Boilermakers Local 154 Ret. Fund v. Chevron Corp., Civil Action No. 7220-CS

• Court: Court of Chancery of Delaware
• Parties: BOILERMAKERS LOCAL 154 RETIREMENT FUND and KEY WEST POLICE & FIRE PENSION FUND, Plaintiffs, v. CHEVRON CORPORATION, SAMUEL H. ARMACOST, LINNET F. DEILY, ROBERT E. DENHAM, ROBERT J. EATON, CHUCK HAGEL, ENRIQUE HERNANDEZ, JR., FRANKLYN G. JENIFER, GEORGE L. KIRKLAND, SAM NUNN, DONALD B. RICE, KEVIN W. SHARER, CHARLES R. SHOEMATE, JOHN G. STUMPF, RONALD D. SUGAR, CARL WARE, and JOHN S. WATSON, Defendants. ICLUB INVESTMENT PARTNERSHIP, Plaintiff, v. FEDEX CORPORATION, JAMES L. BARKSDALE, JOHN A. EDWARDSON, J.R. HYDE, III, SHIRLEY A. JACKSON, STEVEN R. LORANGER, GARY W. LOVEMAN, SUSAN C. SCHWAB, FREDERICK W. SMITH, JOSHUA I. SMITH, DAVID P. STEINER, and PAUL S. WALSH, Defendants.
• Docket Number: Civil Action No. 7238-CS,Civil Action No. 7220-CS
• Decision Date: 25 June 2013

BOILERMAKERS LOCAL 154 RETIREMENT FUND
and KEY WEST POLICE & FIRE PENSION FUND, Plaintiffs,
v.
CHEVRON CORPORATION, SAMUEL H. ARMACOST, LINNET F. DEILY,
ROBERT E. DENHAM, ROBERT J. EATON, CHUCK HAGEL,
ENRIQUE HERNANDEZ, JR., FRANKLYN G. JENIFER, GEORGE L. KIRKLAND,
SAM NUNN, DONALD B. RICE, KEVIN W. SHARER, CHARLES R. SHOEMATE,
JOHN G. STUMPF, RONALD D. SUGAR, CARL WARE, and JOHN S. WATSON, Defendants.
ICLUB INVESTMENT PARTNERSHIP, Plaintiff,
v.
FEDEX CORPORATION, JAMES L. BARKSDALE, JOHN A. EDWARDSON, J.R. HYDE,
III, SHIRLEY A. JACKSON, STEVEN R. LORANGER, GARY W. LOVEMAN,
SUSAN C. SCHWAB, FREDERICK W. SMITH, JOSHUA I. SMITH,
DAVID P. STEINER, and PAUL S. WALSH, Defendants.

Civil Action No. 7220-CS
Civil Action No. 7238-CS

COURT OF CHANCERY OF THE STATE OF DELAWARE

Date Submitted: April 12, 2013
Date Decided: June 25, 2013

OPINION

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Michael Hanrahan, Esquire, Paul A. Fioravanti, Jr., Esquire, Tanya E. Pino, Esquire, Kevin H. Davenport, Esquire, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Marc A. Topaz, Esquire, Lee D. Rudy, Esquire, Eric L. Zagar, Esquire, Michael C. Wagner, Esquire, James H. Miller, Esquire, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Robert D. Klausner, Esquire, Stuart A. Kaufman, Esquire, KLAUSNER, KAUFMAN, JENSEN & LEVINSON, Plantation, Florida, Attorneys for Plaintiffs Boilermakers Local 154 Retirement Fund, Key West Police & Fire Pension Fund, and IClub Investment Partnership.

William B. Chandler III, Esquire, Tamika R. Montgomery, Esquire, Ryan A. McLeod, Esquire, Ian R. Liston, Esquire, WILSON SONSINI GOODRICH & ROSATI, P.C., Georgetown, Delaware; David J. Berger, Esquire, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for Defendants Chevron Corporation, Samuel H. Armacost, Linnet F. Deily, Robert E. Denham, Robert J. Eaton, Chuck Hagel, Enrique Hernandez, Jr., Franklyn G. Jenifer, George L. Kirkland, Sam Nunn, Donald B. Rice, Kevin W. Sharer, Charles B. Shoemate, John G. Stumpf, Ronald D. Sugar, Carl Ware, and John S. Watson.

A. Gilchrist Sparks, III, Esquire, Kenneth J. Nachbar, Esquire, Bradley D. Sorrels, Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Defendants FedEx Corporation, James L. Barksdale, John A. Edwardson, J.R. Hyde, III, Shirley A. Jackson, Steven R. Loranger, Gary W. Loveman, Susan C. Schwab, Frederick W. Smith, Joshua I. Smith, David P. Steiner, and Paul S. Walsh.

STRINE, Chancellor.

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I. Introduction

The board of Chevron, the oil and gas major, has adopted a bylaw providing that litigation relating to Chevron's internal affairs should be conducted in Delaware, the state where Chevron is incorporated and whose substantive law Chevron's stockholders know governs the corporation's internal affairs. The board of the logistics company FedEx, which is also incorporated in Delaware and whose internal affairs are also therefore governed by Delaware law, has adopted a similar bylaw providing that the forum for litigation related to FedEx's internal affairs should be the Delaware Court of Chancery. The boards of both companies have been empowered in their certificates of incorporation to adopt bylaws under 8 Del. C. § 109(a).¹

The plaintiffs, stockholders in Chevron and FedEx, have sued the boards for adopting these "forum selection bylaws." The plaintiffs' complaints are nearly identical and were filed only a few days apart by clients of the same law firm. In Count I, the plaintiffs claim that the bylaws are statutorily invalid because they are beyond the board's authority under the Delaware General Corporation Law ("DGCL"). In Count IV, the plaintiffs allege that the bylaws are contractually invalid, and therefore cannot be enforced like other contractual forum selection clauses under the test adopted by the Supreme Court of the United States in The Bremen v. Zapata Offshore Co.,² because they were unilaterally adopted by the Chevron and FedEx boards using their power to make bylaws. The plaintiffs have attempted to prove their point by presenting to this court a

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number of hypothetical situations in which, they claim, the bylaws might operate inconsistently with law or unreasonably. The plaintiffs have also claimed that the boards of Chevron and FedEx breached their fiduciary duties in adopting the bylaws.

In this opinion, the court resolves the defendants' motion for judgment on the pleadings on the counts relating to the statutory and contractual validity of the bylaws. Because the two bylaws are similar, present common legal issues, and are the target of near-identical complaints, the court decided to address them together. This is efficient, and is also in the interests of the parties, because a decision on the legal validity of the bylaws under the DGCL will moot the plaintiffs' other challenges if the bylaws are found to be invalid. And, it also aids the administration of justice, because a foreign court that respects the internal affairs doctrine, as it must,³ when faced with a motion to enforce the bylaws will consider, as a first order issue, whether the bylaws are valid under the "chartering jurisdiction's domestic law."⁴ Furthermore, the plaintiffs' facial statutory invalidity claim and their related contention that, as a matter of law, the bylaws are not

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contractually enforceable, have cast a cloud over the defendants' bylaws and those of other corporations. A decision as to the basic legal questions presented by the plaintiffs' complaints will provide efficiency benefits to not only the defendants and their stockholders, but to other corporations and their investors.

For these reasons, the court consolidated the Chevron and FedEx cases to address the purely facial legal challenges to the statutory and contractual validity of the bylaws raised by Counts I and IV of the plaintiffs' complaints. The defendants filed a motion for judgment on the pleadings, seeking a dismissal of Counts I and IV, and this is the motion before the court today.

After considering the parties' contending arguments on Count I of the complaints, the court finds that the bylaws are valid under our statutory law. 8 Del. C. § 109(b) provides that the bylaws of a corporation "may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." The forum selection bylaws, which govern disputes related to the "internal affairs" of the corporations, easily meet these requirements.⁵ The bylaws regulate the forum in which stockholders may bring suit, either directly or on behalf of the corporation in a derivative suit, to obtain redress for breaches of fiduciary duty by the board of directors and officers. The bylaws also regulate the forum in which stockholders may bring claims arising under the DGCL or

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other internal affairs claims. In other words, the bylaws only regulate suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine. Thus, the bylaws, by establishing these procedural rules for the operation of the corporation, plainly relate to the "business of the corporation[s]," the "conduct of [their] affairs," and regulate the "rights or powers of [their] stockholders." Because Delaware law, like federal law, respects and enforces forum selection clauses, the forum selection bylaws are also not inconsistent with the law.⁶ For these reasons, the forum selection bylaws are not facially invalid as a matter of statutory law.

As to Count IV of the complaints, the court finds that the bylaws are valid and enforceable contractual forum selection clauses. As our Supreme Court has made clear, the bylaws of a Delaware corporation constitute part of a binding broader contract among the directors, officers, and stockholders formed within the statutory framework of the DGCL.⁷ This contract is, by design, flexible and subject to change in the manner that the DGCL spells out and that investors know about when they purchase stock in a Delaware corporation. The DGCL allows the corporation, through the certificate of incorporation, to grant the directors the power to adopt and amend the bylaws unilaterally.⁸

The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew

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(i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board's authority to adopt binding bylaws consistent with 8 Del. C. § 109. For that reason, our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader DGCL, form part of a flexible contract between corporations and stockholders, in the sense that the certificate of incorporation may authorize the board to amend the bylaws' terms and that stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.⁹

The plaintiffs' argument to the contrary—that stockholders' rights...