 29 The bylaw must be valid on its face and as-applied.
I have already concluded that the Forum Selection Bylaw is facially valid.
F. FC North’s Forum Selection Bylaw is Valid As-Applied Here
The remaining question is whether the Forum Selection Bylaw is valid as-applied.
Chevron did not reach this question because it only considered the facial validity of
Chevron’s and FedEx’s forum selection bylaws. 30 Here, by contrast, FC North and the
Board request that I enforce the Forum Selection Bylaw to dismiss the Merger
Complaint. Chevron is nonetheless instructive on the proper framework to consider the
defendants’ motion to dismiss for improper venue. 31
My decision on whether the Forum Selection Bylaw is valid as-applied to
Providence’s remaining claims is guided by the United States Supreme Court’s analysis
in The Bremen v. Zapata Off-Shore Company, 32 which the Delaware Supreme Court
29
See, e.g., Baker v. Impact Hldg., Inc., 2010 WL 1931032, at *2 (Del. Ch. May 13,
2010) (“The proper procedural rubric for addressing a motion to dismiss based on a
forum selection clause is found under Rule 12(b)(3), improper venue.”).
30
See Chevron, 73 A.3d at 940 (“In an attempt to defeat the defendants’ motion, the
plaintiffs have conjured up an array of purely hypothetical situations in which they say
that the bylaws of Chevron and FedEx might operate unreasonably. . . . [I]t would be
imprudent and inappropriate to address these hypotheticals in the absence of a genuine
controversy with concrete facts.”).
31
See id. at 959 (“[T]he time for a plaintiff to make an as-applied challenge to the forum
selection clauses is when the plaintiff wishes to, and does, file a lawsuit outside the
chosen forum. At that time, a court will have a concrete factual situation against which to
apply the Bremen test, or analyze, à la Schnell, whether the directors’ use of the bylaws is
a breach of fiduciary duty.”).
32
407 U.S. 1 (1972).
15
explicitly adopted in Ingres Corporation v. CA, Inc. 33 Chevron cogently articulated the
lessons of this case law:
In Bremen, the Court held that forum selection clauses are valid provided
that they are “unaffected by fraud, undue influence, or overweening
bargaining power,” and that the provisions “should be enforced unless
enforcement is shown by the resisting party to be ‘unreasonable.’” In
Ingres, our Supreme Court explicitly adopted this ruling, and held not only
that forum selection clauses are presumptively enforceable, but also that
such clauses are subject to as-applied review under Bremen in real-world
situations to ensure that they are not used “unreasonabl[y] and unjust[ly].” 34
An additional lens through which the enforceability of the Forum Selection Bylaw may
be reviewed is under Schnell v. Chris-Craft Industries, Inc. 35 and its teaching that
“inequitable action does not become permissible simply because it is legally possible.” 36
Providence asserts several arguments in opposition to the defendants’ invocation
of the Forum Selection Bylaw to dismiss the Merger Complaint. These arguments can be
generalized as raising three as-applied challenges under Bremen and, to a lesser extent,
Schnell. First, Providence asserts that Delaware has an overriding interest in resolving
what it describes as the “novel and substantial” issues raised in the Merger Complaint.
33
8 A.3d 1143, 1145 (Del. 2010).
34
Chevron, 73 A.3d at 957 (citing Bremen, 407 U.S. at 10; Ingres, 8 A.3d at 1146); see
also Nat’l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., 67 A.3d 373, 381 (Del. 2013)
(same).
35
285 A.2d 437 (Del. 1971).
36
Id. at 439; see also Black v. Hollinger Int’l Inc., 872 A.2d 559, 564 (Del. 2005)
(affirming then-Vice Chancellor Strine’s decision that found certain bylaw amendments
adopted by a controlling stock to be “invalid in equity and of no force and effect, because
they had been adopted for an inequitable purpose and had an inequitable effect”).
16
Second, Providence contends that the timing of the Board’s adoption of the Forum
Selection Bylaw—simultaneous with the adoption of the merger agreement—renders
applying the bylaw to dismiss the Merger Complaint unreasonable. Third, Providence
argues that the circumstances here, in which the Forum Selection Bylaw cannot be
repealed without the support of FC North’s majority stockholder, the Holding Group,
make enforcement of the bylaw unjust. Providence does not allege fraud or overreaching
on behalf of the Board in adopting the Forum Selection Bylaw.
1. Delaware’s Purported Interest in the Claims
Raised in the Merger Complaint
Providence describes its challenge to the merger between FC North and FC South
as a “novel” equity dilution claim under the framework of Gentile v. Rossette. 37 It then
draws on case law resolving disputes involving multi-forum litigation (primarily under
the standard of McWane Cast Iron Pipe Corporation v. McDowell-Wellman Engineering
Company 38 or on forum non conveniens grounds) to assert that Delaware has strong
public policy in favor of this Court deciding novel questions of Delaware corporate law
37
906 A.2d 91 (Del. 2006). In Gentile, the Delaware Supreme Court concluded that a
stockholder plaintiff may have direct and derivative standing to assert a breach of
fiduciary duty claim against a controlling stockholder where “(1) a stockholder having
majority or effective control causes the corporation to issue ‘excessive’ shares of its stock
in exchange for assets of the controlling stockholder that have a lesser value; and (2) the
exchange causes an increase in the percentage of the outstanding shares owned by the
controlling stockholder, and a corresponding decrease in the share percentage owned by
the public (minority) shareholders.” Id. at 100.
38
263 A.2d 281 (Del. 1970).
17
uniformly and authoritatively. 39 Although considerations of Delaware’ interest in having
the Court of Chancery resolve breach of fiduciary duty claims properly may be
considered in a McWane or forum non conveniens analysis, that case law is inapposite to
the circumstances here, where there is a designated forum for resolving intra-corporate
disputes: a North Carolina court. The whole point of adopting the Forum Selection
Bylaw was to solve the issue of multi-forum litigation such that this Court (and courts in
other jurisdictions) would not need to divine the appropriate forum. 40
The DGCL does not express any preference of the General Assembly one way or
the other on whether it is permissible for boards of directors to require stockholders to
litigate intra-corporate disputes in the courts of foreign jurisdictions. In contrast, in 2000,
the General Assembly explicitly amended § 18-109(d) of the Limited Liability Company
Act to prevent a Delaware LLC from mandating a foreign court as the exclusive forum
for intra-entity disputes asserted by its non-manager members, the LLC analogue to
stockholders. 41 This dichotomy led this Court to conclude, when determining the validity
39
See, e.g., Ryan v. Gifford, 918 A.2d 341, 349-51 (Del. Ch. 2007); In re Topps Co.
S’holders Litig., 924 A.2d 951, 956-61 (Del. Ch. 2007); In re Chambers Dev. Co., Inc.
S’holders Litig., 1993 WL 179335, at *3 (Del. Ch. May 20, 1993).
40
See Chevron, 73 A.3d at 952 (“[F]orum selection bylaws are designed to bring order to
what . . . boards . . . say they perceive to be a chaotic filing of duplicative and inefficient
derivative and corporate suits against the directors and the corporations.”).
41
6 Del. C. § 18-109(d). (“Except by agreeing to arbitrate any arbitrable matter in a
specified jurisdiction or in the State of Delaware, a member who is not a manager may
not waive its right to maintain a legal action or proceeding in the courts of the State of
Delaware with respect to matters relating to the organization or internal affairs of a
limited liability company.”).
18
of a foreign forum selection clause in a stockholder agreement, that “Delaware does not
have an overarching public policy that prevents the stockholders of Delaware
corporations from agreeing to exclusive foreign jurisdiction of any matter involving the
internal affairs of such entities.” 42 Similarly here, I do not discern an overarching public
policy of this State that prevents boards of directors of Delaware corporations from
adopting bylaws to require stockholders to litigate intra-corporate disputes in a foreign
jurisdiction.
Providence also overstates the novelty raised by its claims in the Merger
Complaint. At its core, the Merger Complaint alleges that the Board of FC North, under
the control of the Holding Group, overpaid for FC South because the Holding Group has
greater economic interests in FC South than FC North. These claims constitute self-
dealing or waste claims governed by well-established principles of Delaware law.
Gentile and its progeny may be implicated in determining whether such claims are direct,
derivative, or both in nature. The issues of Delaware law involved in that inquiry,
however, are far from the type of unprecedented claims that might theoretically43
42
Baker, 2010 WL 1931032, at *2.
43
Accord In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 961 n.8 (Del. Ch. 2010) (“I
can envision that the Delaware courts would retain some measure of inherent residual
authority so that entities created under the authority of Delaware law could not wholly
exempt themselves from Delaware oversight.”).
19
outweigh Delaware’s substantial interest in enforcing a facially valid forum selection
bylaw designating a federal or state court outside Delaware as the exclusive forum. 44
FC North is based in North Carolina, most of its deposits are held there, most of its
branches are located there, no contention is made that jurisdiction cannot be obtained
there over FC North’s directors, and no legitimate contention can be made that complete
relief cannot be afforded there. Under these circumstances, and given the lack of any
Delaware public policy mandating that claims of the nature asserted in the Merger
Complaint be litigated in Delaware, I conclude it is not unreasonable to apply the Forum
Selection Bylaw in this case.
2. The Timing of the Adoption of the Forum Selection Bylaw
Providence argues that “enforcing the Forum Selection Bylaw against [it] would
be unjust because the Board’s adoption of the Bylaw, which occurred simultaneously
with the announcement of the unfair [proposed merger], goes well beyond [its]
reasonable expectations.” 45 I disagree. As explained in Chevron, “an essential part of the
contract stockholders [like Providence] assent to when they buy stock in [FC North] is
one that presupposes the board’s authority to adopt binding bylaws consistent with 8 Del.
C. § 109.” 46 Thus, the reasonable expectation a stockholder of FC North should have is
44
If a genuinely novel issue of Delaware law were to arise, the Delaware Constitution
expressly provides for a United States District Court or the highest appellate court of any
state, among other tribunals, to certify questions to the Delaware Supreme Court. See
Del. Const. art. IV, § 11(8); see also Supr. Ct. R. 41(a)(ii).
45
Pl.’s Ans. Br. at 30.
46
Chevron, 73 A.3d at 940.
20
that its Board may adopt a forum selection bylaw that, subject to challenge on an as-
applied basis, designates a court outside Delaware as the exclusive forum for intra-
corporate disputes.
Providence also argues it would be inequitable to apply the Forum Selection
Bylaw under Schnell because it was adopted in connection with a self-interested
transaction that disproportionately benefits an alleged controlling stockholder. 47 This is a
reprise of Count II of the Bylaw Complaint, discussed above, and fails for the same
reason: Providence has not alleged any well-pled facts calling into question the integrity
of the federal or state courts of North Carolina or explaining how the defendants have
advanced their “self-interests” by having the claims in the Merger Complaint adjudicated
in those courts instead of a Delaware court. The conduct of the FC North Board in
approving the proposed merger will not be absolved from judicial review; that review
simply must occur in a North Carolina court.
In sum, the Forum Selection Bylaw merely regulates “where stockholders may file
suit, not whether the stockholder may file suit or the kind of remedy that the stockholder
may obtain.” 48 That the Board adopted it on an allegedly “cloudy” day when it entered
into the merger agreement with FC South rather than on a “clear” day is immaterial given
the lack of any well-pled allegations in either of Providence’s demonstrating any
impropriety in this timing.
47
Pl.’s Ans. Br. 34-36.
48
Chevron, 73 A.3d at 952.
21
Separately, Providence’s contention that the Forum Selection Bylaw cannot be
enforced because it seeks to regulate the forum for asserting claims that arose before it
was adopted is unpersuasive. This argument is simply a dressed-up version of the
“vested right” doctrine that was soundly rejected in Kidsco Inc. v. Dinsmore 49 and
Chevron. 50 This too is not a basis to not apply the Forum Selection Bylaw here.
3. The Alleged Inability to Repeal the Forum Selection Bylaw
In its final Bremen argument, Providence argues it is unjust to apply the Forum
Selection Bylaw here because the stockholders of FC North effectively lack the ability to
repeal it since FC North is controlled by the Holding Group. This issue was not
addressed in Chevron because neither of the corporations whose forum selection bylaw
was being challenged there had a controlling stockholder.
Then-Chancellor Strine noted in Chevron that a board-adopted forum selection
bylaw, much like any board-adopted bylaw, is “subject . . . to the most direct form of
attack by stockholders who do not favor them: stockholders can simply repeal them by a
majority vote.” 51 His discussion of the relationship between the ability of a board of
directors and the ability of stockholders to amend a corporation’s bylaws appears to
49
674 A.2d 483 (Del. Ch. 1995), aff’d, 670 A.2d 1338 (TABLE).
50
See Chevron, 73 A.3d at 955 (quoting Kidsco, 674 A.2d at 492) (“As then-Vice
Chancellor, now [former-]Justice, Jacobs explained in the Kidsco case, under Delaware
law, where a corporation’s articles or bylaws ‘put all on notice that the by-laws may be
amended at any time, no vested rights can arise that would contractually prohibit an
amendment.’”).
51
Chevron, 73 A.3d at 954 (citing 8 Del. C. § 109(a)).
22
consider the statutory framework in the abstract. I do not interpret either the DGCL or
Chevron to mandate that a board-adopted forum selection bylaw can be applied only if it
is realistically possible that stockholders may repeal it. In other words, that there is
currently a controlling stockholder who may favor a board-adopted forum selection
bylaw, as appears to be the case with FC North, does not make it per se unreasonable to
enforce the bylaw. For me to conclude otherwise would, as the defendants note, “be
tantamount to rendering questionable all board-adopted bylaws of controlled
corporations.” 52
Reaching this conclusion does not leave minority stockholders of controlled
corporations without recourse. Schnell is a powerful lens through which this Court
evaluates the as-applied validity of forum selection bylaws. In the appropriate case, a
foreign forum selection bylaw may not withstand Schnell scrutiny. For reasons
previously discussed, however, Providence has not convinced me that it would be
inequitable here to require Providence to litigate the claims asserted in the Merger
Complaint in the United States District Court for the Eastern District of North Carolina or
in a North Carolina state court.
*****
For the reasons discussed above, I conclude that it is not unreasonable or unjust
under Bremen or inequitable under Schnell to enforce the Forum Selection Bylaw here.
FC North and the majority of its operations are based in North Carolina. It stands to
52
Defs.’ Reply Br. 21.
23
reason, under the presumption of Delaware law that directors will act in good faith, 53 that
the Board determined that the most efficient courts in which to defend against the claims
governed by the Forum Selection Bylaw, such as those raised in the Merger Complaint,
are the federal and state courts in North Carolina. Under Delaware law and FC North’s
governing documents, the Board was entitled to designate those courts for this purpose.
Providence has not sufficiently alleged or argued any grounds that give me pause in
enforcing the Forum Selection Bylaw, and, accordingly, I will enforce it.
Further supporting my conclusion are important interests of judicial comity. If
Delaware corporations are to expect, after Chevron, that foreign courts will enforce valid
bylaws that designate Delaware as the exclusive forum for intra-corporate disputes, 54
then, as a matter of comity, so too should this Court enforce a Delaware corporation’s
bylaw that does not designate Delaware as the exclusive forum. In my opinion, to
conclude otherwise would stray too far from the harmony that fundamental principles of
judicial comity seek to maintain.
53
See Aronson, 473 A.2d at 812.
54
See, e.g., Groen v. Safeway Inc., No. RG14716641 (Cal. Super. Ct. May 14, 2014);
Miller v. Beam, Inc., No. 2014 CH 00932 (Ill. Cir. Ct. Mar. 5, 2014); Hemg Inc. v. Aspen
Univ., 2013 WL 5958388 (N.Y. Sup. Ct. Nov. 14, 2013); contra Roberts v. TriQuint
SemiConductor, Inc., No. 1402-02441 (Or. Cir. Ct. Aug. 14 2014); Galaviz v. Berg, 763
F. Supp. 2d 1170 (N.D. Cal. 2011). For the reasons set forth in Chevron and this
Opinion, the Galaviz and TriQuint decisions, to the extent they purport to apply Delaware
law, are based on a misapprehension of Delaware law regarding the facial validity and as-
applied analysis of forum selection bylaws.
24
IV. CONCLUSION
For the foregoing reasons, defendants’ motion to dismiss the Bylaw Complaint
under Court of Chancery Rule 12(b)(6) is GRANTED. Defendants’ motion to dismiss
the Merger Complaint under Court of Chancery Rule 12(b)(3) also is GRANTED. 55
IT IS SO ORDERED.
55
Based on this conclusion, Providence’s motions for expedition and a preliminary
injunction are moot.
25