Forum Selection Clauses Were Here Before They Were In Bylaws (Delaware)
Wednesday, October 22, 2014

Recent rulings by judges in Delaware and other states have given impetus to the adoption of exclusive forum bylaws.  To the casual observer, the idea might seem entirely novel.  But as Koheleth (the Gatherer) wrote What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.”  

Exclusive forum bylaws do not require that all actions involving a corporation be brought in a specified forum.  Typically, they apply only to the following four categories of suits:

  • Derivative suits;

  • Actions asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the corporation;

  • Actions asserting a claim against the corporation or any director, officer or other employee of the corporation arising pursuant to any provision of the Delaware General Corporation Law (or the corporation law of the state of incorporation) or the corporation’s certificate of incorporation or bylaw; or

  • Actions asserting a claim against the corporation or any director, officer or other employee governed by the internal affairs doctrine.

In the case of officers, the first two categories may already be covered by one or more forum selection clauses in existing contracts.  For example, an employment agreement might provide that the exclusive forum is not a court, but arbitration as in the following:

To the fullest extent allowed by law, any controversy, claim or dispute between you and the Company (and/or any of its affiliates, owners, shareholders, directors, officers, employees, volunteers or agents) relating to or arising out of this Agreement, your employment or the termination of that employment will be submitted to final and binding arbitration in ___________, for determination in accordance with the American Arbitration Association’s (“AAA”) Employment Arbitration Rules (the “Rules”), including any subsequent modifications or amendments to such Rules, as the exclusive remedy for such controversy, claim or dispute. 

Since derivative suits are suits between the corporation and the defendants, they would seem to be covered by this type of provision.  Note that in this case, covered disputes aren’t limited to claims of breach of contract, but extend to claims and disputes “relating to or arising out” of the employment relationship.

Other sources of exclusive forum provisions may be equity compensation plans, award agreements and severance agreements.

 

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