Exclusive Forum Bylaws: You Win Some, You Lose Some
A couple of recent California decisions provide some good news — and some bad news — when it comes to the enforceability of corporate exclusive forum bylaws. The good news is that a California judge held that an exclusive federal forum bylaw of the type sanctioned by the Delaware Supreme Court earlier this year in Sciabacucchi v. Salzberg was enforceable under California law. Here’s the intro from a Skadden memo:
On September 1, 2020, Judge Marie S. Weiner of the San Mateo County, California Superior Court held that an exclusive federal forum provision was enforceable under California law. See Wong v. Restoration Robotics, Inc., No. 18CIV02609 (Cal. Super. Ct., Sept. 1, 2020). This is the first California decision to evaluate the enforceability of a Delaware charter provision requiring shareholder claims under the Securities Act of 1933 (Securities Act) to be brought exclusively in federal court since the Delaware Supreme Court held that such provisions are facially valid in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020).
Now for the bad news — a decision by another California judge called into question the enforceability of bylaws designating the Delaware Chancery Court as the exclusive forum for shareholder claims. Here’s an excerpt from a Ropes & Gray memo:
Delaware entities have increasingly relied on forum selection clauses mandating litigation in the Delaware Court of Chancery, in recognition of the Chancery Court’s expertise and consistency in its application of corporate law. A recent California trial court decision may threaten that reliance. On July 29, 2020, a judge of the California Superior Court ruled in West v. Access Control Related Enterprises, LLC that a forum selection clause mandating litigation in Delaware was unenforceable in California because the site of the expected litigation in Delaware—the Chancery Court—did not provide for civil jury trials. The court held that the enforcement of the forum selection clause would have abridged the right to a civil jury trial under California law.
The memo says that the decision isn’t as dire as it sounds — it shouldn’t apply to equitable and derivative claims, so many common Chancery Court actions would not be affected by this ruling. But the decision invites litigation about what claims are subject to its holding, which in turn adds uncertainty to whether such a bylaw would be enforced in a particular case.
-John Jenkins, DealLawyers.com September 21, 2020
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