Insight Use of Forum Selection Clause in Corporate Context

In a recent case, the United States Federal District Court for the Northern District of California denied a Delaware corporation’s motion to dismiss a shareholder derivative action for improper venue, finding that the forum selection clause in the corporation’s bylaws requiring that the action be brought in Delaware was unenforceable. The decision in Galaviz v. Berg, No. 10-cv-3392, slip op. (N.D. Cal. Jan 3, 2011) calls into question the viability of a forum selection clause for corporate governance disputes.

In Galaviz, the shareholders brought a derivative claim against the directors of Oracle Corporation (Oracle), alleging certain breaches of fiduciary duties. Prior to the shareholders filing their claim, the same directors unilaterally amended Oracle’s bylaws to provide that any derivative actions must be brought in the Court of Chancery in the State of Delaware. Notwithstanding the forum selection clause, the shareholders filed their claim in California federal court.

The Court’s reasoning for refusing to enforce the forum selection clause highlights the difference in the relative power and authority of two parties to an ordinary contract versus directors and shareholders to a corporation’s charter and bylaws. In the ordinary contract situation, courts tend to enforce the parties’ choice of venue (absent public policy concerns) presuming the parties had relatively equal bargaining power and an opportunity to review and consider the contractual provisions and affirmatively agree to the forum selection clause. Note, however, that in Idaho there is a statute that specifically provides that forum selection clauses are unenforceable.

In contrast, a corporation’s charter or bylaws may often be amended without or with limited shareholder approval. In fact, in Galaviz, the directors amended Oracle’s bylaws to include the forum selection clause unilaterally and without shareholder approval, and many of the shareholders had acquired Oracle stock prior to the change in bylaws. The court took exception to this fact pattern on the grounds that the shareholders effectively did not consent to the forum selection clause.

It is likely that any court tasked with interpreting a corporation’s charter or bylaws and potentially enforcing a forum selection clause will distinguish its ruling from Galaviz based on the facts. For example, a court may enforce a forum selection clause if the shareholders approve the clause in the initial charter or bylaws or in an amendment to the charter or bylaws. In any event, the court’s decision in Galaviz warrants further consideration of the use of forum selection clauses in corporate charters and bylaws.

If you would like more information or have questions regarding this topic, please contact a member of our Business Group or 208.344.6000.