Beware of the Intersection of Corporate and Employment Law
A recent court decision and an employee protection law can lead to some unexpected outcomes. Delaware has given forum selection clauses in stockholder agreements broad new weight under 8 Del. C. 122(18), a law passed in 2024. California prohibits employers from requiring California-based employees to litigate, or apply non-California law to, claims arising in California. For any Delaware corporation with a founder, controlling stockholder, or executive officer stockholder based in California, those two regimes now create a real planning problem. A Delaware court’s recent decision in Masimo Corporation v. Kiani highlights the risk.
The Masimo Decision and Section 122(18)
Masimo’s founder served as CEO and chairman until September 2024. His 2015 employment agreement granted substantial severance and a “Special Payment” on certain terminations. It also required all disputes “arising out of or relating to” the agreement to be brought exclusively in Orange County, California. After an activist contest, the founder resigned for “Good Reason” and sued in California. Masimo countered in Delaware. The Court of Chancery dismissed the Delaware action. It held that Section 122(18) required the employment agreement to be treated as a corporate governance agreement. As a result, the forum selection clause in the employment agreement prevailed, requiring that California courts hear the dispute, despite Masimo’s bylaws dictating that Delaware courts be the forum for such disputes.
The California Section 925 Counterpressure
The immediate response to the Masimo decision may be to ensure that employment agreements have the same forum selection clauses as the company’s bylaws. California Labor Code Section 925, however, cuts in the opposite direction. The statute bars an employer from requiring a California-based employee, as a condition of employment, to adjudicate claims arising in California outside California. It also prohibits requiring the employee to be deprived of the substantive protection of California law. Section 925 contains a narrow exception. It does not apply where the employee was individually represented by legal counsel in negotiating the choice of forum or choice of law term. For a Delaware corporation with a California-based executive who is also a stockholder, these rules collide with Section 122(18) directly. Imposing a Delaware forum in an employment agreement risks a Section 925 challenge.
Practical Implications
Delaware corporations should inventory existing agreements between the corporation and current and prospective stockholders to determine if they trigger Section 122(18). That includes employment, severance, equity, and consulting agreements. Flag the forum, governing law, and dispute-resolution provisions. Close attention should be paid to any agreements with employees based in California or another state with protections similar to Section 925 restricting out-of-state forum selection clauses. As with many contractual issues, a careful review of all relevant laws can avoid unexpected outcomes.
