Litigation limiting bylaw and charter provisions are something of a running interest of mine – I have four different papers discussing them, more or less, and here is the latest of many blog posts on the subject – so I was tickled when I discovered In re Cerence Stockholder Derivative Action, 2024 WL 5187699 (D. Mass. Dec. 20, 2024), where the company had two different forum selection provisions, one in the charter and one in the bylaws, and they were not the same.

Conflicting provisions in the charter and bylaws?  That’s how we know these things have really gone mainstream.

So.  Cerence is incorporated in Delaware, and has a charter provision, adopted when it went public as a spinoff in 2019, requiring:

Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer or other employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders … shall be the Court of Chancery of the State of Delaware, in all cases to the fullest extent permitted by law, or, if the Court of Chancery or the State of Delaware does not have jurisdiction, any other state or federal court located within the State of Delaware.

Then, in 2022, the Seventh and Ninth Circuits issued decisions addressing bylaws that required all derivative claims be heard in Delaware’s Court of Chancery.  By their terms, these bylaws applied to both state and federal derivative claims, but because Chancery has no jurisdiction to hear Exchange Act claims, they functionally acted as a waiver for derivative federal claims.  As I blogged (and blogged and blogged) at the time, the Seventh Circuit refused to enforce one bylaw, while the Ninth Circuit upheld another.

Also in 2022, the plaintiffs filed their derivative Section 14(a) claims against Cerence in the District of Massachusetts.  The case was stayed in favor of a related securities class action.

In 2023, the company – acting, I can only assume, in response to the Seventh and Ninth Circuit rulings and not to the derivative lawsuit, I think? – amended its bylaws to add a new forum provision that said:

Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, the Exchange Act, or the respective rules and regulations promulgated thereunder.

This was funny because the original charter provision was just fine as it was; you get the sense that the bylaw was drafted by someone who was unaware of what the charter actually said. So, the charter would require all derivative actions to be filed in the state of Delaware – state or federal court – while the bylaws would require that all federal claims be filed in some federal court somewhere.

Well, Massachusetts is, indeed, somewhere, so when the stay was lifted and litigation got going again, and Cerence moved to dismiss the derivative action in favor of Delaware on the basis of the charter provision, the plaintiffs said, but no!  The bylaws – which you just passed – permit our claims to advance right here.  Cerence responded, naturally, that when the charter and bylaws conflict, the charter controls.

The court held that, read correctly, the provisions did not conflict at all.  The charter required claims to be filed in a Delaware court unless the company consented in writing; the bylaw was the equivalent of just such a consent; therefore, the plaintiffs were permitted to advance their claims in any federal court, including a federal court in the Bay State.

Q.E.D.