The Evolving Law of Forum Selection Clauses in the Corporation’s Bylaws and Articles in California

By Gerald P. Burleson, Member of the California Bar, and

Emily Bishop, 3rd year law student, University of San Diego Law School

© 2016 by Gerald P. Burleson, all rights reserved

Highway Signpost with Corporate Governance wording

Highway Signpost with Corporate Governance wording

The impact in California of forum selection clauses contained in a corporation’s bylaws or in its articles of incorporation has been the subject of an earlier article at this blog.  The law in California concerning such forum selection clauses has continued to evolve and change, particularly in light of developments in Delaware.  This article discusses the law concerning forum selection clauses in California and Delaware as it has developed more recently.

On June 24, 2015, in adopting new § 115 of the Delaware General Corporation Law (“DGCL”), the Delaware legislature statutorily endorsed the Delaware Chancery Court’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., in which the court upheld the validity of board-adopted internal affairs forum selection provisions in a corporation’s bylaws. New § 115 of the DGCL[1] both expressly authorizes and restricts exclusive forum selection provisions in bylaws as well as charter documents.  Specifically, § 115 provides that the charter document or bylaws of a corporation, (1) may contain a provision requiring that any or all internal corporate claims, including derivative actions, deal litigation, and breach of fiduciary duty claims, be adjudicated exclusively in Delaware courts and (2) may not contain a provision prohibiting such claims from being litigated in Delaware courts.  Effectively, the second provision of § 115 bars any bylaw or charter rule that would restrict such intra-corporate claims from being brought in the Delaware courts.[2]  Thus, for example, while it would be permissible for a Delaware corporation with a principal place of business in California to adopt a provision in its bylaws or articles of incorporation limiting litigation of internal corporate affair issues to California and Delaware, it would be impermissible for the provision to prescribe only California as the exclusive jurisdiction.  Accordingly, bylaws of Delaware corporations may only opt for Delaware as an exclusive forum.  Importantly, § 115 does not affect the application of an exclusive non-Delaware forum selection provision if it is contained in a shareholder agreement or other contract.[3]

While § 115 may cause concern to California shareholders, the effect of Delaware’s latest legislative action depends almost entirely on whether non-Delaware courts will enforce bylaws and charter provisions that designate Delaware as the exclusive forum.  Although the trend is not universal, most courts across the U.S. have enforced exclusive forum provisions in favor of Delaware courts.[4]  While the Delaware judiciary’s willingness to support bylaws and charter provisions that effectively funnel corporate litigation to Delaware courts is entirely unsurprising, California’s willingness to support their enforceability is somewhat more unexpected.

In 2014, one California state trial court not only upheld the Boilermakers decision, but also implied that Galaviz v. Berg,[5] the primary contrary authority to Boilermakers in California, was no longer good law.  In Groen v. Safeway Inc., the Superior Court of Alameda County relied on the framework established in Boilermakers regarding the “contractual principles at play” between the shareholders and the corporation to enforce an exclusive forum provision in connection with a derivative suit arising from Safeway’s merger announcement.  In its decision the court rejected the plaintiff’s argument that the corporation’s bylaw was invalid as a matter of California law. The court explained that under the Internal Affairs Doctrine, California courts apply the law of the state of incorporation in deciding intra-corporate disputes.  Ultimately, in opting to follow Boilermakers rather than Galaviz, the Court noted that Galaviz had been decided before Boilermakers, a statement hinting that Galaviz was no longer good law.

In Brewerton v. Oplink Communications Inc., for the second time in 2014, a California state trial court enforced a corporation’s exclusive forum selection bylaw.  Unlike in Safeway, where the bylaw was enacted months before the merger agreement was signed, in Brewerton the bylaw was enacted at the same time as the challenged transaction.  Nevertheless, the Court found the forum selection bylaw enforceable, rejecting the plaintiff’s argument that the bylaw could not be enforced against stockholders who bought their shares before the bylaw was enacted.  In upholding the facial validity of such a bylaw, the Court cited the same “contractual principles” reasoning used in Boilermakers and Safeway.

Recently the U.S. District Court for the Central District of California continued this trend.  In In re CytRx, the Court departed from the earlier California federal decision, Galaviz, and enforced an exclusive forum selection bylaw unilaterally adopted by the board of directors.  In analyzing the facial validity of the provision, the Court cited Boilermakers, accepting that such bylaws are consistent with the contractual nature between a corporation and its shareholders.  In terms of enforceability, the Court ruled that the framework set forth in Atlantic Marine Const. Co. v. U.S. District Court W.D. Texas,[6] concerning forum-selection clauses in contracts, was equally applicable to those in bylaws.  In Atlantic Marine, the U.S. Supreme Court held that when a federal court is presented with a forum-selection clause in a contract, the court should apply a forum non-conveniens analysis rather than a motion to dismiss for improper venue analysis.  The Supreme Court further held that “forum-selection clauses should control except in unusual cases.”  The Central District of California, applying this analysis in In re CytRx, determined that the forum-selection bylaw was enforceable because the public interest factors did not present one of those “exceptional” or “extraordinary” cases where it should not be enforced.

In conclusion, after the Ninth Circuit’s decision in In re CytRx, derivative plaintiffs in California must accept the reality that a forum selection clause contained in a nominal defendant corporation’s articles or bylaws, if properly adopted, very likely will determine the forum in which the shareholder derivative litigation must proceed.

[1] DGCL § 115 provides that: The certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.  “Internal corporate claims” means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.

[2] This legislative limitation effectively overrules the Delaware Chancery Court’s decision in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014), which upheld the facial validity of a Delaware corporations bylaw that designated North Carolina, the corporation’s principle place of business, as the exclusive forum for litigating internal corporate claims.

[3] Although § 115 precludes placing certain types of exclusive forum selection provisions in a corporation’s charter or bylaws, it does not purport to impose this same restriction on forum selection provisions located outside those two governing documents. John Bonanno v. VTB Holdings, C.A. No. 10681-VCN (Feb. 8, 2016).

[4] See, e.g., Groen v. Safeway Inc., No. RG14716641 (Cal. Super. Ct., May 14, 2014); Miller v. Beam, Inc., No. 2014 CH 00932 (Ill. Cir. Ct., Mar. 5, 2014); Hemg Inc. v. Aspen Univ., No. 650457/13, 2013 WL 5958388 (N.Y. Sup. Ct., Nov. 14, 2013). Contra Roberts v. TriQuint SemiConductor, Inc., No. 1402-02441 (Or. Cir. Ct., Aug. 14, 2014).

[5] In Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011), a California federal court refused to enforce an exclusive forum provision.

[6] Atlantic Marine Const. Co. v. U.S. District Court W.D. Tex. 134 S. Ct. 568 (2013).

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