Court Decision Reiterates That Forum Selection Bylaws Are Best Adopted Before Any Threat of Shareholder Litigation

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On February 24, 2014, RF Micro Devices, Inc. and TriQuint Semiconductor Inc. announced a merger agreement under which the companies agreed to an all-stock “merger of equals.” Following the merger’s announcement, five lawsuits on behalf of TriQuint’s stockholders were filed: three of those lawsuits were filed in the Delaware Court of Chancery and two lawsuits were filed in Oregon state court. The defendants in the Oregon lawsuits moved to dismiss on a number of grounds, including a forum selection bylaw that required the litigation to be filed in Delaware, but that the TriQuint board of directors had adopted at the same meeting it recommended the merger.

In refusing to enforce the bylaw, the Oregon court first discussed Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011), in which the District Court for the Northern District of California refused to enforce Oracle’s forum selection bylaw because there could be no mutual consent to the forum choice when “the bylaw was adopted by the very individuals who are named as defendants, and after the alleged wrongdoing took place.” Op. at 3. The Court then noted that, while Galaviz limited itself to principles of mutual assent under contract law, Delaware corporation law permits a board of directors to adopt a forum selection bylaw. Citing Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), the Oregon court accepted the facial validity of board-adopted forum selection bylaws, but noted that stockholders still were free “to allege any actual facts suggesting that the enforcement of a unilaterally adopted bylaw would somehow be untoward.” Op. at 5. Thus, the Oregon court could refuse to enforce a forum selection bylaw if enforcement would have “the effect of violating the public policies of Oregon.” Op. at 2 n.1.

In that regard, the Oregon court noted that under Oregon law, like Delaware law, stockholders can repeal bylaws that are adopted by a board of directors. Yet, in this case, plaintiffs alleged that the board’s motivations for approving the bylaw were improper because (1) the board anticipated that the merger would spark “this exact litigation,” Op. at 9, and (2) the board knew that, by adopting the bylaw at the same meeting during which it recommended the merger, stockholders would not have time to repeal the bylaw before its application to the anticipated lawsuit.

Relying on the Delaware Supreme Court decision in Schnell v. Chris-Craft Industries Inc., 285 A.2d 430, 432 (Del. Ch. 1971) - which held that an inequitable action does not become permissible simply because it is legal - the Oregon court noted that “[e]nforcement of the bylaw would not be an issue had the board, at the very least, adopted it prior to any of its alleged wrongdoing, and with ample time for the shareholders to accept or reject the change.” Op. at 9. But because of the “closeness of the timing of the bylaw amendment to the board’s alleged wrongdoing, coupled with the fact that the board enacted the bylaw in anticipation of this exact lawsuit” and because “its enforcement will have the effect - and Defendants knew it would have the effect - of forcing the shareholders to accept the bylaw,” the bylaw’s enforcement would be unfair and unjust. Op. at 9-10.

The Roberts decision reaffirms the validity of boardadopted forum selection bylaws. But the lesson of the decision, when coupled with the decision in Galaviz, is clear: If a board of directors determines to adopt a forum selection bylaw, it should be done on a clear day and not in tandem with any particular transaction.

Copyright © Morris, Nichols, Arsht & Tunnell LLP. This update provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. For a more complete or detailed discussion, please contact any member of Morris Nichols Corporate & Business Litigation Group.

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