Forum Selection Clauses

By: Mary Beth Kerrigan

In City of Providence v. First Citizens Bancshares, Inc. decided in September 2014, the Delaware Court of Chancery analyzed a forum selection provision contained in a company’s by-laws and granted the defendant’s motions to dismiss.  The plaintiff, City of Providence, challenged the forum selection provision in the defendant’s by-laws, which provision selected the United States District Court for the Eastern District of North Carolina as its forum.  The defendant, First Citizens BancShares, Inc., which was headquartered in Raleigh, North Carolina, had adopted this provision on the same day that it announced that it had entered into a merger agreement to acquire another bank.   The plaintiff’s complaints (i) challenged the facial validity of the forum selection provision, asserting a breach of fiduciary duty in connection with its adoption; and (ii) asserted claims against the defendant’s board of directors with respect to the proposed merger.

Companies often include forum selection clauses in by-laws to provide that a given jurisdiction will be the sole and exclusive forum for an enumerated set of lawsuits, including derivative lawsuits and breach of fiduciary duty lawsuits.  In many instances, the company’s state of incorporation is chosen as the forum.   These provisions allow companies to minimize the risk of multi-jurisdictional litigation and also allow companies to choose the forum for potential future litigation.

In City of Providence, the plaintiff claimed that the defendants’ forum selection provision was invalid as a matter of Delaware law or public policy.  However, the Delaware Court of Chancery disagreed and concluded that the plaintiff “failed to demonstrate that it would be unreasonable, unjust, or inequitable to enforce the Forum Selection Bylaw” clause.  The Court determined that directors of a Delaware corporation are not prohibited from designating an exclusive forum other than Delaware in its bylaws.

Although many states have not yet addressed the issue of enforceability of forum selection provisions, given the high percentage of shareholders lawsuits which are filed in connection with M&A transactions, companies should consider amending their by-laws to provide for an appropriate forum selection provision to help reduce future potential litigation risks.   With the Delaware Court of Chancery conclusion in the City of Providence decision, other states will likely follow.

For more information, please contact Mary Beth Kerrigan

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