State company can choose Delaware as exclusive litigation forum, court rules

A state appellate panel has affirmed a Santa Clara County Superior Court ruling finding a company can choose Delaware as its exclusive litigation forum, even though the policy was passed without shareholder consent.

The Dec. 21 ruling by the 6th District Court of Appeal takes on an issue that has been litigated in other states but not previously in California. Drulias v. 1st Century Bancshares Inc., 2018 DJDAR 12232 (Cal. App. 6th Dist. Dec. 21, 2018).

The case dates to the 2016 merger of two financial companies. As part of its proposed merger with Midland Financial Co., the board of 1st Century Bancshares Inc. voted to change its bylaws to make corporation-friendly Delaware its "exclusive litigation forum for intra-corporate disputes." 1st Century is headquartered in California but incorporated in Delaware.

Dean Drulias, a California-based 1st Century shareholder, sued. He claimed the company breached its fiduciary duties and violated California law. The company countered that his claims violated the internal affairs doctrine, which demands any shareholder challenge be heard in Delaware, where the unilateral passage of bylaws is legal.

Justice Franklin D. Elia wrote that the Delaware ruling "does not conflict with California law or public policy." He rejected Drulias' claim that the California's Corporations Code holds "foreign corporations transacting intrastate business" liable to California courts and liability.

Instead, Elia said the code section merely states that California could potentially bar the bylaw change in question, but not that it actually is required to do so.

"Nothing in the provision requires a California court to exercise jurisdiction over such a case where it finds 'that in the interest of substantial justice [the] action should be heard in' another forum," he wrote.

Elia added, "Drulias consented to the board's unilateral adoption of corporate bylaws by purchasing stock."