Have at It, Court of Chancery . . .

Bushansky v. Soon-Shiong, No. D072213 (D4d1 May 25, 2018)

Over the past decade, it has become increasingly prevalent for corporations to enact what are called forum-selection bylaws. These require stockholders who sue the company or its directors in stockholder litigation to bring their claims only in the state of incorporation, usually Delaware. Because bylaws are, more or less, a contractual arrangement between the company and its stockholders, the theory is that the bylaws are an enforcible forum selection contract. The Delaware Supreme Court agrees, and has held that they are enforceable. I’m not aware of a reported California appellate decision that’s given a thumbs-up, but the parties in this case seem to agree that the bylaw here is valid and enforceable. They just disagree that it applies.

The issue is that the bylaw facially applies only when the Delaware courts have personal jurisdiction over all indispensable defendants. Which is generally not a big deal, because there is a statute that says serving as a director of a Delaware corporation is in itself a consent to Delaware jurisdiction. But this case is a little different. It’s a derivative action in which a stockholder is suing the company’s directors and officers for breach of fiduciary duty on behalf of the company. But Plaintiff joined the company’s auditors, alleging aiding and abetting. Those guys don’t have any contacts in Delaware. It was only when defendants moved to enforce the choice of venue that the auditors joined the motion and stipulated that they would consent to personal jurisdiction there. 

Plaintiff says that is not enough because there was no Delaware personal jurisdiction over the auditors when the case was filed. His theory is that the bylaw is therefore inapplicable for failure to satisfy a condition precedent. Although the Court of Appeal agrees that Delaware personal jurisdiction over everyone is a condition precedent to enforcement, it disagrees that the condition needs to be satisfied from the moment the case is filed. Unlike subject matter jurisdiction, personal jurisdiction can arise from the parties’ consent, which often occurs after filing, albeit early in the case. (E.g., by making a general appearance after being served.) So the court here holds that so long as parties for which there wasn’t personal jurisdiction at the outset give consent within a reasonable time—viz. by the time they seek to enforce the bylaw—that’s sufficient to satisfy the condition.

Affirmed.