Federal Court Refuses to Enforce Forum Selection Clause in Bylaws

A fair amount of legal scholarship has focused recently on providing for the selection of a litigation forum in the organizational documents of a corporation. Professor Joseph Grundfest has been a prime proponent of the idea and we wrote here about a speech he gave about it recently. Professor Steven Davidoff has written about it here. A decision of the Delaware Court of Chancery last year intimated the legitimacy of the concept in the case of In re Revlon, Inc. Shareholders Litigation, 990 A.2d 940, 960 (Del. Ch., 2010).

Just this week, however, one federal judge in California decided he was not willing to "join the party" on this concept. In Galaviz v. Berg, N.D. CA, No. C 10-3392-RS (Jan. 3, 2011), available here, the U.S. District Court for the Northern District of California applied federal law to reject the argument that directors can amend bylaws to require (without seeking shareholder approval), all derivative suits to be filed in a particular jurisdiction, such as the state of formation. The Court did not make its decision based on Delaware law. The Court also suggested that the analysis would be different if the forum selection clause, requiring derivative suits against the company to be filed exclusively in Delaware, were made a part of the corporate charter instead of the bylaws only. Reportedly, this is the first reported decision to address the issue directly. Jim Hamilton has a helpful post about this case here.

Perhaps this ruling is an insight for those who might favor the federalization of corporate law. This decision was based on federal law and was made by one of the hundreds of federal judges sitting among dozens of U.S. District Courts around the country. Conceivably, the future could present us with hundreds of other decisions on this corporate issue that we may need to sort out in the coming years.

SUPPLEMENT: Frank Reynolds writes for Westlaw’s Securities Litigation Newsletter here with his insights on this decision. Prof.Bainbridge links to this post here. Max Kennerly comments on the topic in general here.