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Court Of Appeal Finds No Right To Sue Directors In California

In July 2017, I wrote about Judge Brian C. Walsh's ruling that Delaware, not California, was the proper forum for suing the directors of a Delaware corporation based on the corporation's forum selection bylaw.  California Judge Honors Delaware Forum Selection Bylaw.  Just in time for Christmas, a California Court of Appeal affirmed Judge Walsh's ruling.   Drulias v. 1st Century Bancshares, 2018 Cal. App. LEXIS 1202.

The parties agreed that Delaware law governed much of the case.  They agreed that Delaware law governed the plaintiff's breach of fiduciary claim.  They also concurred that the validity of the corporation's forum selection bylaw was governed by Delaware law.  The plaintiff also did not contest the validity of the corporation's forum selection bylaw under Delaware law.  

The plaintiff argued that enforcement of the bylaw provision would deprive him of a statutory right to a California forum.  The plaintiff's argument rested on the last sentence of Corporations Code Section 2116 (highlighted below):

"The directors of a foreign corporation transacting intrastate business are liable to the corporation, its shareholders, 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."

The Court of Appeal disagreed.  Below are some notable observations from the opinion by Justice Franklin D. Elia:

  • "[N]either California nor Delaware law requires forum selection clauses be freely negotiated to be enforceable."
  • "The forum selection bylaw is entirely consistent with Drulias's reasonable expectations at the time he chose to purchase stock in 1st Century."
  • "Forum selection bylaws have the effect of consolidating such litigation into a single forum, thereby reducing litigation expenses and avoiding duplication of effort (not to mention promoting efficient use of judicial resources), which is beneficial to corporations and their shareholders alike."

Some readers may recall that the parties had actually tried to settle the case in California. That attempt, however, came to grief on when Judge Peter H. Kirwan declined to approve the settlement in large part based on In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. Jan. 22, 2016).  See California Judge Troubled By Trulia Refuses To Approve Settlements.  The Court of Appeal found that those settlement attempts did not make the corporation's forum selection provision unreasonable.

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About this Author

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

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...