Delaware Court of Chancery Upholds North Carolina "Exclusive Forum" Bylaw

In a closely-watched case with implications for corporations across the nation, Chancellor Andre Bouchard of the Delaware Court of Chancery has issued an opinion enforcing a forum-selection bylaw that requires intra-corporate disputes involving a Delaware corporation to be brought in the North Carolina courts. Both Delaware and North Carolina, which recently enacted legislation allowing North Carolina corporations to designate North Carolina as the exclusive forum or venue for intra-corporate disputes (N.C. Gen. Stat. § 55-7-50), have now broadly sanctioned forum-selection bylaw provisions. 

The Court’s September 8, 2014 opinion in City of Providence v. First Citizens BancShares, Inc., et al., Consol C.A. No. 9795-CB, dismissed a shareholder’s challenge to a forum-selection bylaw enacted by the board of First Citizens BancShares, Inc. (FCB), a Delaware corporation, requiring intra-corporate disputes to be brought, to the fullest extent permitted by law, in the federal district court for the Eastern District of North Carolina or, if the federal court lacks jurisdiction, in the state courts of North Carolina.  

First Citizens is the first occasion Delaware courts have had to address the validity of a forum-selection bylaw that specified the courts of a state other than Delaware as the exclusive forum for such litigation. (The Delaware Court of Chancery previously upheld a bylaw that designated Delaware as the exclusive forum of intra-corporate disputes in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).) In upholding FCB’s forum-selection bylaw, First Citizens confirmed that the logic and reasoning of Chevron applies equally to the validity of bylaws that specify non-Delaware forums. 

FCB, which is headquartered in Raleigh, announced in June 2014 that it had amended its bylaws to include the North Carolina forum-selection clause. At the same time, it announced that it had entered into an agreement to acquire First Citizens Bancorporation, Inc. (FC South), a South Carolina holding corporation with overlapping controlling shareholders with FCB. The shareholder plaintiff challenged both FCB’s forum-selection bylaw and the fairness of FCB’s proposed merger with FC South, arguing that the bylaw was invalid on its face and "as applied" to plaintiff's merger-related claims.  The Court rejected both arguments. 

Notably, with respect to the "as applied" challenges, the Court in First Citizens found that the bylaw was not unreasonable merely because it had been enacted in connection with the proposed acquisition of FC South. “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 . . . demonstrating any impropriety in timing.”   

The Court also rejected the plaintiff’s “as applied” challenge based on the existence of a controlling stockholder, which, as a practical matter, prevented the minority shareholders from repealing the forum-selection bylaw. First Citizens flatly states that the fact that a controlling shareholder may favor a forum-selection bylaw “does not make it per se unreasonable to enforce the bylaw,” and that to conclude otherwise would “be tantamount to rendering questionable all board adopted bylaws of controlled corporations.”  

Chancellor Bouchard’s opinion in First Citizens should reassure Delaware corporations of their ability to choose forums other than Delaware for the litigation of intra-corporate disputes, as long as there is a logical connection to that other forum. Controlled corporations have the same rights in this regard as non-controlled corporations. Further, absent well-pleaded facts demonstrating some impropriety by the corporation’s board of directors, the fact that a bylaw is enacted in connection with a proposed transaction that may result in shareholder litigation is irrelevant.

With the decision in First Citizens, and with North Carolina’s adoption of N.C. Gen. Stat. § 55-7-50, North Carolina corporations and Delaware corporations with their headquarters in North Carolina should consider whether they wish to adopt a forum-selection bylaw specifying North Carolina as their preferred forum for any shareholder litigation.

Gerald RoachGeoff Adams and Jason Martinez of Smith Anderson represented FCB’s special committee and independent directors in the proposed merger with FC South. Donald Tucker and Clifton Brinson of Smith Anderson represented FCB’s independent directors in the First Citizens litigation. FCB and its directors were represented by Cravath, Swaine & Moore and Richards, Layton & Finger.  


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