30 Cal. App. 5th 696
Cal. Ct. App. 5th2018Background
- 1st Century Bancshares, a Delaware corporation based in Los Angeles, approved a board-adopted bylaw designating Delaware courts as the exclusive forum for intra‑corporate disputes while approving a merger with Midland.
- The bylaw was adopted unilaterally by the board pursuant to the corporation’s certificate of incorporation (stockholders retain power to repeal).
- California shareholder Dean Drulias filed a putative class action in California alleging directors breached fiduciary duties in approving the merger; he sought injunctive relief and later a first amended complaint adding the investment banker.
- Defendants moved to enforce the Delaware forum‑selection bylaw via a section 410.30 forum non conveniens motion; the trial court stayed (not dismissed) the California action.
- Drulias argued the bylaw conflicts with Cal. Corp. Code § 2116 (conferring ability to enforce director liability in California courts) and that enforcement was unreasonable because the bylaw was unilaterally adopted, adopted concurrently with the merger, and defendants litigated in California before seeking the stay.
- The Court of Appeal applied Delaware law to the bylaw’s validity (internal affairs doctrine), found no conflict with § 2116 or California public policy, and upheld the stay under section 410.30.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Cal. Corp. Code § 2116 prevents enforcement of a Delaware board‑adopted forum‑selection bylaw | § 2116 gives California shareholders a right to enforce director liability in California courts; enforcing the bylaw would deprive that right | § 2116 codifies the internal‑affairs doctrine and the modern rule allowing California courts to hear such claims but does not create a mandatory California‑forum right that overrides forum‑selection clauses | The bylaw does not conflict with § 2116 or California public policy; enforcement is not barred |
| Whether unilateral (board‑adopted) bylaws are unenforceable because not freely negotiated | Unilateral adoption without shareholder negotiation makes enforcement unreasonable or coerced | Delaware law permits board unilateral adoption; shareholders buying Delaware stock accept that framework and the bylaw is within reasonable expectations; California law does not require negotiation for enforceability | Unilateral adoption does not render the bylaw unenforceable; enforcement was reasonable |
| Whether the bylaw is unreasonable as to claims predating its adoption (retroactivity) | Bylaw adopted at merger approval should not apply retroactively to accrued/known claims | Timing alone does not invalidate enforcement; Delaware and other courts have applied bylaws to pre‑existing claims to consolidate litigation | Timing did not make enforcement unreasonable; bylaw may apply to merger‑related claims |
| Whether defendants’ prior litigation/activity in California estops them from enforcing the bylaw | Defendants sought benefits of California litigation and settlement activity, so invoking the bylaw later is unfair | Defendants’ limited California activity was due to settlement efforts, court scheduling, and plaintiff’s amended complaint; they did not engage in extensive litigation that would make enforcement unfair | Defendants’ conduct did not render enforcement unreasonable under Trident Labs standard; stay affirmed |
Key Cases Cited
- Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch.) (facially valid under Delaware law of board‑adopted forum‑selection bylaws)
- City of Providence v. First Citizens BancShares Inc., 99 A.3d 229 (Del. Ch.) (bylaw can apply to claims that arose before adoption)
- Smith, Valentino & Smith, Inc. v. Superior Court, 17 Cal.3d 491 (Cal.) (party opposing enforcement bears burden to show unreasonableness; trial court’s discretion to stay based on forum clauses)
- Verdugo v. Alliantgroup, L.P., 237 Cal.App.4th 141 (Cal. Ct. App.) (forum clauses unenforceable if they diminish unwaivable statutory rights; shifts burden to enforcing party)
- Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (U.S.) (nonnegotiated forum‑selection clauses are not per se unenforceable; subject to fairness review)
- Trident Labs, Inc. v. Merrill Lynch Commercial Finance Corp., 200 Cal.App.4th 147 (Cal. Ct. App.) (extensive prior litigation in the forum can make later enforcement of a forum clause unreasonable)