Control of Forum in Derivative Actions

By Brian J. Robbins and Gregory E. Del Gaizo

Oracle Corp. is based in Redwood City. Every year, Oracle holds its annual shareholder meeting at its executive headquarters in California. By any measure, the nerve hub of Oracle is California. Therefore, if an executive or director of Oracle is going to be sued for breaching his fiduciary duty, the lawsuit must be brought in ... Delaware? Though it seems counter intuitive, that is the current argument Oracle is making in a shareholder derivative action presently being litigated in the U.S. District Court for the Northern District of California before Judge Richard Seeborg in Galaviz v. Berg , C 10-3392 RS. In a matter of first impression, Oracle is moving to dismiss the action because a bylaw amendment approved by its board of directors in 2006 mandates a shareholder can only sue fiduciaries in Delaware for breaching their duties. The outcome of this motion will likely have wide-ranging effects on corporate litigation throughout the country.

On March 16, Vice Chancellor J. Travis Laster of the Delaware Chancery Court issued the opinion In re Revlon, Inc. Shareholders Litigation, 990 A.2d 940, which immediately became one of the most widely discussed rulings concerning fiduciary duty litigation in recent memory, mostly because Laster took the unusual step of replacing the lead plaintiffs' counsel. He took umbrage with the plaintiffs' counsel's litigation of the case, in particular, the lack of expediency in which they handled the matter before coming to a settlement. In Revlon , Laster addressed the argument that his opinion might cause plaintiffs to file in other jurisdictions besides Delaware. In a footnote, he stated that corporations could prevent this occurrence by creating or amending articles of incorporation to include charter provisions that select an exclusive forum for intra-entity disputes.

The commentary on Revlon has been, for the most part, focused on the vice chancellor's comments about plaintiffs' counsel. A quiet revolution, however, has been occurring in the corporate world since the vice chancellor issued the decision. According to a lecture given to the Delaware corporate bar by professor Joseph Grundfest of Stanford Law School, since Revlon , at least 23 different companies have adopted, or are in the process of adopting, forum selection provisions, either through amendments to bylaws or articles of incorporation. The most notable company that recently adopted one of these forum selection clauses is Chevron Corp., the San Ramon-based oil giant.

Though Revlon was decided this year, certain companies have had a similar type of jurisdictional provision in their bylaws or articles of incorporation for years, including Oracle. According to the litigants in Galaviz , on June 9 and 10, 2006, the Oracle board met at the Half Moon Bay Ritz-Carlton and voted to amend Oracle's bylaws to state that any derivative action must be brought in Delaware Chancery Court. In particular, the bylaw stated, "the sole and exclusive forum for any actual or purported stockholder derivative action brought on behalf of Oracle be the court of Chancery in the State of Delaware." According to the plaintiff in Galaviz , the board adopted this bylaw amendment soon after final approval of a settlement in a derivative action that had Oracle's CEO Larry Ellison pay $122 million.

The parties have fully briefed the motion to dismiss in Galaviz. Oracle has mainly relied on Revlon and cases dealing with forum selection clauses in contracts. Plaintiffs, in turn, have pointed out that Laster told corporations to amend their articles of incorporation, not bylaws. They claim that the amendment to the bylaws limits Oracle's shareholders' rights, which can only be done through an amendment to the company's articles of incorporation under Delaware law.

Importantly, amending the company's articles of incorporation would have required a shareholder vote, while the board can amend bylaws without shareholder input. In addition, by amending the company's bylaws, instead of seeking out shareholder approval through a change in the Oracle's articles of incorporation, defendants are attempting to force shareholders to adhere to a clause which they did not negotiate or agree to, unlike most forum selection clauses. The plaintiffs have also pointed out that much, if not all, of the alleged wrongdoing at issue in Galaviz occurred before the board amended the bylaw. Lastly, the plaintiffs in Galaviz argue that the forum selection clause is inequitable since it will discourage the pursuit of derivative claims by increasing the difficulty and costs of litigation.

A decision denying the motion to dismiss will likely slow the current trend of amending bylaws or articles of incorporation to contain an exclusive jurisdiction clause. If Judge Seeborg grants the motion, however, boards of directors will move even faster to amend their bylaws. Such measures would represent a profound shift in the way derivative actions are litigated. Under these new amendments and clauses, potential defendants, through their control of the real plaintiff, the company, would essentially be choosing where they get to be sued, and plaintiff's choice of forum and the difficulties in litigating in foreign states would be given no consideration.

Further, the approval of this type of amendment to a company's articles of incorporation or bylaws leaves substantial questions unanswered. For instance, imagine if a shareholder were to name as a defendant an officer that was not subject to personal jurisdiction in the state that the board chose as the exclusive jurisdiction for derivative actions. In such a scenario, this particular officer may be able to breach his fiduciary duty without a shareholder having any recourse for holding the officer accountable for his or her misconduct.

Also, there appears to be no requirement that the board choose the state of incorporation as the exclusive jurisdiction for derivative actions. Since a bylaw amendment does not require shareholder approval, the board could just as easily pick someplace that would increase the challenges and costs for a shareholder to bring litigation in that forum, such as in a foreign country. Finally, this type of amendment would put into question how courts and parties would handle federal claims if the exclusive jurisdiction chosen was not a federal court. For example, Oracle does not carve out in its bylaws that a shareholder is allowed to bring federal derivative claims in federal court. In fact, though the parties in Galaviz agree that the Northern District of California has subject matter jurisdiction of the case, defendants claim that the matter can only be brought in Delaware. Therefore, if an Oracle-type of bylaw is upheld, state courts would either decide federal law claims or shareholders' claims would be prevented from being heard, abridging shareholders' ability to hold corporate fiduciaries accountable for their actions.

A decision on Oracle's motion to dismiss is expected soon. Regardless of Seeborg's decision, however, it is highly likely that his ruling will not be the last word on this matter. Considering the parties involved and the importance of the issues, an appeal of the decision seems assured regardless of how it is decided.

Reprinted with permission from the December 10 issue of The Recorder. © 2010 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

* The firm name changed from Robbins Umeda LLP to Robbins LLP on January 1, 2013.