Recent Decisions Highlight The Broad Enforceability Of Forum Selection Provisions In Bylaws, And Underscore Their Benefit To Corporations And Their Stockholders

• Jurisdiction: United States,Federal,Delaware
• Law Firm: Baker Botts
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Directors and Officers, Court Procedure, Securities
• Author: Mr Danny David, John B. Lawrence, Tom O'Brien and Kirstie Wallace
• Published date: 19 July 2023

Ten years after the Delaware Court of Chancery issued its seminal Boilermakers decision first enforcing a forum selection provision in a Delaware corporation's bylaws, this month Judge Robert Pittman of the United States District Court for the Western District of Texas issued perhaps the most expansive decision to date enforcing such a provision. In Sobel v. Thompson, Judge Pittman enforced a provision requiring that the Delaware Court of Chancery "shall be the sole and exclusive forum . . . for any derivative action of proceeding brought on behalf of the Corporation," even though two of the derivative claims at issue could never be brought in the Delaware Court of Chancery, thus foreclosing the stockholders' ability to ever bring those claims. Cause No. 1:21-cv-00272-RP (W.D. Tex. July 5, 2023).

The plaintiff, a stockholder in SolarWinds Corporation, asserted four derivative claims on behalf of SolarWinds against the company's officers and directors. These included not only state law claims for breach of fiduciary duty and misappropriation, but also federal claims for violation of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. By law those Exchange Act claims can be heard only in federal court and could never be filed in the Delaware Court of Chancery. The plaintiff argued that enforcing the forum selection provision and dismissing the Texas federal action, leaving no home for his derivative Exchange Act claims, would thus violate both the federal public policy underlying the Exchange Act and Delaware law.

The court agreed that enforcing the provision would in fact bar the stockholder from ever bringing his derivative Exchange Act claims, but ruled that this result did not outweigh the presumption that forum provisions are valid or make enforcement of the provision here unreasonable:

While enforcing the COI's venue provision would foreclose Plaintiff's derivative Exchange Act claims, there is no indication that it would deprive him of all substantive rights under the statute. First, as Defendants observe'and Plaintiff does not dispute'Delaware law recognizes derivative state law claims with available remedies that are commensurate to those available under Plaintiff's federal derivative claims. Moreover, Plaintiff does not dispute that the COI's venue provision only applies to derivative claims'it does not prevent him from directly pursuing Exchange Act claims in any federal court.

In other words, while there was no dispute that...