Saturday, November 28, 2020

Litigation Limits in Corporate Constitutive Documents – the Uber Case

This holiday weekend, I continue my blog series on the March of Litigation Limits in Corporate Constitutive Documents (most recent prior posts here, here, and here – and those link back to earlier entries).

In Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the Delaware Supreme Court held that corporate charters may contain provisions selecting federal courts as the forum for Securities Act/Section 11 claims under the federal securities laws.  That, of course, raised the question whether non-Delaware courts would treat these provisions as enforceable.

We have two rulings on that so far: In September, there was Wong v. Restoration Robotics, Case No. 18CIV02609 (Cal. Sup. Ct. Sept. 1, 2020), and then, earlier this month, we got In re Uber Technologies Securities Litigation, Case No. CGC19579544 (Nov. 16, 2020) (more details on the Uber case available at Kevin LaCroix’s blog post).

Both courts, correctly in my view, recognized that the enforceability, or not, of these provisions is not a matter of internal affairs and is therefore not governed by Delaware law.  Instead, both applied California law.  After that, both courts examined California contract doctrine and concluded that the provisions were not unconscionable or otherwise unreasonable/void as against public policy, and therefore were enforceable against the plaintiffs. 

What both courts skimmed over, however, is whether corporate charters and bylaws should be treated as contracts in the first place.  As regular readers know, I have argued that there are major differences between the legal regime that governs corporations, and the legal regime that governs contracts.  See Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, 104 Geo. L.J. 583 (2016).  Corporate law is entangled with state imposed fiduciary obligations that place limits on directors’ ability to propose, and enforce, forum provisions, and corporate law also places sharp limits on the ability of shareholders to act.  Both of these aspects of corporate doctrine render it a poor analogy to contract law.  For example, corporate law specifies the manner by which bylaws and charters may be amended; contract doctrine has no such strictures.  Corporate law cares about conflicts of interest; contract doctrine expects each party to act selfishly. So there are all kinds of questions raised when corporate provisions are treated as contractual, like: Do directors operate under a conflict of interest when they invoke a litigation limit against a plaintiff?  Should holders of nonvoting shares be treated as equally bound as holders of voting shares?  If the provision is in a director-enacted bylaw, does that affect the analysis of whether a binding contract has been formed?  What if there are supermajority voting requirements, or other limits on shareholder governance rights, which inhibit shareholders’ ability to  modify a forum provision imposed by directors?  What if those limits, while legal in the state of incorporation, would be prohibited under the corporate law of the state whose contract law is being applied? 

Crucially, neither the Wong nor the Uber courts tried to engage these questions.  Uber briefly cited to a California case for the proposition that “whether a set of bylaws constitutes a contract turns on whether the elements of a contract are present,” which is true as far as it goes, but (1) Uber’s forum provision was not in the bylaws – it was in the charter; (2) the case on which the Uber court relied – O'Byrne v. Santa Monica-UCLA Medical Center, 94 Cal. App. 4th 797 (2001) – involved associational bylaws, not corporate bylaws, a difference that apparently escaped the court; and (3) the court’s only examination of whether the “elements of a contract” were met involved a fleeting reference to consent, rather than a full-blown analysis of how the corporate legal framework differs from the contractual one.

All of which is to say, I’m afraid that courts’ failure to grapple with this issue is sleepwalking us into a regime where contract law and corporate law really will collapse, in a manner that will render the latter incoherent.

Ann Lipton | Permalink


I, too, find this whole organic-documents-as-contracts matter perplexing. Having thought through some of the arguments relating to LLC operating agreements as contracts in a piece I wrote a few years ago (and left the deeper thinking for another day), I find myself suitably certain that charters and bylaws are not contracts but that they may be explained and analyzed using certain contract interpretation rules (or in a manner similar to a contract) when the situation warrants. I may need to get back into this debate at some point, when I can find the space and time to do that.

I appreciate the post and share your concern and questions, Ann.

Posted by: joanheminway | Nov 28, 2020 5:15:37 PM

Thanks, Joan! I think LLCs present a very different question, absolutely - but the thing that really worries me in these cases - Wong and Uber, and the Boeing case I blogged about earlier - is that courts are barely even asking the question, it's just assumed.

Posted by: Ann Meredith Lipton | Nov 28, 2020 5:18:09 PM

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