Corporate Considerations

In an issue of first impression in California, a California appellate court has rejected a shareholder plaintiff’s effort to avoid enforcement of a Delaware company’s forum selection bylaw, despite the shareholder’s arguments that the bylaw was inconsistent with California law and was otherwise unreasonable given the manner and timing of its adoption.  Drulias v. 1st Century Bancshares, Inc., __ Cal.Rptr.3d __, 2018 WL 6735137 (Cal. Ct. App. Dec. 21  2018).  While Delaware law plainly authorizes such forum selection bylaws, this ruling by a non-Delaware court is a welcomed confirmation that these provisions can be enforced in proceedings brought outside of the state.

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Ruling on summary judgment, the Delaware Chancery Court has held that forum selection clauses in three separate companies’ corporate charters requiring that any claims under the Securities Act of 1933 be brought in federal court are “ineffective and invalid.”  Sciabacucchi, et al. v. Salzberg, et al., C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).  In doing so, the court noted that the source of the 1933 Act claims was federal law, distinct from any right created under Delaware law, and thus beyond the power of the companies to control through their bylaws in this manner.

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The Delaware Chancery Court has dismissed an action brought by three plaintiffs’ law firms seeking legal fees in connection with merger litigation that was initially successful, but which ultimately failed on appeal when the transaction closed and the objector lost standing.  Bragar Eagel & Squire, PC, et al. v. Kinder Morgan Energy Partners, LP, et al., C.A. No. 2017-0841-JTL (Del. Ch. Apr. 9, 2018).  The court determined that principles of res judicata required that it reject the firms’ subsequent action to recover fees and that, even if that were not the case, the firms’ prior efforts had not produced a “cognizable benefit” for the objecting plaintiff sufficient to justify a fee award.

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The Delaware Supreme Court, once again addressing questions of issue preclusion in the context of shareholder derivative litigation, has rejected suggestions by the Chancery Court that giving preclusive effect to initial, unsuccessful efforts to litigate demand futility violates the Due Process rights of shareholders attempting to bring a subsequent action elsewhere. California State Teachers’ Retirement System, et al. v. Aida M. Alvarez, et al. and Wal-Mart Stores, Inc., No. 295, 2016 (Del. Jan. 25, 2018).  According to the Court, such issue preclusion does not necessarily violate Due Process rights, at least where the various plaintiffs have a common interest and legal representation is adequate in the initial action.

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In response to the Delaware Supreme Court’s question in connection with remand, the Delaware Chancery Court has suggested reevaluation of its prior willingness to dismiss subsequent derivative litigation where an earlier derivative action has been dismissed due to demand futility.  In re Wal-Mart Stores, Inc. Delaware Derivative Litigation, C.A. No. 7455-CB (consol.), supp. op. (Del. Ch. July 25, 2017).  Where the court previously would dismiss subsequent efforts to re-litigate demand failure, the new approach suggested by the Chancery Court provides that an earlier action should not be given preclusive effect if it failed to survive a motion to dismiss pursuant to Delaware Chancery Court Rule 23.1, the Delaware analog to Federal Rule of Civil Procedure 23.1.

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