Federal District Court Says "No" to Forum Selection Bylaws

May corporate directors control the venue for shareholder derivative actions by adopting bylaws requiring that cases be filed in a particular forum? That question of first impression has been answered in the negative in an eight-page opinion by Judge Richard Seeborg of the Northern District of California. Judge Seeborg issued the opinion on January 3, 2011, in two nearly identical derivative actions brought against Oracle Corporation for an alleged overbilling scheme relating to sales of software to the United States government between 1998 and 2006. See Galaviz v. Berg, Nos. C 10-3392 RS, C 10-4233 RS, 2011 WL 135215 (N.D. Cal. Jan 3, 2011).

Galaviz concerned a bylaw specifying Delaware Chancery Court as the sole proper venue for all derivative actions against Oracle. Id. at *1. Such forum selection bylaws have become increasingly common since In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 960 (Del. Ch. 2010), in which Vice Chancellor Laster commented by way of dicta that “if board of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.”

The bylaw at issue in Galaviz was unanimously adopted in 2006 at a board meeting attended by all of the individual directors named as defendants in the suit. Galaviz, 2011 WL 135215 at *1. The adoption occurred prior to the filing of any suits concerning the overbilling, but long after the alleged scheme was purported to have commenced. Id.

Oracle moved to dismiss the California derivative actions for improper venue as a result of the forum selection bylaw. Id. Judge Seeborg found the issue to be a matter of federal procedural common law, which permits enforcement of forum selection clauses in contracts, including those containing elements of adhesion. Id. at *4. But the court considered the bylaw to be on “different footing” than contractual forum selection clauses, because it was adopted without the element of mutual consent, at least with respect to shareholders who purchased their shares prior to the time the bylaw was adopted. Id. at *1, 4. According to Judge Seeborg, the absence of mutual consent was especially problematic because the bylaw at issue was adopted by the very individuals named as defendants, after the alleged wrongdoing took place. Id. at *4. Ultimately, the court denied Oracle’s motion to dismiss. Id at *5.

It is worth noting Judge Seeborg’s statement in dicta that a forum selection provision in a charter amendment approved by a majority of shareholders might be more likely to warrant enforcement than a similar provision in a bylaw, even in the case of a plaintiff shareholder who had personally voted against the amendment. Id. at *4. Indeed, the court noted that Vice Chancellor Laster’s comments in Revlon refer to “ ‘charter provisions’,” rather than bylaws. Id. at n.6 (quoting In re Revlon, 990 A.2d at 960).

It remains to be seen how courts in other jurisdictions will decide the enforceability of venue provisions in corporate governance documents. For now, corporations are advised to consider the Galaviz decision and consult with counsel when determining whether to place such provisions in their bylaws or charters.