Opinion
A161727
11-16-2021
BRUCE GOLDSTEIN, Plaintiff and Appellant, v. ADAM NEUMAN et al., Defendants and Respondents.
NOT TO BE PUBLISHED
(City & County of San Francisco Super. Ct. No. CGC-19-580474)
POLLAK, P. J.
Plaintiff Bruce Goldstein appeals an order granting a motion to stay his action for corporate waste against The We Company (the company) on the basis of inconvenient forum (Code Civ. Proc., § 410.30). He contends the trial court erred by enforcing the company's forum selection bylaw. We find no error and, accordingly, shall affirm the order.
Background
The company is a Delaware corporation that provides coworking space to freelancers and small startup companies. In 2019, the company filed registration papers with the Securities and Exchange Commission announcing its intention to conduct a public offering of the company's securities. In the fall of 2019, however, the company instead entered an agreement with its largest investor to raise its needed capital.
On November 4, 2019, a company stockholder named Natalie Sojka filed the present individual, putative class, and derivative action asserting claims for breach of fiduciary duties and corporate waste in connection with, among other things, the aborted initial public offering.
Defendants include the company, Adam Neumann, the controlling shareholder of the company, and numerous company directors including, Bruce Dunlevie, Ronald Fisher, Lewis Frankfort, Steven Langman, Mark Schwartz, John Zhao, Masayoshi Son, and Softbank Group Corporation.
On November 14, 2019, the company adopted a bylaw requiring its stockholders to bring all internal corporate claims in the Delaware Court of Chancery. The company gave notice of the bylaw's adoption to its stockholders on December 2, 2019.
The bylaw provides, in relevant part: "[T]he Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder, employee or agent of the Company to the Company or the stockholders, (iii) any action asserting a claim against the Company or any director, officer, stockholder, employee or agent of the Company arising out of or relating to any provision of the General Corporation Law of the State of Delaware or the Company's Certificate of Incorporation or these Bylaws or (iv) any action asserting a claim against the Company or any director, officer, stockholder, employee or agent of the Company governed by the internal affairs doctrine of the State of Delaware."
In January 2020, Sojka was granted leave to file an amended complaint. The amended complaint alleges identical claims but substitutes Goldstein for Sojka as the named plaintiff.
The amendment also added a second plaintiff against whom the company successfully compelled arbitration and who is not a party to the appeal.
On January 24, 2020, the company filed a motion to stay or dismiss the action on the ground of inconvenient forum pursuant to the company's newly adopted forum selection bylaw. In opposition, plaintiff argued that the bylaw could not be applied retroactively to an already pending action. He asserted that the case involves a single "action" that was filed before the bylaw was adopted, or alternatively, if the amended complaint is considered a new "action" it should be treated as having the original filing date under the "relation back" doctrine. Plaintiff also argued that defects in the process by which the bylaw was adopted precluded its enforcement.
After considering supplemental briefing on the validity of the bylaw's adoption, the court issued an order granting the company's motion to stay. The court held that the forum selection bylaw was valid, that the bylaw was binding on plaintiff because he filed his action after the company adopted the bylaw, and that enforcement of the bylaw in this case was not unreasonable or unfair.
Plaintiff timely filed a notice of appeal.
Discussion
"The proper procedure for enforcing a contractual forum selection clause in California is a motion pursuant to [Code of Civil Procedure, ] section 410.30. [Citation.] That provision codifies the forum non conveniens doctrine, under which a trial court has discretion to decline to exercise its jurisdiction over a cause of action that it believes may be more appropriately and justly tried elsewhere. [Citations.] Where a section 410.30 motion is 'based on a forum selection clause[, ] . . . factors that apply generally to a forum non conveniens motion do not control . . . .' [Citation.] Instead, 'the test is simply whether application of the clause is unfair or unreasonable[; if not, ] the clause is usually given effect.'" (Drulias v. 1st Century Bancshares, Inc. (2018) 30 Cal.App.5th 696, 703, fn. omitted (Drulias.).)
Here, plaintiff challenges the validity of the bylaw under Delaware law and argues that, even if valid, enforcement of the bylaw in this case is both contrary to law and unreasonable because the litigation was commenced before the bylaw was adopted.
We review the trial court's factual determination that the bylaw was enacted in accordance with Delaware law for substantial evidence. (Vita Planning & Landscape Architecture, Inc. v. HKS Architects, Inc. (2015) 240 Cal.App.4th 763, 771-772.) Plaintiff's legal arguments regarding the retroactive application of the forum selection bylaw are reviewed de novo. (Intershop Communications AG v. Superior Court (2002) 104 Cal.App.4th 191, 199.) The court's determination that enforcement in this case is not unreasonable is reviewed for an abuse of discretion. (Ibid.)
1. The forum selection bylaw was enacted in accordance with applicable Delaware law.
Plaintiff acknowledges that Delaware law permitted the company to adopt the bylaw without a shareholder or board of directors meeting and without prior notice, upon receipt of signed written consents from the requisite number of shares of the company's capital stock. (8 Del. Code, § 228; Drulias, supra, 30 Cal.App.5th at pp. 705-707 [a forum selection bylaw adopted by a Delaware corporation without stockholder consent is enforceable in California].) Plaintiff further acknowledges that the record contains written consents signed by three entities "who collectively hold 'a requisite number of shares of the requisite classes of the company's capital stock.'" He argues, however, that these documents fail to establish compliance with subdivision (c) of section 288, which requires that all written consents be delivered to the company "within 60 days of the first date on which a written consent is so delivered to the corporation."
Plaintiff correctly points out that two of the three documents are not dated, but declarations submitted by two company officers establish that the written consents were delivered within the requisite time period. As the trial court explained, "The Salisbury Declaration provides: 'On November 14, 2019, The We Company adopted a forum selection bylaw specifying, among other things, that derivative suits brought on behalf of the company, and stockholder suits alleging a breach of fiduciary duty by the company's directors, officers, or stockholders, must be brought in the Delaware Court of Chancery. This forum bylaw was adopted by unanimous written consent of the company's board of directors, and was ratified by stockholders of the company representing a majority of the outstanding shares of the company's senior preferred stock.' The Salisbury declaration appends documentation showing that each director had consented to the adoption of the company's forum-selection bylaw by November 13, 2019. The Salisbury declaration also appends documentation showing that the shareholders collectively holding a majority of the outstanding shares of the company's senior preferred stock submitted written consent to the bylaw amendment, one of which was dated November 14, 2019 and the other two of which were undated. The court interprets the Salisbury declaration . . . to mean that the company had received written consents from the three preferred shareholders in question on or before November 14, 2019. The court is also persuaded that none of the written consents were delivered more than 60 days before November 14, 2019 - the bylaws that the preferred shareholders were consenting to amend were themselves only effective on October 30, 2019 and the redline document on the consents themselves reflects changes that were made on November 13, 2019." Plaintiff's suggestion that the company may not have received the written consents until after notice was given to the shareholders in December is purely speculative. Substantial evidence supports the trial court's finding that the bylaw was validly adopted.
2. Enforcement of the bylaw in this case is not unlawful or unreasonable.
Plaintiff contends that the retroactive enforcement of the bylaw in this case is both unlawful and unreasonable. We disagree.
In Drulias, supra, 30 Cal.App.5th at pages 709-710, the court rejected the argument that "a unilaterally adopted forum selection bylaw cannot reasonably be applied 'retroactively to litigation arising out of conduct that occurred before shareholders had notice of the bylaw and an opportunity to walk away.'" The court observed that "there is nothing inherently unreasonable about enforcing a forum selection bylaw adopted after the alleged wrongdoing." (Id. at p. 709, citing North v. McNamara (S.D. Ohio 2014) 47 F.Supp.3d 635, 644 ["forum-selection bylaw does not become unenforceable simply because it was adopted after the purported wrongdoing"]; City of Providence v. First Citizens BancShares Inc. (Del.Ch. 2014) 99 A.3d 229, 241 [rejecting argument that forum selection bylaw could not be applied to claims that arose before it was adopted]; In re: CytRx Corp. Stockholder Derivative Litig. (C.D. Cal., Oct. 30, 2015, No. CV 14-6414-GHK (PJWx)) 2015 U.S. Dist. Lexis 176966, p. *16 ["the timing of a forum-selection clause's adoption does not dictate the clause's validity"].)
In Drulias, the defendant adopted the forum selection bylaw concurrently with the approval of a merger agreement. The court explained that "valid reasons" existed for defendant's action:" 'Today, the public announcement of virtually every transaction involving the acquisition of a public corporation provokes a flurry of class action lawsuits alleging that the target's directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price.' [Citation.] Forum selection bylaws have the effect of consolidating such litigation into a single forum, thereby reducing litigation expenses and avoiding duplication of effort (not to mention promoting efficient use of judicial resources), which is beneficial to corporations and their shareholders alike." (Drulias, supra, 30 Cal.App.5th at p. 709.)
While the forum selection bylaw at issue in Drulias was enacted before the litigation was filed, that distinction is not determinative. Plaintiff has not cited, and we have not located, any authority holding that a newly enacted forum selection bylaw cannot be applied to pending litigation as a matter of law.
Cobb v. Ironwood Country Club (2015) 233 Cal.App.4th 960, 966 (Cobb), cited by plaintiff, is not controlling. In that case, the court held that the defendant's amendment of its bylaws to retroactively require arbitration of its members' dispute violated the implied covenant of good faith and fair dealing, where the dispute was already being litigated when the arbitration bylaw became effective. Plaintiff argues by analogy that application of the company's later-enacted forum selection bylaw here similarly "violates the covenant of good faith and fair dealing and does not amount to a legally enforceable agreement." Citing Cobb, he argues that defendants are not permitted to retroactively impair "accrued rights." This argument has been rejected by both California and Delaware courts. (Drulias, supra, 30 Cal.App.5th at p. 710, fn. 7 [noting that Delaware law governs validity of the bylaw and Delaware courts have rejected the argument that unilaterally adopted forum selection bylaws cannot be applied retroactively to accrued or known claims]; see also City of Providence v. First Citizens BancShares Inc., supra, 99 A.3d at p. 241 [contention that the forum selection bylaw cannot be enforced because it seeks to regulate the forum for asserting claims that arose before it was adopted "is simply a dressed-up version of the 'vested right' doctrine that was soundly rejected [in court's prior decisions]," citing Kidsco Inc. v. Dinsmore (Del.Ch. 1995) 674 A.2d 483, 492 ["[W]here a corporation's articles or bylaws 'put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment.' "]; Boilermakers Local 154 Retirement Fund v. Chevron Corp. (Del.Ch 2013) 73 A.3d 934, 955 [same].)
In the trial court, plaintiff also relied on Cobb to argue that "there is nothing in the language of either the bylaws generally, or this specific amendment, that states it is intended to have such a retroactive effect." (Cobb, supra, 233 Cal.App.4th at pp. 966- 967.) But the amendment at issue in Cobb, unlike the amendment at issue here, purported "to limit [defendant's] liability, in that it additionally mandates a 'waive[r of] all claims, rights and demands for punitive and consequential damages.'" (Id. at p. 968.) As quoted more fully above, the company's forum selection bylaw merely provides that Court of Chancery of the State of Delaware "shall be the sole and exclusive forum" for "any" qualifying action. It makes no attempt to limit plaintiff's vested rights and thus, can fairly be read to apply to all actions, pending or not yet filed.
Plaintiff argues that permitting enforcement of a forum selection bylaw to pending litigation, "if taken to an extreme, could lead to serious abuse." He continues, "What would stop a company from unilaterally adopting a forum bylaw any time it is sued in a forum that it does not like? Or from litigating a lawsuit on the merits and then, if it is losing, unilaterally adopting a forum bylaw and moving to dismiss or stay on that basis? Or, if things are not going well in Delaware, from passing yet another forum bylaw saying all claims must be brought in Nevada, the Cayman Islands, or some other jurisdiction? Under each scenario, plaintiffs would be forced to dismiss their claims and file in the new forum regardless of the time and costs expended on litigating in the original forum. The court can and should avoid such absurd results by finding that enforcement of a later-enacted forum bylaw is categorically unfair and unreasonable when an action subject to the forum bylaw is already pending in another court."
Contrary to plaintiff's suggestion, defendants did not "concede" that the forum bylaw cannot be retroactively applied to an already-pending action. Defendants noted in response to plaintiff's "parade of horribles," that it "ha[d] never argued that its forum selection bylaw can apply retroactively to already-filed litigation-that is why the company never tried to enforce the bylaw against Sojka before she abandoned her claims. Instead, the company has only argued that the bylaw applies to new plaintiffs-like appellant-who seek to bring internal corporate claims after the bylaw took effect."
Undoubtedly, circumstances may demonstrate that application of a newly enacted forum selection bylaw to pending litigation would be unfair and unreasonable. (See, e.g., Trident Labs, Inc. v. Merrill Lynch Commercial Finance Corp. (2011) 200 Cal.App.4th 147, 152, 157 [enforcement of a forum selection clause calling for litigation in Illinois was unreasonable where defendant had filed an answer and a counterclaim; engaged in "substantial discovery"; moved for judgment on the pleadings; and demurred to the plaintiff's first amended complaint].) But, as discussed post, plaintiff has not met his burden of proof in that regard in this case. (See Drulias, supra, 30 Cal.App.5th at p. 703 ["Ordinarily, the party seeking to avoid enforcement of a forum selection clause bears the 'burden of establishing that [its] enforcement . . . would be unreasonable.' "].)
Plaintiff argues that "[i]t would be unreasonable and unfair, not to mention unduly burdensome, to require [him] to re-file a new action in Delaware after years of litigation and to start from scratch, after significant costs have already been incurred in prosecuting the action in California." While that may be so, the adoption of the bylaw and its application here do not come after "years of litigation" but at the outset of the case, before discovery or the consideration of any motions other than the stay motion. The bylaw was adopted within weeks of the filing of the original complaint. Plaintiff joined the action by amended complaint two months after the bylaw was adopted and with notice that the company intended to enforce it against him. As the trial court found, "Plaintiff['s] decision to crawl into the shell left behind by Sojka gives [him] no special protection. A contrary result would unfairly exalt form over substance, allowing plaintiff[] to nullify the company's legal rights by means of procedural gamesmanship."
The trial court did not err in finding application of the bylaw here to be reasonable and granting defendants' motion to stay.
In light of this conclusion, we do not reach plaintiff's arguments regarding the date by which his action should be deemed to have commenced.
Disposition
The order granting a stay is affirmed. Defendants shall recover their costs on appeal.
WE CONCUR: STREETER, J. BROWN, J.