Chancellor Andre Bouchard of Delaware Chancery Court struck a double blow Monday for corporations that want to restrict shareholder litigation to a single jurisdiction. In a decision upholding the validity of a bylaw requiring shareholders of First Citizens Bancshares to sue board members only in North Carolina, Bouchard ruled that Delaware corporations can designate venues other than Delaware as the exclusive forum for shareholder claims – an issue of first impression in Chancery Court. But that wasn’t all. Bouchard also rejected shareholder arguments that First Citizens’ forum selection clause can’t be enforced because it was enacted on the same day that the North Carolina bank announced its $676 million acquisition of a related First Citizens entity in South Carolina.
According to First Citizens’ lawyer Sandra Goldstein of Cravath Swaine & Moore, Bouchard’s ruling is the first to uphold a forum selection bylaw adopted in connection with a merger (and in anticipation of the inevitable shareholder suits that follow M&A deals). In an interview Tuesday, Goldstein predicted that the chancellor’s reasoning on the timing of First Citizens’ bylaw will turn out to be of broader significance than his holding on non-Delaware jurisdictions, since most forum selection clauses direct all shareholder litigation to Delaware.
Bouchard said that First Citizens shareholders hadn’t shown that the board had an improper motive in restricting litigation to a single venue just because directors adopted the clause in connection with a merger. The First Citizens clause doesn’t preclude shareholder suits, he said; it just regulates where they can be filed. “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 this timing,” Bouchard wrote.
“The chancellor said it’s a completely appropriate purpose for the board to decide it only wants to be sued in one place (and) it’s not inappropriate to adopt the clause at the time of the merger,” Goldstein said. “You’re not shielding yourself from liability … You’re saying, ‘Sure, sue us, but sue us in one jurisdiction, not multiple forums.’”
Under Bouchard’s ruling, First Citizens shareholders – who are represented by Labaton Sucharow – can still try to challenge the board’s approval of the merger, but in North Carolina instead of Delaware. Goldstein said, however, that if plaintiffs try in North Carolina litigation to revive claims that First Citizens directors breached their duty by adopting the forum selection bylaw, she will argue that Bouchard has already decided that question. (Plaintiffs’ lawyer Ned Weinberger of Labaton told me that his team is still reviewing Bouchard’s opinion and considering its options.)