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January 08, 2016 Practice Points

Forum-Selection Bylaws and Forum Non Conveniens

Many corporations have adopted forum-selection bylaws requiring shareholders to pursue derivative actions in specific jurisdictions

by Allen L. Lanstra

Many corporations have adopted forum-selection bylaws requiring shareholders to pursue derivative actions in specific jurisdictions. In 2013, the Delaware Court of Chancery held in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), that a forum-selection bylaw adopted by the board of directors of a Delaware corporation, which covers derivative actions was valid, binding, and enforceable. Earlier this year, the Delaware legislature effectively codified the Boilermakers decision by expressly allowing for forum-selection provisions governing "internal corporate claims" in the certificate of incorporation or bylaws of a Delaware corporation. See Del. C. § 115.

A federal court faced with a forum-selection bylaw in a derivative case faces jurisdictional issues not shared by state courts. Recently, in In re CytRx Corp. Stockholder Derivative Litigation, the U.S. District Court for the Central District of California dismissed a suit that was required to be filed in the Delaware Court of Chancery under the corporation's bylaw. C.A. 14-6414-GHK (PJWx), slip op. (C.D. Cal. Oct. 30, 2015). Unlike prior courts that addressed the enforceability of a forum-selection bylaw through a Federal Rule 12 motion, the Central District followed the forum non conveniens framework set forth by the United States Supreme Court in Atlantic Marine Const. Co. v. U.S. District Court W.D. Tex., 134 S.Ct. 568 (2013). In Atlantic Marine, the Supreme Courtheld that when a federal court is presented with a forum-selection contractual clause, it should apply a modified version of the doctrine of forum non conveniens—which affords a court the discretionary power to decline jurisdiction for the convenience of the parties, if justice would be served by the action being heard in another forum. The Supreme Court held that under this modified forum non conveniens doctrine, "forum-selection clauses should control except in unusual cases," largely because the two parties to the contract agreed to the expectation of the forum to resolve a dispute. Id. at 581.

In In re CytRx Corp. Stockholder Derivative Litigation, the Central District of California held that the Atlantic Marine framework for forum non conveniens applies equally to forum-selection bylaws. The court agreed with Boilermakers regarding the enforceability of forum-selection bylaws, accepting that the bylaws are consistent with the contractual nature of the corporation-shareholder relationship. The court further determined that the public-interest factors at play in a forum non conveniens analysis did not present one of those "exceptional" or "extraordinary" cases where the forum-selection bylaw should not be enforced. Id. at 8–9.

Keywords: litigation, forum non conveniens, forum-selection, bylaw, derivative, commercial and business

Allen L. Lanstra is with Skadden, Arps, Slate, Meager & Flom LLP, in Los Angeles, California.

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