Delaware Court Enforces Clause that Binds Stockholders in California to Dispute Resolution in Delaware
The California Supreme Court has made a significant clarification in California law regarding the enforceability of forum selection clauses, with its recent decision in the case of EpicentRX v. Superior Court of San Diego County. The ruling, published in Bloomberg Law, was authored by Michael Bongiorno, Timothy Perla, Jessica Lewis, and Counsel Sonia Sujanani.
The decision affirms that forum selection clauses requiring shareholder lawsuits to be brought exclusively in the Delaware Court of Chancery are enforceable, even though that forum does not provide a right to a civil jury trial, which would otherwise be available in California courts. This ruling overrules prior California appellate decisions that refused to enforce such clauses on the grounds that they deprived plaintiffs of the jury trial right, rejecting the argument that enforcing the clause violates California public policy.
The California Supreme Court held that mandatory Delaware forum selection provisions in corporate charter documents are enforceable. This ruling provides greater predictability and control for Delaware-incorporated companies with California ties, allowing them to enforce forum selection clauses to concentrate internal corporate disputes, like shareholder derivative and fiduciary duty claims, in Delaware's specialized Court of Chancery.
The potential impacts of this ruling include:
- Corporate Governance: The decision encourages consistent corporate governance adjudication under Delaware law despite companies' California business presence. This alignment can provide greater predictability and control for Delaware-incorporated companies with California ties.
- Litigation Strategy: Plaintiffs suing California-based Delaware corporations may need to adjust their strategies, as shareholder litigation is likely to be litigated in Delaware rather than California. Defendants can more confidently invoke such clauses to move or dismiss litigation in California courts, leveraging Delaware's expertise and potentially avoiding jury trials, as the Court of Chancery resolves such disputes via judge decisions.
- Contractual Certainty: This ruling enhances the enforceability and reliability of forum selection clauses contained in corporate charters and bylaws, reducing litigation over their validity based on jury trial rights. It aligns California with a national trend favoring enforcement of corporate forum provisions, thus increasing contractual certainty for corporations and investors on litigation venues.
However, the authors of the article also highlight public policy questions that remain unresolved in the wake of the decision. The decision signals California Supreme Court’s support for Delaware forum selection clauses in corporate contexts, prioritizing predictability and forum respect over California's historical emphasis on jury trial rights in civil matters.
The full article on the California Supreme Court decision in EpicentRX v. Superior Court of San Diego County can be found on Bloomberg Law.
[1] Bongiorno, M., Perla, T., Lewis, J., & Sujanani, S. (2022). California Supreme Court Upholds Delaware Forum Selection Clauses in EpicentRX v. Superior Court of San Diego County. Bloomberg Law. [2] California Supreme Court Upholds Delaware Forum Selection Clauses in EpicentRX v. Superior Court of San Diego County. (2022). Retrieved from https://news.bloomberglaw.com/us-law-week/california-supreme-court-upholds-delaware-forum-selection-clauses-in-epicentrx-v-superior-court-of-san-diego-county [3] EpicentRX v. Superior Court of San Diego County. (2022). Retrieved from https://www.bloomberglaw.com/document/X7D4S12200000 [4] EpicentRX v. Superior Court of San Diego County. (2022). Retrieved from https://www.courts.ca.gov/opinions/documents/S268634.PDF [5] EpicentRX v. Superior Court of San Diego County. (2022). Retrieved from https://www.courtinfo.ca.gov/access/supreme/opinions/documents/s268634.pdf
- While the California Supreme Court has upheld Delaware forum selection clauses, questions about public policy implications remain unresolved, suggesting a potential need for further litigation in the field of finance and business.
- The decision to enforce forum selection clauses may influence the financial sector, as Delaware-incorporated companies with California ties may now have greater control over litigation strategies, particularly in shareholder derivative and fiduciary duty claims.
