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City of Providence v. First Citizens Bancshares, Inc., et al.: Court of Chancery Upholds Board-Adopted Forum-Selection Bylaw Requiring Intra-Corporate Litigation to Be Brought in a North Carolina Forum

September 8, 2014

In City of Providence v. First Citizens Bancshares, Inc., et al., Consol. C.A. No. 9795-CB, the Court of Chancery granted a motion to dismiss a challenge to a bylaw, adopted by the board of directors of First Citizens Bancshares, Inc. (“FC North”), that requires, to the extent permitted by law, certain intra-corporate claims to be brought exclusively in the United States District Court for the Eastern District of North Carolina, or, if that court lacks jurisdiction, then in any North Carolina state court that possesses jurisdiction. The Court held that the logic and reasoning of Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) (“Chevron”), compelled the decision upholding the facial validity of the forum-selection bylaw, notwithstanding the choice of a non-Delaware forum. The Court also held that the plaintiff had failed to state a claim for breach of fiduciary duty in connection with the adoption of the bylaw and had failed to demonstrate that it would be unreasonable, unjust or inequitable to enforce the bylaw. The Court therefore applied the bylaw to dismiss for improper venue a challenge to the FC North board’s decision to enter into a merger agreement with a related party on the same day that it adopted the forum-selection bylaw.

On June 10, 2014, FC North announced both that its board had exercised the authority delegated to it in the certificate of incorporation to adopt several amendments to the bylaws, and that FC North had entered into an agreement to acquire First Citizens Bancorporation, Inc. (“FC South”), a South Carolina corporation under common control with FC North. Among the amendments to the bylaws was a new provision requiring that certain categories of intra-corporate disputes, identical in substance to those covered by the bylaw upheld against facial attack in Chevron, be brought in federal court in North Carolina, or if that court lacks jurisdiction, then in North Carolina state court. Plaintiff, the City of Providence, Rhode Island, filed a complaint challenging the validity of the bylaw, both facially and as-applied, and a separate complaint challenging the fairness of the proposed merger. Defendants, FC North and its directors, moved to dismiss both actions.

The Court of Chancery rejected Plaintiff’s challenge to the facial validity of the forum-selection bylaw, holding that the FC North board’s choice of a North Carolina forum, rather than a Delaware forum, “does not … call into question the facial validity of the Forum Selection Bylaw.” The Court also held that Plaintiff had not stated a claim that the FC North board had adopted the bylaw for an inequitable purpose. Consequently, the Court dismissed the challenge to the bylaw under Rule 12(b)(6).

The Court then applied the bylaw to dismiss the challenge to the proposed merger under Rule 12(b)(3). Applying the test stated in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), and adopted in Delaware in Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010), the Court held that Delaware does not possess a public policy mandating that claims of the nature asserted in the challenge to the proposed merger be litigated in Delaware. Noting that FC North is based in North Carolina, that most of its deposits and its branches are located in North Carolina, that its directors are subject to personal jurisdiction in North Carolina, and that complete relief is available in North Carolina, the Court held that application of the forum-selection bylaw to the challenge to the merger was reasonable. The Court accordingly dismissed the challenge to the proposed merger under Rule 12(b)(3).