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  • Writer's picturePaul Peter Nicolai

Companies May Select Forum Through Charter Provision

Updated: Nov 8, 2021

Before filing registration statements with the SEC, a group of companies designated the federal courts as the exclusive place to resolve claims in their certificates of incorporation.

Shareholders asked for a declaratory judgment that the federal-forum provisions were invalid under Delaware law by filing a class action in Delaware state court. The state court agreed and granted their motion for summary judgment. In holding that the provisions were ineffective and invalid, the court said Delaware corporation charters could not bind a plaintiff to a particular forum where the claim does not involve rights or relationships that were established by or under Delaware corporate law.

The Supreme Court of Delaware reversed. It explained that the plaintiff had to show that the federal-forum provisions did not address a proper subject matter of charter provisions under Delaware law and that the charter provisions could not operate lawfully or equitably under any circumstances.

It concluded the federal-forum provisions were valid because they could fall within either of two categories authorized by Delaware corporate law which authorized any provision for the management of the business and for the conduct of the affairs of the corporation, or any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders if such provisions are not contrary to the laws of Delaware.

It said a bylaw that seeks to regulate the forum in which intra-corporate litigation can occur is a provision that addresses the management of the business and the conduct of the affairs of the corporation and is facially valid.

The court also noted that when parallel state and federal actions are filed, no procedural mechanism is available to consolidate or coordinate the suits, and there is the possibility of inconsistent judgments. By directing claims to federal court, a federal-forum provision provides for management of the business and for the conduct and affairs of the corporation.

“Before this decision, many believed that forum selection provisions were limited to binding a plaintiff to a particular forum when the claim involved rights that were established by Delaware corporate law or affecting a corporation’s internal affairs.

Based on this decision corporations will seek to include forum selection provisions in corporate charters or bylaws for claims seeking to channel class actions.

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