North Carolina Business Litigation Report

The Delaware Court Of Chancery Can See Forever On A Clear Day (Even To North Carolina)

I don't usually write about decisions from the Delaware Court of Chancery because it's rare for that Court to even mention North Carolina.  But a decision by that Court this week -- in City of Providence v. First Citizens Bancshares, Inc., explicitly approves that Delaware corporations can, via a forum selection clause in their bylaws, specify that corporate law disputes be litigated in North Carolina courts.  So that decision is certainly worth note in this North Carolina-centric blog.

Here are the facts:  First Citizens Bank & Trust Company, which has banking branches all over North Carolina (and in 16 other states) and which is headquartered in NC, is a Delaware corporation.  The Court of Chancery dubbed it "FC North."  FC North announced on June 10th a merger transaction with First Citizens Bancorporation, Inc., a separate bank holding company incorporated and based in South Carolina ("FC South" to the Court). 

On the same day as the announcement of the merger, the FC North Board amended its bylaws to provide that (1) any derivative action against the corporation, (2) any claim for breach of fiduciary duty, (3) any claim arising pursuant to any provision of the General Corporation Law of the State of Delaware, or (4) any claim governed by the internal affairs doctrine must be brought in the North Carolina Courts.  The full text of the bylaw is quoted in footnote 18 to the Court's opinion.

In the course of the inevitable lawsuit stemming from almost every merger announcement, the City of Providence challenged the validity of the bylaw amendment.  It wanted to litigate in Delaware, not North Carolina.

Perhaps you are wondering whether a board of directors is free to revise its corporation's bylaws without shareholder consent.  The Court of Chancery ruled on that issue a while ago, holding:

In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders. . . . [A] change by the board [to the bylaws pursuant to 8 Del. C. § 109(a)] is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own.

Op. at 9 (quoting Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013).

So, now the Court of Chancery confronted a new question.  As it put it, that question was "whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes."  Op. at 8.

The answer, as you can guess already, is yes, a Delaware board may dictate that disputes over Delaware corporate law matters involving its corporation must be litigated in a non-Delaware court.

The Chancery Court rejected the argument that FC North's directors, all based in North Carolina, were self-interestedly trying to tilt the playing field in their favor.

This was perhaps the point at which the Court of Chancery might have lavished praise upon the quality of the Courts in North Carolina, their unbiased nature, and their judicial prowess.  But it fell short of that mark, stating only that:

Providence has not provided any well-pled facts to call into question the integrity of the federal and state courts of North Carolina or to explain how the defendants are advancing their 'self-interests' by having their approval of the proposed merger adjudicated in those courts as opposed to the courts of Delaware.

Op. at 14.

A law professor at Widener University School of Law was more provincial in his outlook.  He was quoted in a news article as saying:

One of the better arguments for a presumption that courts of the state of incorporation will handle internal affairs disputes is that those courts are more experienced in the matter and are the ultimate source of definitive legal rulings.

That’s not to say that courts of other states can’t ever do a decent job, but a bylaw that systematically moves litigation from the courts of the state of incorporation to some other jurisdiction doesn’t exactly advance the policy argument just noted.

Article.

Moreover, as far as the alleged self-interest of the directors in amending the bylaw at the same time as their announcement of the merger, the Court noted that the bylaw did not mean that "the proposed merger will . . . be absolved from judicial review" it meant only that any review "must occur in a North Carolina court."  Op. at 21.

In fact, the Court pretty much saw the timing issue as irrelevant.  It said "[t]hat the Board adopted [the bylaw change] on an allegedly 'cloudy' day . . . rather than on a 'clear' day is immaterial given the lack of any well-pled allegations . . . demonstrating any impropriety in this timing."  Op. at 21.

If you are expecting the case challenging the merger of FC North and FC South to pop up in the Business Court, that seems unlikely.  The forum selection provision that was challenged makes the Eastern District of North Carolina the designated forum unless that court lacks jurisdiction or the corporation consents in writing to an alternative forum.

Note to North Carolina corporate lawyers forming Delaware corporations which will be headquartered in North Carolina  (of which there must be hundreds): consider including in the bylaws a forum selection provision specifying that disputes be litigated in the North Carolina courts.

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Mack Sperling
Brooks Pierce, LLP
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