Fairwell to California-Forum Going-Private Litigation

Drulias v. 1st Century Bancshares, Inc., No. H045049 (D6 Dec. 21, 2018)

Most public companies are incorporated in Delaware. Which means that, under the internal affairs doctrine, Delaware law governs the relations between the company, its officers and directors, and its stockholders. But the modern understanding of the internal affairs doctrine does not generally require litigation over those issues to be brought in the courts of the state of incorporation. Indeed, California’s codification of the doctrine in Corporations Code § 2116 specifically says that duties arising under the corporate law of out of state corporations “may be enforced in the courts of this state.” 

Part of the Delaware brand, however, is the Court of Chancery, a special court of super smart corporate law savvy judges who have the reputation of being able to resolve emergency disputes over Delaware corporate law in like three days by issuing a 300 page opinion with 523 footnotes. I have litigated there. It’s impressive. So most Delaware companies would prefer to resolve their shareholder cases in Delaware, instead of some random state court that is less laser focused on the finer points of Delaware corporate law.

Plaintiffs, however, don’t always agree. Especially when a Delaware court would likely toss a case on the pleadings. So Delaware companies started amending their bylaws to require shareholder disputes to be litigated in Delaware courts. And several years ago Delaware’s courts—ever protective of their brand—held that was a valid thing to do. But up till now no published California decision had addressed whether a Delaware forum selection bylaw was adequate to curtail litigation that was nonetheless filed in California state court.

The Court of Appeal does so here. It explains that the enforcibility of the forum selection is an issue of Delaware law, which has been resolved. Nor are there any valid reasons for a California court to refrain from honoring that selection. Although § 2116 permits California courts to assume jurisdiction over cases arising under the corporate law of other states, it does not give stockholders an absolute right to litigate here. Nor are there any fairness concerns that overwhelm the bylaw’s choice of Delaware forum. When an investor decides to invest in a Delaware corporation, it is perfectly reasonable for him or her to expect that the corporation will require shareholder disputes to be resolved in the Courts of the jurisdiction that best knows the law that governs the dispute.

Affirmed.