Galaviz v. Berg: Corporations Cannot Dictate Forum Selection Unilaterally Through Bylaws (Part 2)

In Galaviz v. Berg, No. C 10-3392 RS (N.D. Cal. Jan. 3, 2011), Prince and Galaviz (“Plaintiffs”), filed separate yet similar actions against Oracle Corporation, asking the court to hold directors of Oracle personally liable for breach of fiduciary duty and abuse of control. Oracle, as the nominal defendant, sought dismissal of the case, alleging improper venue. In doing so, the company pointed to a corporate bylaw that required all actions brought against Oracle or its directors in their individual capacity to be brought in the Delaware Court of Chancery.

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Because venue provisions in contracts were routinely given effect, the same outcome was required for the bylaw. The court, however, disagreed.  Oracle argued that the bylaws were analogous to a contract with its shareholders.

The court noted that the adoption of amendments to the bylaws required application of corporate law principles. Bylaws could be adopted by the board, without the consent of shareholders.  As the court described:

• May corporate directors control the venue for shareholder derivative actions brought against them by adopting a bylaw purporting to require that such cases be filed in a particular forum?  Under federal procedural law that controls such venue issues, parties may enter into contracts— including those where elements of adhesion exist— that contain legally enforceable forum selection clauses. . . . A bylaw unilaterally adopted by directors, however, stands on a different footing. Particularly where, as here, the bylaw was adopted by the very individuals who are named as defendants, and after the alleged wrongdoing took place, there is no element of mutual consent to the forum choice at all, at least with respect to shareholders who purchased their shares prior to the time the bylaw was adopted.

In the absence of consent, the court declined to treat the bylaw as a contract.   

Defendant also asserted that the bylaw was invalid because the board lacked the authority to adopt it.  The court did not resolve the issue but noted that even if directors had the requisite authority, federal courts were not obligated to follow it.

• Even assuming, however, that the directors had the power to adopt a bylaw of this nature in the abstract, the enforceability of a purported venue requirement is a matter of federal common law. . .   Oracle has not shown federal law requires or even permits the federal courts to defer  to any provision of state corporate law that might purport to give a corporation's directors the power to control venue under the circumstances discussed above. . . . 

The court, therefore, denied the motion to dismiss on the basis of improper venue. The primary materials for this case may be found on the DU Corporate Governance website.