Delaware Business Litigation Report

Chancery Invokes Internal Affairs Doctrine to Dismiss Dispute Over Former Delaware Corporation Brought Over Two Years After Its Migration to Nevada

Sylebra Capital Partners Master Fund, LTD v. Perelman, et. al., C.A. No. 2019-0843-JRS (Del. Ch. Oct. 9, 2020)

Defendant Scientific Games Corporation (the “Company”) is a gaming and lottery company that reincorporated in Nevada from Delaware in January 2018. The Company adopted new Nevada bylaws that, among other things, require stockholders to bring claims for breaches of fiduciary duties in Nevada. Because the Company operates in the gaming industry, the bylaws also require stockholders to meet “suitability” requirements and restrictions on sale set by gaming regulators in jurisdictions where the Company operates. Approximately four months before Plaintiffs filed suit, the Company filed suit in Nevada to force Plaintiffs to comply with an investigation into their suitability as stockholders.

Plaintiffs are minority stockholders who invested in the Company before its relocation. In this later-filed Delaware action, Plaintiffs sought to invalidate provisions of the Company’s Delaware bylaws dealing with suitability, to invalidate the Nevada forum-selection bylaw, and to invalidate provisions of the Company’s Nevada charter. 

The Court of Chancery dismissed all of Plaintiffs’ claims. Regarding the Delaware bylaws, the Court found that the claims were moot because the Delaware bylaws at issue no longer exist as a result of the reincorporation. Likewise, the “notions of comity and deference” inherent to the internal affairs doctrine compelled the Court to refrain from deciding claims implicating the internal affairs of the (Nevada) Company and claims affecting potential future harms in Nevada. 

Nor was the Court persuaded that the Plaintiffs had shown that the forum-selection bylaw was unenforceable. The Court began by recognizing that such bylaws are presumptively valid and enforceable. Regarding Plaintiffs’ primary assertion that they did not consent to the bylaw, the Court observed that all stockholders impliedly consent to the board’s adoption of bylaws as a condition of purchasing stock. And this consent did not change just because the forum-selection bylaw was adopted after the alleged wrongdoing or because, at the time that bylaw was adopted, there was a restriction on Plaintiffs’ sale of their stock. After all, Plaintiffs were aware of the suitability requirements and the potential of restrictions on their sale of their stock.

Past this, the Court made short work of Plaintiffs’ remaining arguments. Plaintiffs did not come close to establishing that Nevada’s courts lacked integrity or ability to address Plaintiffs’ claims. Nor did Plaintiffs establish the bylaw was a result of fraud, given that Plaintiffs did not plead fraud and that the proxy statement for the reincorporation not only announced the intention to enact the Nevada forum-selection bylaw but also attached the proposed Nevada bylaws.

The Court accordingly granted the Defendants’ Motion to Dismiss.

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