The Seventh Circuit recently issued an important decision holding that an exclusive forum provision in a company’s bylaws requiring that all derivative actions be brought in Delaware Chancery Court is unenforceable as applied to derivative cases brought under the federal proxy laws. On its face, Seafarers Pension Plan v. Bradway seems to foreclose the use of exclusive forum provisions for claims for which there is exclusive federal jurisdiction. As the Seventh Circuit notes, that would seem to be consistent with both federal proxy fraud law, which forbids contractual waivers of compliance with the law, as well as Delaware state law. But as discussed below, there is reason to believe that the decision may not be the last word on the topic, and, indeed, that it could end up before the U.S. Supreme Court.
II. The Seventh Circuit’s Opinion
The Seafarers case arose out of the tragic crashes of two Boeing 737 MAX jets, and the subsequent grounding of all 737 MAX jets for more than one year. The plaintiff in the case, a pension fund and Boeing shareholder, filed a derivative suit asserting claims under Section 14(a) of the Securities Exchange Act of 1934, claiming that the Boeing officers and board members made materially false and misleading statements about the 737 MAX in several proxy materials. The suit was filed in federal court in Chicago, where Boeing is located.
The defendants—officers and directors of Boeing—moved to dismiss the suit for forum non conveniens, arguing that a Boeing bylaw required all derivative actions be brought exclusively in Delaware Chancery Court. Enforcing the bylaw would effectively bar any derivative Section 14(a) claims—indeed, any Exchange Act claims—because federal courts have exclusive jurisdiction over all claims brought under the Exchange Act of 1934. See 15 U.S.C. § 78aa(a).
In a 2-1 decision, the Seventh Circuit reversed the district court’s dismissal of the case. The reasoning rested primarily on the anti-waiver provision of Section 29(a) of the Exchange Act, which bars efforts to contractually waive compliance with the Act. See 15 U.S.C. § 78cc(a). According to the Seventh Circuit’s straightforward reasoning, forum selection clauses cannot stop plaintiffs from bringing Exchange Act claims in federal court, including Section 14(a) claims, and this rule extends to derivative claims. Simply put, parties may not contract to waive a plaintiff’s right to bring a derivative Exchange Act claim in federal court. The Seventh Circuit also found that this conclusion is consistent with Delaware law; specifically, Section 115 of the Delaware General Corporation Law allows corporate bylaws to require litigants to bring “any or all internal corporate claims,” including derivative claims, “in any or all of the courts in” Delaware, so long as the forum bylaw is “consistent with applicable jurisdictional requirements.” Del. Code tit. 8, § 115. Boeing’s bylaw ran afoul of Section 115 for two reasons. First, Boeing’s bylaw was not “consistent with” the “jurisdictional requirements” of the Exchange Act, which on its face requires all claims to be brought in federal court. Second, Section 115 does not authorize exclusive jurisdiction in Delaware state courts, because the phrase “in any or all of the courts in” Delaware includes both state and federal courts in Delaware, whereas the phrase “courts of Delaware” might have authorized exclusive state court jurisdiction. So exclusive state court jurisdiction is not consistent with Section 115 in the first place.
Finally, the Seventh Circuit distinguished federal cases upholding contractual choice-of-forum and choice-of-law clauses. Of course, “valid choice-of-forum clauses will ordinarily be enforced.” See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). But this general rule does not empower such clauses to effectively strip a party of the ability to assert those claims at all, particularly in the face of an express anti-waiver provision like Section 29(a). The Court also distinguished Bonny v. Society of Lloyd’s, 3 F.3d 156 (7th Cir. 1993), in which the Seventh Circuit enforced a forum-selection clause that foreclosed the plaintiff’s Exchange Act claims by requiring that the suit be brought in England under English law. The Seventh Circuit held that the international character of the contracts in Bonny distinguished it from the bylaw at issue in Seafarers. Parties to international contracts cannot expect that U.S. law will apply, particularly when the contract at issue specifies a different forum. Accordingly, the Bonny court enforced the choice-of-forum clause even though it meant that the plaintiff could not bring any Exchange Act claims. Because English law provided for claims that were substantively similar to the plaintiff’s Exchange Act claims in that case, the plaintiff was not left without any remedy.
III. Judge Easterbrook’s Dissent
Circuit Judge Frank H. Easterbrook dissented in Seafarers, reasoning that barring derivative suits from federal courts did not equate to a waiver of compliance with the Exchange Act or a bar of federal law claims of any kind. According to Judge Easterbrook’s dissent, Section 14(a) still could be enforced notwithstanding Boeing’s forum bylaw because the bylaw did not prevent shareholders like the plaintiff from bringing direct Section 14(a) claims in federal court. Nor did the bylaw stop the Securities and Exchange Commission from bringing an enforcement action.
Judge Easterbrook also reasoned that state courts could hear derivative Section 14(a) claims despite the exclusive federal court jurisdiction provided by 15 U.S.C. § 78aa(a) because a derivative Section 14(a) claim is a state-law cause of action, even if an alleged violation of federal law by the officers and directors “plays a role” in the litigation. Indeed, state law governs the demand requirement. And assuming the plaintiff wins the right to sue the officers and directors derivatively for alleged Section 14(a) violations, the corporation’s claim is an alleged violation of the state law duty of care, perpetrated by conduct that exposed the corporation to federal law liability under Section 14(a). State law creates the cause of action, even if proving the defendants’ breach depends on a violation of federal securities laws.
Standing alone, the Seventh Circuit’s decision in Seafarers creates an exception to any bylaw purporting to confine all derivative claims to Delaware Chancery Court and creates uncertainty about where such claims might be litigated. Nevertheless, there are several reasons why the Seventh Circuit’s decision may not be the last word on the subject. First, Plaintiffs separately have sued in the Court of Chancery, seeking a declaration as to the validity of the bylaw under Delaware law. Second, Boeing may seek re-argument or reconsideration of the decision by an en banc panel. And finally, it should be noted that there is another case pending in the Ninth Circuit that presents the same issue: Lee v. Fisher, 2021 WL 1659842 (N.D. Cal. Apr. 27, 2021), Appeal Case No. 21-15923. This sets up the possibility of a circuit split and consideration by the U.S. Supreme Court. Stay tuned.
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