In January 2018, six amendments were made to the New Jersey Business Corporation Act. One authorizes New Jersey corporations to adopt what is often referred to as a forum selection by-law. Delaware has also authorized its corporations to adopt a forum selection clause, either in the Certificate of Incorporation or the by-laws.

Like a corporation's Certificate of Incorporation, its by-laws, whether adopted by the shareholders or the board of directors, is also a contract between and among the shareholders. By-laws express the will of at least the majority and bind the minority as well as shareholders who subsequently acquire shares. A well-drawn forum selection by-law requires a shareholder, who desires to assert a claim involving the internal affairs of the corporation or against its current or former directors and officers for breach of fiduciary duty, to bring the action only in a New Jersey state court or the federal court in New Jersey. The by-law may further provide for the recovery of costs and reasonable attorney fees when the forum selection clause is violated.

Internal affairs are matters that pertain to the relationships between and among the corporation and its shareholders, directors and officers. The Internal Affairs Doctrine, a long-standing principle of corporate law in many states, provides that the law of the state of incorporation controls the internal affairs of corporate governance. The rationale behind the doctrine is that only one state should have the authority to regulate a corporation's internal affairs so that its officers and directors know what law will be applied to their actions, and the corporation's shareholders will know by what standards the management of the corporation will be measured.

When a corporation is subject to jurisdiction in states other than its state of incorporation, lawsuits challenging its internal affairs, or action the corporation has (or has not) taken, may be brought in different states simultaneously by different shareholders. This may engender a rush to the local courthouse to gain the advantage of being “first to file.” Forum shopping also becomes a possibility when an aggrieved shareholder's choice of jurisdiction is based on the view that the law of the chosen state is more favorable regarding the issue to be litigated. Some cases, but not necessarily all, present genuinely credible claims, but whether a valid grievance or a “strike” suit, the corporation must defend. The defense may be successful, but even if the plaintiff proves its case—or, more likely, extracts a settlement—the result may provide little, if any, benefit to the corporation or the plaintiff. Nonetheless, the corporation foots the bill for the defense costs, the settlement amount, and the plaintiff's attorney fees allowed. This creates in an indirect burden on the other shareholders.

The authorization granted to New Jersey corporations to adopt and enforce a forum selection clause is designed to remediate both the evil of forum shopping and the potential necessity of the corporation having to defend the same issue in actions brought in multiple jurisdictions with the possibility of inconsistent results. With a forum selection clause in the corporation's by-laws, whether its shareholders reside in New Jersey, Idaho or Alabama, a claim asserted involving the corporation's internal affairs or the action or inaction of its board of directors or officers that affects the shareholders generally must be brought in New Jersey.

Forum selection is not a new concept. Before it became part of corporate law, it was (and remains) common for parties executing commercial contracts to provide not only for the choice of law to govern their disputes, but also their choice of the jurisdiction in which controversies are to be decided. As a general matter, contractual forum selection clauses have been enforced unless it would be unreasonable to do so. A forum selection clause reverses the presumption favoring the plaintiff's choice of jurisdiction, a presumption which places the burden of challenging jurisdiction on the defendant. Instead, the clause shifts the burden to the plaintiff to prove why the by-law should not be enforced.

In two decided cases dealing with corporate, as distinguished from contract, forum selection provisions, the issue was not so much the validity of the provision, but rather whether an exception embodied in the terms of the clause, limiting its enforceability, should be applied. Both cases involved Delaware corporations, one with a forum selection clause in its Certificate of Incorporation, the other in its by-laws. In both cases, the clause required that Delaware had to have personal jurisdiction over all indispensable parties named as defendants. In each case, the plaintiff had named as an additional defendant a party not subject to jurisdiction in Delaware.

In Bushansky v. Patrick Soon-Shiong, 23 Cal. App. 5th 1000 (Cal. App. 2018), the additional defendant was the corporation's accountant, who consented to jurisdiction promptly after the filing of the complaint. The court held that the accountant's consent satisfied the clause's requirement and was sufficient to enable the court to enforce it. The dismissal of the California action by the court below was affirmed.

The California court considered the other case, a Washington Court of Appeals decision to the contrary, and rejected its reasoning. The Washington court had held that jurisdiction was determined on the facts existing on the date of the filing of the complaint, and that any subsequent consent to jurisdiction by the additional defendant was insufficient to render the clause enforceable.

Both cases refer to the difference between forum selection clauses that are mandatory, as distinguished from those that are permissive. A court in another case, one involving a contract, said that the presumption of enforceability of a forum selection clause applies only if the clause is mandatory. It defined a mandatory clause as one that requires litigation to occur in a specified forum, and a permissive clause as one that permits litigation to occur in the specified forum but does not bar litigation elsewhere.

In addition to being mandatory, the terms of the clause should be explicit. For example, the essence of a Third Circuit decision in a contract case is that if the forum selection clause is to encompass arbitration, it should say so.

As to a New Jersey corporation adopting an exclusive forum selection provision as part of its initial by-laws, the statutory amendment provides that all of its current and former directors and officers are deemed to have consented to personal jurisdiction in the selected forum. If, however, the by-law is added by amendment, forum selection and the deemed jurisdiction provisions apply only to actions commenced after the date of the amendment and asserting claims arising after that date.

A well-drawn, mandatory forum selection by-law for a New Jersey corporation should result in actions involving its internal affairs or against its current or former officers and directors for breach of fiduciary duty being brought only in New Jersey, either in the state's courts or the United States District Court for the District of New Jersey. A by-law of this nature, while potentially resulting in difficulty or inconvenience to some shareholders, is intended to benefit the corporation and its other shareholders.

Another of the recent amendments to the New Jersey Business Corporation Act should be considered in tandem with forum selection. In 2013 the Legislature repealed N.J.S.A. 14A:3-6 and replaced it with N.J.S.A. 14A:3-6.1 to 6.9. (the “New Statute”) presumably to place tighter restrictions on the bringing and maintenance of derivative and class actions. The New Statute, however, by its terms, applied only to those New Jersey corporations that would “opt in,” that is make the New Statute's provisions expressly applicable in their respective Certificates of Incorporation. Consequently those corporations which, through ignorance, disinterest or purposeful choice, failed to adopt the New Statute were left—other than with guidance provided in the Rules of Court—with no statutory provision dealing with the corporate requirements for derivative and class actions. These corporations were thrown back on pre- 1945 common law. The 2018 amendment corrects this by removing the “opt in” requirement. Now, except for its fee shifting and security for costs aspects, which still require that they be expressly adopted in the Certificate of Incorporation, the New Statute is applicable to all New Jersey corporations. Instead of being required to “opt in,” New Jersey corporations may, if they choose, “opt out” in whole or in part.

Business lawyers should consider both of these amendments for their corporate clients. Litigators considering action against a New Jersey corporation should also take note.

Stuart L. Pachman is a member of Brach Eichler in Roseland and has written extensively on business law issues. He is the author of Title 14A Corporations published by Gann Law Books.