California Court Rejects The Enforceability Of A Delaware Forum Selection Clause In Corporate Bylaws

Tuesday, March 1, 2011 - 13:38

In a matter of first impression, the United States Federal District Court for the Northern District of California recently denied motions to dismiss a derivative action for improper venue, finding the forum selection clause in the corporate bylaws of a Delaware corporation to be unenforceable. The decision in Galaviz v. Berg, No. 10-cv-3392, slip op. (N.D. Cal. Jan. 3, 2011), calls into question the ability of corporations to effectively mandate a chosen forum for the resolution of intra-company disputes.

The plaintiffs in Galaviz brought a claim in the Federal District Court for the Northern District of California against the directors of Oracle Corporation ("Oracle") alleging that each director is individually liable for breach of fiduciary duty and abuse of control in connection with certain actions allegedly taken by Oracle from 1998 to 2006.

In 2006, prior to the initiation of the Galaviz litigation, Oracle's board of directors unanimously approved a resolution to amend Oracle's bylaws to include a forum selection provision which provided that "[t]he sole and exclusive forum for any actual or purported derivative action brought on behalf of the Corporation shall be the Court of Chancery in the State of Delaware." Accordingly, the defendants moved to dismiss the claims of the plaintiffs on the basis of improper venue, asserting that the forum selection clause in Oracle's bylaws is binding upon the plaintiffs and that the proper venue for the claims is the Delaware Chancery Court.

In analyzing whether to grant the motion to dismiss, the district court distinguished between corporate bylaws and contracts, rejecting Oracle's contention that the validity of a forum selection clause in corporate bylaws should be analyzed in the same manner as a forum selection clause in a contract.1The district court focused on the ability of a corporation's directors to unilaterally amend the corporation's bylaws and noted that under contract law, while a party's acceptance of an agreement may "serve as consent to all the terms therein, whether or not all of them were specifically negotiated or even read," a party may not independently amend or alter the provisions of a contract after the contract has been entered into. Consequently, the district court denied Oracle's motion to dismiss, finding that Oracle had otherwise failed to demonstrate the effectiveness of its forum selection bylaw under federal law such that it restricted the plaintiffs from pursuing their claims in the California Northern District Court.

The district court's holding calls into question the enforceability of venue selection clauses in corporate bylaws and, if followed in other jurisdictions, has the potential to limit a corporation's ability to dictate the forum in which stockholder derivative claims must be brought. Courts tasked with analyzing this issue in the future may distinguish the facts of Galaviz from the facts of the cases brought before them. The district court noted that the Galaviz plaintiffs purchased shares in Oracle prior to the amendment to Oracle's bylaws, that a majority of the alleged wrongdoing had occurred prior to the bylaw amendment and that the same directors named as defendants had adopted the forum selection bylaw. Had Oracle's bylaws included a forum selection clause prior to any alleged wrongdoing and/or the purchase of shares in Oracle by the plaintiffs, the district court may have come to a different conclusion. Further, the district court may have reached a different conclusion had the forum selection clause been adopted by Oracle's stockholders as a bylaw or charter amendment.

The district court's holding is especially interesting in light of a recent remark by Vice Chancellor Laster in In re Revlon, Inc. Shareholders Litigation , 990 A.2d 940, 960 (Del. Ch. 2010) that "if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, the corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes." While this statement was made in dicta, it may indicate that the Delaware courts would support the inclusion of a forum selection clause in corporate charters or bylaws. However, the Galaviz court glossed over Laster's statement, merely attributing it as a potential cause for the recent inclusion of forum selection clauses in corporate bylaws.

The ability of a corporation to dictate a forum in advance of stockholder derivative suits has many benefits to public corporations and their stockholders. The district court's decision in Galaviz is the first of its kind and companies should take note of whether future courts follow the Galaviz decision in determining the validity of forum selection clauses in corporate bylaws. 1 The district court acknowledged that if federal contract law principles were controlling, "there would be little basis to decline to enforce" the forum selection clause in Oracle's bylaws.See Argueta v Banco Mexicano, S.A. , 87 F.3d 320 (9th Cir. 1996).

Adam M. Turteltaub and Robert B. Stebbins are Partners and Jennifer E. Wade is an Associate in the Corporate and Financial Services Department of Willkie Farr & Gallagher's New York office.

Please email the authors at aturteltaub@willkie.com, rstebbins@willkie.com or jwade@willkie.com with questions about this article.