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Can An Article Or Bylaw Forum Selection Provision Bind Persons Who Are Not Yet Stockholders?

Today, the Nevada Assembly Judiciary Committee is holding a hearing on SB No. 95, a bill that would make numerous changes to Nevada's business entity statutes.  One change would be to amend NRS 78.046 to authorize the articles of incorporation or bylaws of a corporation to require, to the extent not inconsistent with any applicable jurisdictional requirements and the laws of the United States, that "concurrent jurisdiction actions" must be brought solely or exclusively in a specified court or courts.  The bill defines a "concurrent jurisdiction action" as any action, suit or proceeding against the corporation or any of its directors or officers, that:

  • Asserts a cause of action under the laws of the United States;

  • Could be properly commenced in either a federal forum or a forum of Nevada or any other state; and

  • Is brought by or in the name or on behalf of:

    • The corporation;

    • Any stockholder of the corporation; or

    • Any subscriber for, or purchaser or offeree of, any shares or other securities of the corporation.

An action under the Securities Act would meet the first two criteria.  However, I have my doubts about the third criterion insofar as it includes subscribers and offerees because they are not yet stockholders.  To the extent that the articles and bylaws may be considered a contract between the corporation and its stockholders, it is a stretch to extend that contract to persons who have not yet become stockholders.  While a subscription agreement could conceivably include a forum selection provision, someone who is merely offered a security has agreed to nothing and no privity exists between the corporation and the offeree.  

The proposed amendment would also seem to require a stockholder to litigate in the specified forum matters unrelated to the corporation itself.  For example, if a stockholder has a personal dispute with the corporation's chief executive officer that may be brought in federal or state court, this bill would seem to require that the stockholder be limited to bringing that action in the forum specified in the articles or bylaws.  

© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 112

About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...