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California Court of Appeal Enforces Delaware Forum Selection Bylaw

In Drulias v. 1st Century Bancshares, Inc., No. H045049, 2018 WL 6735137 (Cal. App. Dec. 21, 2018), the California Court of Appeal, Sixth Appellate District, affirmed an order staying a stockholder lawsuit brought in the Superior Court of California, Santa Clara County, on forum non conveniens grounds based upon enforcement of an exclusive Delaware forum selection bylaw. This decision confirms that California courts will enforce forum selection bylaws designating Delaware as the exclusive venue for intra-corporate claims. 

Drulias involved a Delaware corporation headquartered in California. At the same time the board of directors of the corporation approved a merger, the board also adopted a forum selection bylaw designating Delaware as the exclusive venue for intra-corporate claims. Shortly after the announcement of the merger, the plaintiff stockholder filed a putative class action in California Superior Court on behalf of all holders of the corporation’s common stock alleging breach of fiduciary duties against the board members in connection with the negotiation and approval of the merger.

Defendants moved to dismiss or stay pursuant to Sections 410.30 and 418.10 of the California Code of Civil Procedure, arguing that the forum selection bylaw required the action to be litigated in Delaware. The trial court stayed the action under Section 410.30, concluding the bylaw was enforceable.

Plaintiff appealed. Plaintiff argued that the forum selection bylaw was unenforceable under California law because it conflicted with Section 2116 of the California Corporations Code. Section 2116 provides:

The directors of a foreign corporation transacting intrastate business are liable to the corporation, its shareholder, creditors, receiver, liquidator or trustee in bankruptcy for the making of unauthorized dividends, purchase of shares or distribution of assets or false certificates, reports or public notices or other violation of official duty according to any applicable laws of the state or place of incorporation or organization, whether committed or done in this state or elsewhere. Such liability may be enforced in the courts of this state.

Plaintiff construed this language as conferring a statutory right on California-based stockholders to sue the directors of a foreign corporation in California. The Court of Appeal rejected this argument. It cited to the modern version of the internal affairs doctrine codified in Section 2116, which provides that “a court will exercise jurisdiction [over an action involving the internal affairs of a foreign corporation] unless it is an inappropriate or inconvenient forum for the trial of the action” (emphasis added). The Court held that Section 2116 thus created no “substantive rights” for California-based stockholders to litigate in California courts.

The Court of Appeal also rejected the plaintiff’s alternative argument that enforcement of the forum selection bylaw was unreasonable on the ground that the board adopted it without additional stockholder approval. The Court observed that neither California nor Delaware law required that a forum selection clause be expressly negotiated to be enforceable and that by virtue of purchasing stock plaintiff consented implicitly to the board’s unilateral adoption of corporate bylaws. The Court further rejected plaintiff’s argument that the bylaw could not be applied retroactively to litigation arising out of conduct that occurred before the stockholder had notice of the bylaw. The Court, following the rationale of other courts, held that enforcing a forum selection bylaw adopted after the alleged wrongdoing was not inherently unreasonable. The Court also noted the salutary effects of forum selection bylaws, which “have the effect of consolidating litigation into a single forum, thereby reducing litigation expenses and avoiding duplication of effort and judicial resources, which is beneficial to corporations and their shareholder alike.”

This decision (among others) from the California Court of Appeal makes clear that California courts will enforce Delaware forum selection clauses, and will accord great deference to the processes by which boards of directors enact them.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

John Stigi, securities, corporate, attorney, Sheppard Mullin, law firm
Partner

John Stigi is a partner in the Business Trial Practice Group in the firm's Century City and New York offices, and leader of the firm's Corporate/Securities Litigation Team.

Mr. Stigi's practice focuses on securities class action and shareholder derivative action defense, SEC investigation defense, internal corporate investigations, complex contract and commercial litigation, and M&A and corporate governance litigation.  He has extensive experience representing issuers, officers, directors and auditors in all areas of securities, corporate...

310-228-3717
Melissa Mikail, Sheppard Mullin Law Firm, Century City, Corporate Law Attorney
Associate

Melissa M. Mikail is an associate in the Business Trial Practice Group in the firm's Century city office.

424-288-5315