Forum Selection Clause in Articles of Incorporation Is Valid Despite Dispute Over Meaning of Translation from German

On August 19, 2022, Justice Chan of the New York County Commercial Division issued a decision in Cattan v. Vasella, 2022 NY Slip Op 32814(U) holding that a forum selection clause requiring that the dispute be resolved in Switzerland was valid despite the interpretation of the German translation of portions of the clause implying that it did not govern disputes between the corporation and a corporate officer or director, stating:

As a threshold matter, the movants argue that this action must be dismissed because Article 39 of Novartis's Articles of Incorporation, the forum selection clause, requires that plaintiffs bring this action in Switzerland.

In opposition, plaintiffs argue that Article 39 does not apply to this action because the term "shareholdership," or "corporate relationship" as translated from the German text, is limited to matters between [*5] shareholders and the corporation and does not encompass disputes between the corporation (with shareholder plaintiffs as proxy) and a corporate officer or director. In a recent decision of the Commercial Division, Justice Jennifer Schecter rejected the same argument, holding that "[b]oth directors and shareholders have a 'corporate relationship' with [the company]" and the forum selection clause "necessarily covers disputes between the corporation and its directors arising out of acts taken in their fiduciary capacity because they stem from the corporate relationship" (Caftan v Ermotti, 2021 WL 6200975, *1 [Sup Ct, NY County, Dec. 30, 2021] [addressing a similar forum selection clause in a Swiss company's Articles of Incorporation that contains the phrase "any disputes arising out of the corporate relationship"]). Justice Schecter's reasoning is compelling—shareholder derivative actions necessarily arise from corporate relationship since internal corporate disputes against corporate directors and officers are predicated on their status as the company's governing bodies, and "the aggrieved party in such a dispute is usually a shareholder of the corporation" (FDIC v Raffa, 882 F. Supp. 1236, 1246 [D Conn 1995]).

Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding these issues. Click here to subscribe to this or another of Schlam Stone & Dolan's blogs.