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Corporate directors may be the overlords of the companies whose boards they sit on, but they don’t have the power to control the venue for derivative suits against them, according to a decision Monday in a San Francisco federal district court shareholder suit against Oracle’s directors. Judge Richard Seeborg’s ruling, which addresses a question of first impression, is a big blow for Oracle, which had invoked a forum-selection provision in its bylaws in moving to dismiss two derivative suits involving allegations that Oracle fraudulently bilked the government out of millions of dollars by overcharging for software and licenses. If those allegations sound familiar, it’s because they’re the focus of a 2007 whistleblower suit against Oracle, which the government joined in July 2010. As we reported last year, qui tam relator Paul Frascella and his London Mead lawyers accuse Oracle of scheming to deceive the government about discounts it gave commercial customers for its products. (A hearing on Oracle’s motion to dismiss the government’s amended complaint is set for Jan. 14; Oracle is represented by Arnold & Porter in the False Claims Act case.) Just weeks after the government intervened in the FCA case, shareholders represented by Cotchett, Pitre & McCarthy and California solos Jerry Cimmet and John Kelson filed derivative suits in San Francisco state and federal court. (The state court case was later removed to federal district court.) The derivative suits seek to hold various Oracle directors liable for breach of fiduciary duty and abuse of control in connection with the alleged government overbilling scheme. Oracle’s lawyers at Morrison & Foerster moved to dismiss both suits in October, citing a 2006 amendment to the company’s bylaws mandating that any derivative suits must be brought in Delaware Chancery Court. MoFo argued that the forum selection provision in the bylaws was properly adopted and that federal courts have a strong policy of enforcing such provisions to avoid duplicative litigation. But in an eight-page opinion and order denying Oracle’s motions, Judge Seeborg ruled that only contractual agreements designating a forum for derivative litigation–and not corporate bylaws adopted by directors–are enforceable under federal law. “A bylaw unilaterally adopted by directors…stands on a different footing [from contractual forum agreements],” Judge Seeborg wrote. “Particularly where, as here, the bylaw was adopted by the very individuals who are named as defendants, and after the alleged wrongdoing took place, there is no element of mutual consent to the forum choice at all, at least with respect to shareholders who purchased their shares prior to the time the bylaw was adopted.” The question was one of first impression, the judge noted, since “no court has previously ruled on the enforceability of a venue provision for derivative actions contained in corporate bylaws.” Plaintiffs lawyer Mark Molumphy of Cotchett Pitre told us the ruling establishes an important principle. “The insertion of these forum selection clauses in bylaws, rather than by amending a company’s charter with shareholder approval, has been increasing,” he said. “I think this decision will help to pull the cover off the practice. It shows that passing a bylaw on normal company business is one thing, but when you’re going to pass a bylaw that limits shareholders’ rights, that’s something much different, and I think that’s at the core of the decision.” We left a message with MoFo’s Jordan Eth but didn’t hear back.

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