Federal Forum Provision in Incorporation Document Is Upheld

• Pages: 23-23
• Date: 01 October 2023
• Author: Ashlee E. Hamilton
• Subject Matter: Civil Law

Published in Litigation News Volume 49, Number 1, Fall 2023. © 202 3 by the American Bar As sociation. Reprodu ced with permission . All rights reser ved. This information o r any portion ther eof may not be copied o r disseminated in any form

or by any means or stored i n an electronic database o r retrieval syst em without the expr ess written co nsent of the American B ar Association.

In a case of rst impression, one state court addressed

the enforceability of a federal forum selection provision

in a company’s certicate of incorporation. Businesses

began using such provisions to avoid state courts after

the U.S. Supreme Court upheld the anti-removal pro-

vision of the Securities Act of 1933 in Cyan Inc. v. Beaver

County Employees Retirement Fund. Analogizing the provi-

sion to a forum selection clause, the court declined to exercise

jurisdiction over a shareholder derivative suit. However, ABA

Litigation Section leaders warn that putting a federal forum

provision in corporate documents does not guarantee a fed-

eral forum for securities claims.

In Wong v. Restoration Robotics, Inc., a shareholder led a

class action in California state court alleging the defendant, a

Delaware corporation, and its ofcers and directors violated

the act. The defendant moved to dismiss, asserting that a pro-

vision in its certicate of incorporation specically designated

the federal courts as the forum for any claims arising under

the act and bound all stockholders. Notably, the shareholders

voted on the amendment to the certicate of incorporation

that included the federal forum provision (FFP). In arguing

for dismissal, the defendant relied on the Delaware Supreme

Court’s ruling in Salzberg v. Sciabacucchi, which held that

FFPs are not contrary to Delaware law and that FFPs “do not

offend federal law and policy.”

The trial court explained that Salzberg addressed only a

facial challenge as to whether an FFP could be included in an

article of incorporation under Delaware corporate law and

not its substantive application. Because Delaware corporate

law extends only to a company’s “internal affairs,” and a

shareholder derivative suit against a company and its of-

cers and directors was not an “internal affair,” the trial court

concluded that Delaware law did not apply. It also rejected

Salzberg’s conclusion that FFPs did not contravene federal law

and policy as conclusory and noted that Salzberg did not bind

other states considering whether an FFP might be enforce-

able under the laws of their jurisdictions. Accordingly, the

court concluded that Salzberg was “irrelevant” to determining

whether the FFP was enforceable.

Nevertheless, in the absence of any case on point, the trial

court considered Salzberg’s suggestion to evaluate an FFP’s

enforceability under existing standards for (1) forum selection

clauses, (2) mandatory arbitration provisions, and (3) settlement

releases—but under California law. The court rst reasoned that a

settlement release is not comparable to a “[p]rovision unilaterally

imposed, buried in a multi-pages SEC ling,” observing that pub-

lic policy favors settlements but not involuntary waivers of rights.

Next, the court found that the FFP was unlike a mandatory arbi-

tration provision but suggested that the FFP would be enforceable

under such an analysis.

Rather, the court found the FFP most like a contractual

forum selection clause, observing that the shareholders had

voted on the amended certicate of incorporation that included

the FFP. The court explained that a forum selection clause is

generally enforceable unless its application would be unfair

or unreasonable, and a trial court retains discretion whether

to enforce the clause. In holding that the FFP was enforceable,

the court relied on Drulias v. First Century Bancshares, Inc. In

that case, a California appellate court upheld a forum selection

clause in corporate bylaws that were adopted without share-

holder approval, stating that “[a] forum selection clause need

not be subject to negotiation to be enforceable.”

Noting the circumstances in Drulias were more “unfair,”

the court determined that the plaintiffs had failed to dem-

onstrate the FFP was unfair or unreasonable. Because the

shareholders retained their due process and substantive rights

under the act and did not establish that the FFP violated either

California law or public policy, or that it was unconstitutional

or illegal under federal law, the court declined to exercise

jurisdiction and dismissed the case.

Drafters may begin regularly including FFPs in bylaws and

incorporation documents, according to Litigation Section

leaders. “If you want a chance to avoid litigating a 1933 Act

claim in state court, it is worth taking a crack at including a

provision like this in the bylaws. There is no guarantee that

the law will be interpreted the same in every state and by

every judge, so it is not a bullet-proof means of avoiding state

court,” warns Sean O’D. Bosack, Milwaukee, WI, cochair of

the Section’s Corporate Counsel Committee.

“Without having a good handle on the law of every state, it

is tough to say. It tends to make sense if you are incorporating

in Delaware. Probably in California as well,” advises Joseph

S. Simms, Cleveland, OH, cochair of the Section’s Securities

Litigation Committee.

Some corporations may already be heeding that advice.

Since the ruling in Wong, California courts have upheld FFPs

in two additional cases: In re Uber Technologies Securities,

Litigation andIn re Dropbox, Inc. Securities Litigation.

Federal Forum Provision in

Incorporation Document Is Upheld

By Ashlee E. H amilton, Litigation News Contribut ing Editor

FALL 2023 • VOL. 4 9 NO. 1

23 | ABA LITIGATION SECTIO N

CIVIL PROCEDURE UPDATE