The Court of Chancery Declines to Disturb Company’s “Waiver” of its Forum Selection Bylaw to Settle Derivative Action in California
Many Delaware companies have adopted forum selection bylaws that prevent their stockholders from bringing internal corporate claims in courts outside of Delaware. These bylaws are a valid and effective tool for limiting duplicative stockholder litigation filed in multiple jurisdictions. The Delaware courts have authorized their use and the Delaware General Assembly validated them under Section 115 of the Delaware General Corporation Law. Numerous other courts have also enforced Delaware forum selection bylaws.
Although these bylaws specify Delaware as the exclusive forum, they often permit the company to waive its right to Delaware as the exclusive forum and consent to a different venue. While even the seminal Delaware decision on forum selection bylaws, Boilermakers 154 Retirement Fund v. Chevron, 73 A.3d 934 (Del. Ch. 2013), approved of bylaws that permitted such a waiver, to our knowledge no court has addressed whether a company may properly waive its right to Delaware as the exclusive forum under a forum selection bylaw and consent to venue elsewhere. That is, until Niedermayer v. Kriegsman, C.A. No. 11800-VCMR (Del. Ch. May 2, 2016) (Montgomery-Reeves, V.C.).
In Niedermayer, defendants asked the Court of Chancery to stay the Delaware action after those same defendants had already successfully enforced the company’s Delaware forum selection bylaw in California, but were now waiving Delaware as the exclusive forum to allow the California court to approve a pending settlement with the California plaintiffs. The Court of Chancery granted defendants’ motion to stay over the Delaware plaintiffs’ objection. Its bench ruling provides important guidance on whether a company may consent to a non-Delaware forum under a Delaware forum selection bylaw.
The company CytRx Corp. has a forum selection bylaw that names Delaware as the “exclusive” jurisdiction for derivative and breach of fiduciary duty actions, but allows the company to consent to a non-Delaware forum. The bylaw provides: “[u]nless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum ….”
Multiple lawsuits involving internal corporate claims were filed against CytRx’s officers and directors. Several stockholders initiated a derivative action in California federal court, while certain others requested books and records exploring the same issues. The California federal court eventually dismissed the California derivative action based on CytRx’s Delaware forum selection bylaw and the California plaintiffs appealed. While that appeal was pending, two stockholders, who previously only sought books and records, filed a virtually mirror-image derivative action in Delaware.
Soon, the defendants to the Delaware action – the very same defendants who already successfully asserted CytRx’s right to Delaware as the exclusive forum under its bylaw – moved to stay the Delaware action citing a non-monetary settlement reached in the California action. In short, despite having first enforced their right to Delaware as the exclusive forum in California federal court, defendants were now seeking to waive that right, and consent to venue in the California federal court to have their derivative settlement approved.
Recognizing that the settlement’s approval would release their claims, the Delaware plaintiffs opposed defendants’ motion to stay, and further amended their complaint to challenge the bylaw “waiver” as another breach of fiduciary duty by the directors. In their opposition, the Delaware plaintiffs sought to have the Court of Chancery direct the California federal court to stand down on the ground that the Court of Chancery was the proper forum to decide the important corporate law issue presented by the company’s “ex post facto waiver” of Delaware as the exclusive forum under its bylaw.
Court of Chancery Stays the Delaware Action in Deference to the California Court’s Consideration of the Settlement
Some factors appeared to support plaintiffs’ opposition to the stay. First, the case presented a novel corporate law issue concerning a company’s enforcement of a Delaware forum selection bylaw in a foreign jurisdiction, and then subsequent waiver of its right to Delaware as the exclusive forum, and consent to the foreign jurisdiction for purposes of a non-monetary settlement. Second, the case raised important questions of whether and to what extent companies might be using forum selection bylaws to forum shop for the most defendant-friendly or easiest-to-settle jurisdiction, or running reverse auctions with plaintiffs’ counsel to secure the cheapest settlement.
These factors, however, did not persuade the Court to deny defendants’ motion to stay – at least when defendants had not “gamed” the bylaw to avoid Delaware. First, the Court found that defendants had not “slow-rolled” the Delaware plaintiffs to game a cheap settlement in California. Instead, the Delaware plaintiffs had not diligently pursued their case. In the fifteen months following their books and records demand, the Court found at least three periods of prolonged and unexplained silence in plaintiffs enforcing their records demand, and plaintiffs never once filed a books and records action, or sought judicial intervention.
Second, defendants did not rush into the California settlement to avoid litigating in Delaware. Rather, shortly before the Delaware plaintiffs sued, and with the California derivative action the only case not yet settled, defendants reached an agreement in principle with the California plaintiffs. In turn, the parties memorialized their settlement just a week after the Delaware plaintiffs filed their action, which led to defendants moving to stay.
Third, defendants were not trying to avoid stronger claims brought in the Delaware action. Aside from their new claim challenging the bylaw “waiver,” which came after the settlement, the Delaware plaintiffs asserted the same claims as the California plaintiffs. And the Delaware plaintiffs did not even argue that by obtaining the company’s books and records their complaint was materially better than the California plaintiffs’ complaint.
The Court then addressed how practicality and efficiency weighed in favor of a stay. The Court reasoned that regardless of its ruling on the motion to stay, the Delaware plaintiffs would still have to object to the settlement before the California federal court to avoid their claims being released. The Court pointed out that if the Delaware plaintiffs won on their objection, they could then come back to Delaware. If they lost and believed there were novel issues of Delaware law, they could appeal from the California federal court, and the federal court of appeals could then certify the questions to the Delaware Supreme Court for guidance. Moreover, the parties could not practically brief the issues in Delaware before the California federal court preliminarily approved the settlement.
Finally, regarding the Delaware plaintiffs’ request to send a message to the California federal court, the Court quoted Cook v. Whitman for the principle of comity that “[i]t is not … generally the purpose of [the Court of Chancery] to act as a stalking horse for issues that a sister court will have before it, and which that court is perfectly qualified to resolve.” 2014 WL 359288, at *2 (Del. Ch. July 22, 2014). Accordingly, the only message that the Court of Chancery conveyed to the California federal court was that it “is qualified to resolve plaintiffs’ objections to the settlement if and when they arise.”
The Niedermayer decision provides some solace to corporate practitioners that in the appropriate circumstances a company may properly waive its right to Delaware as the exclusive forum under its bylaws and consent to an alternate forum for the adjudication of internal corporate claims. At least where defendants have not “gamed” the forum selection to achieve a favorable settlement of the Delaware claims elsewhere, the Court of Chancery appears amenable under principles of comity and judicial efficiency to staying its hand and allowing a non-Delaware court to rule on a derivative or class-action settlement despite a Delaware forum selection bylaw.