First Citizens Wins Precedent‑Setting Victory for Delaware Corporations

On September 8, 2014, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted Cravath’s motion to dismiss in its entirety a putative class action lawsuit filed by the City of Providence on behalf of shareholders of First Citizens BancShares, Inc. (“First Citizens North”). The suit challenged the company’s forum-selection bylaw -- adopted on the same day that it entered into a merger agreement -- requiring that shareholder disputes be litigated in North Carolina, where the company is headquartered, rather than in Delaware, its place of incorporation.

Plaintiff alleged that in connection with First Citizens North’s proposed merger with First Citizens Bancorporation, Inc. (“First Citizens South”), First Citizens North and its board of directors breached their fiduciary duties and violated Delaware statutory and common law by adopting a forum-selection bylaw. Plaintiff sought a judgment declaring that the bylaw is invalid due to the timing of its adoption and the Delaware Court of Chancery has jurisdiction over any action arising out of conduct related to the proposed merger. Defendants moved to dismiss the bylaw litigation as well as merger litigation brought by plaintiffs.

In an issue of first impression, the Chancery Court ruled that the board of a Delaware corporation may adopt bylaws that designate an exclusive forum other than Delaware for intra-corporate disputes. Chancellor Bouchard stated that this decision was “compelled by the logic and reasoning” of then-Chancellor, now Chief Justice, Strine in his decision in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013). That decision upheld the statutory and contractual validity of lawful board-adopted corporate bylaws that name Delaware as the exclusive venue for shareholder suits of Delaware corporations.

Chancellor Bouchard further concluded that the company’s forum-selection bylaw regulates “‘where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain.’ That the Board adopted it on an allegedly ‘cloudy’ day when it entered into the merger agreement with [First Citizens South] rather than on a ‘clear’ day is immaterial given the lack of any well-pled allegations . . . demonstrating any impropriety in this timing.” Boards should have the discretion to select a forum in which to be sued so long as they select an appropriate forum that does not insulate them from liability.

The Cravath team included partner J. Wesley Earnhardt and associate Sarah M. Colombo. The case is City of Providence v. First Citizens BancShares Inc. et al., No. 9795 (Del. Ch.)