DealLawyers.com Blog

Yesterday, the Chancery Court addressed which forum selection bylaw should apply to derivative actions in the following fact pattern: (1) a company announces a proposal to redomesticate (and adopt a new forum selection bylaw); (2) derivative suits challenging the redomestication are filed in the current state of incorporation, as required by the current forum selection bylaw; and (3) days/hours after filing, company stockholders approve the redomestication and the new forum selection bylaw. (As you may suspect, the company is Tesla and the states are Delaware and Texas.) In In Re Tesla, Inc. Derivative Litigation (Del. Ch.; 4/26), Vice Chancellor David wrote: 

Although the plaintiffs advocate for an inflexible rule requiring the Court to assess proper venue based on the facts as they existed when the complaints were filed, courts sometimes look to later points in time when determining venue, such as when the defendant appears or at the time a movant seeks transfer. Courts in other jurisdictions have enforced forum selection bylaws adopted after derivative lawsuits were filed. And the unique facts of this case present a strong case for enforcement, since the Texas forum selection bylaw was publicly announced before these actions were initiated and became effective just days later, before the defendants appeared and any meaningful litigation occurred.

The plaintiffs argue that enforcing the Texas forum selection bylaw would violate two sections of the Delaware General Corporation Law. For reasons explained below, it does not. They also argue that enforcement would be unreasonable or unjust, including because Texas law is less favorable to stockholders. I will not second-guess Tesla stockholders’ chosen forum by purporting to weigh the advantages and disadvantages of Texas law and procedure relative to our own. The owners of the corporation voted to require that derivative litigation be filed in a Texas forum. On the present facts, it is not inequitable to enforce their decision.

As to the claims that enforcing the later adopted bylaw violates Delaware law, the plaintiffs point to Section 266(e), which provides:

The conversion of a corporation out of the State of Delaware in accordance with this section and the resulting cessation of its existence as a corporation of this State pursuant to a certificate of conversion to non-Delaware entity shall not be deemed to affect any obligations or liabilities of the corporation incurred prior to such conversion or the personal liability of any person incurred prior to such conversion, nor shall it be deemed to affect the choice of law applicable to the corporation with respect to matters arising prior to such conversion.

To that, Vice Chancellor David said (citations omitted):

They first contend that enforcing the Texas Forum Bylaw here would impermissibly “affect” Tesla’s “obligation” to litigate the Actions in Delaware as required under the Delaware Forum Bylaw. This argument fails because Plaintiffs never had any vested right or obligation to litigate in a particular forum. “Our corporate law has long rejected the so-called ‘vested rights’ doctrine,” the notion that a corporation’s governing documents cannot be amended in a manner that diminishes or divests pre-existing stockholder rights [. . .]

The Texas Forum Bylaw does not change the choice-of-law analysis; it “merely regulates ‘where stockholders may file suit.’” [. . .] But Plaintiffs say that if Delaware law applies, then under Section 115, Tesla could not adopt a provision in its bylaws that prohibits bringing internal corporate claims in Delaware. This argument also misses the mark. Regardless of what substantive law governs Plaintiffs’ derivative claims, “Section 115 does not apply here” because that statute governs Delaware corporations and Tesla “was not incorporated in Delaware when it adopted the [Texas Forum] Bylaw.”

Plaintiffs also argued that the Texas bylaw is unreasonable or unjust “as applied” and should not be enforced. This also didn’t sway her:

Plaintiffs cannot undermine enforcement of the Texas Forum Bylaw by challenging the Redomestication. A party “cannot escape a valid forum selection clause . . . by arguing that the underlying contract was invalid for a reason unrelated to the forum selection . . . clause itself.” [. . .] Plaintiffs attack the Redomestication, but they do not argue that Tesla’s stockholders were misled about the effect of the Texas Forum Bylaw in requiring derivative litigation to be brought in Texas rather than Delaware courts.

– Meredith Ervine