The Forum Selection Saga Continues

On October 24, 2022, the Ninth Circuit granted en banc review in Lee v. Fisher 34 F.4th 777 (9th Cir. 2022), vacating the Circuit’s prior ruling that the forum selection clause in the bylaws of Gap Inc. (“Gap”) is enforceable. This is the latest chapter in the saga of forum selection enforceability that has gripped the Courts and litigants for years. With this ruling, the  Ninth Circuit is set to consider whether forum selection clauses are enforceable, even if they result in a waiver of substantive rights under federal law. A ruling enforcing Gap’s clause will leave the Ninth and Seventh Circuits in direct conflict, while a ruling against Gap could bring the two circuits back into alignment.

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General Counsel’s Natural Habitat: Delaware Court of Chancery Court Holds that LLC Act’s Consent-to-Jurisdiction Statute Extends to a Delaware LLC’s General Counsel

The Delaware Court of Chancery recently interpreted the Delaware Limited Liability Company Act’s (“LLC Act”) provision for service on any “person” who “participates materially in the management” of a Delaware LLC as sufficient to support implied consent to Delaware jurisdiction by a Delaware LLC’s general counsel.  In past cases, the Delaware Court of Chancery found that this material-participation standard applies to LLC officers who hold the title of president and perform functions customarily associated with that role.  But in In re P3 Health Group Holdings, LLC, No. 2021-0518-JTL, Vice Chancellor Laster considered the plain meaning of “participates materially” and those words’ “natural habitat” in other statutes like the federal tax code and Delaware General Corporation Law’s (“DGCL”) consent-to-jurisdiction statute for corporate officers, and held that the LLC Act’s consent-to-jurisdiction statute extends to any person who holds a “C-suite” position in a Delaware LLC, including an LLC’s general counsel.  C-suite executives of Delaware LLCs should thus anticipate that they may be subject to jurisdiction in Delaware for claims involving their actions as senior officers of a Delaware entity going forward.

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The Era of Section 11 Litigation in State Courts Appears To Be Ending

On April 28, 2022, a state appellate court for the first time addressed provisions in a public company’s certification of incorporation that designate federal court as the sole forum for the litigation of Section 11 claims.  Wong v. Restoration Robotics, Inc.,  – Cal. Rptr. 3d –, 2022 WL 1261423.  Section 11 of the Securities Act of 1933 gives stock purchasers a claim against stock issuers and a broad range of other defendants for materially false or misleading statements in registration statements.  (more…)

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Relearning the ABCs: Delaware Court of Chancery Issues Rulings Making Clear That More Information Is Required in Bankruptcy-Alternative Proceedings

The Delaware Court of Chancery took the old maxim “justice delayed is justice denied” to heart recently when it denied a request for a stay of proceedings hours after the request had been filed.  The ruling from Vice Chancellor Paul A. Fioravanti, Jr. in In re Kidbox.com, Inc., Case No. 2022-0379-PAF, is the latest in a series of rulings from the Delaware Court of Chancery requiring litigants in bankruptcy-alternative proceedings in Delaware to support their petitions for relief with sufficient disclosures and to avoid bare-boned pleadings.  These rulings further signal that counsel engaged in bankruptcy-alternative proceedings in Delaware should be prepared for a higher level of scrutiny from the Court of Chancery. (more…)

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Guarding Its Turf: SPAC-Related Chancery Opinion May Force Companies to Defend Disclosure-Based Claims on Multiple Fronts

Companies that have endured a corporate trauma are often faced with a two-headed monster of litigation: first, a federal securities class action, typically alleging that misstatements or omissions inflated the company’s stock price because the company failed adequately to predict, or disclose the likelihood of, the trauma; and, second, stockholder litigation claiming that the company’s directors (and sometimes officers) breached their state-law fiduciary duties in subjecting the company to the costs of defending or settling the securities litigation. In order to avoid (or at least defer unless and until necessary) the expense and distraction of litigating identical or overlapping issues in two or more fora, defendants often have sought a stay, by agreement or motion, of the fiduciary duty litigation, pending at least resolution of a threshold motion to dismiss in federal court. This approach has proven beneficial for all involved because it allows the parties to concentrate their resources in the federal proceeding that will determine whether viable disclosure claims have been alleged; if those claims fail, then there may no longer be any basis to pursue the state-law fiduciary duty claim and all can save the resources of litigating those claims in the meantime. (more…)

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Seventh Circuit Says Delaware Companies May Not Bar The Door To Federal Court For Federal Proxy Fraud Derivative Claims

I.        Introduction

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. (more…)

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Delaware Won’t Let Just Anybody In

Perhaps because it addresses the usually unexciting topic of forum non conveniens, a recent decision by Vice Chancellor Laster has flown largely under the radar. In Focus Financial Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL (Nov. 2, 2020), the Court issued a characteristically in-depth analysis of that sleepy doctrine in a case involving claims relating to the enforcement of a noncompete.

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California Court Upholds Delaware Corporation’s Exclusive Federal Forum Charter Provision

The Superior Court of California, County of San Mateo, recently enforced a Delaware corporation’s charter provision mandating that claims brought under the Securities Act of 1933 be filed in a federal court. This marked the first decision outside of Delaware to enforce an exclusive federal forum provision since the Delaware Supreme Court decided in March 2020 that such provisions are valid under Delaware law.

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Delaware Supreme Court Upholds Federal Forum Provisions

On March 18, 2020, the Supreme Court, in Salzberg v. Sciabacucchi, upheld the validity under Delaware law of “federal-forum provisions,” in which Delaware corporations mandate that claims brought under the Securities Act of 1933 be filed in a federal court.

The highly anticipated opinion, reversing a Chancery Court decision, underscores Delaware’s preference for private ordering and confirms that corporate managers and stockholders have significant latitude in choosing the fora for certain types of litigation. While the decision confirms the facial validity of this particular type of forum provision, other ramifications of this decision remain unclear, and this topic will undoubtedly be the subject of further litigation or possibly legislative action.

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