Delaware Court Upholds Forum Selection Bylaw
A Delaware court has upheld the validity of a corporation’s bylaw provision requiring litigation in Delaware for disputes relating to the internal affairs of the corporation. The Court rejected plaintiffs’ two main arguments against forum selection bylaws. First, the Court said that a board did not breach its fiduciary duty by adopting the bylaw because choice of venue relates to the corporation’s internal affairs, which include fiduciary duty suits, derivative suits, and Delaware law claims. Second, the bylaws should be enforced as contractual provisions because shareholders adopt them upon purchase of shares, and shareholders have legal power to change them. The Court specifically left open whether securities laws claims could similarly be limited to Delaware courts.
OUR TAKE: This case may have implications for Investment Company Act Section 36(b) claims which ultimately hinge on a determination of fiduciary duty under state law, one of the categories specifically cited by the court. If utilized, fund shareholders may have an additional barrier to bringing a 36(b) claim because Delaware courts are generally favorable to their domestic entities.