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Ninth Circuit En Banc Panel Enforces Exclusive Forum Provision That Prevents Shareholders From Pursuing Derivative Claims Under Federal Securities Laws
June 5, 2023 Download PDF
Last year, we reported that the Ninth Circuit enforced a corporation’s exclusive forum provision that required “any derivative actions” to be brought in the Court of Chancery of the State of Delaware, despite plaintiffs’ assertion of a federal securities claim under the Securities Exchange Act of 1934, for which there is exclusive jurisdiction in federal courts. On June 1, 2023, an en banc panel of the Ninth Circuit reached the same conclusion on a 6-5 vote, notwithstanding the fact that its decision left plaintiff with no forum in which to assert derivative claims arising under the Exchange Act. The en banc decision is a significant development for officers and directors of Delaware corporations, who have increasingly been forced to defend derivative actions outside of Delaware courts, as shareholder plaintiffs have strategically tacked on federal claims to derivative lawsuits in an attempt to secure jurisdiction outside of the Court of Chancery. The en banc decision also deepens a circuit split with the Seventh Circuit, which refused to enforce a similar exclusive forum provision in similar circumstances, and increases the possibility of Supreme Court review.
In September 2020, Gap shareholder Noelle Lee filed a derivative lawsuit nominally on behalf of Gap, against its directors and officers, alleging that they failed to create meaningful diversity within company leadership and made false statements in Gap’s proxy statements about the level of diversity the company had achieved. The company’s bylaws contain a forum selection clause requiring “any derivative action or proceeding brought on behalf of the Corporation” to be filed in the Delaware Court of Chancery. Plaintiff asserted both state law fiduciary duty claims and a federal securities claim alleging a violation of Section 14(a) of the Exchange Act, which prohibits misleading statements in proxy materials. Because federal courts have exclusive jurisdiction over claims arising under the Exchange Act, plaintiff filed her lawsuit in federal court in the Northern District of California, notwithstanding the company’s exclusive forum provision requiring derivative lawsuits to be filed in the Delaware Court of Chancery. The district court dismissed the complaint on forum non conveniens grounds, holding that the shareholder was bound by the company’s forum selection clause with respect to all of her claims and needed to file in the Court of Chancery.
Plaintiff appealed to the Ninth Circuit, arguing that enforcement of the forum selection clause was unlawful and against public policy because it left her with no forum in which to assert her Section 14(a) claim derivatively because the Court of Chancery does not have jurisdiction over Exchange Act claims. A three-judge panel of the Ninth Circuit affirmed the district court’s dismissal on forum non conveniens grounds. The Ninth Circuit granted Lee’s petition for rehearing en banc.
En Banc Opinion
A six-judge majority of the Ninth Circuit’s en banc panel reached the same conclusion as the earlier panel and affirmed the district court’s dismissal.
First, the Court rejected the argument that the forum provision violates the Exchange Act’s anti-waiver provision, which prohibits stipulations or provisions that waive the right to enforce compliance with the Exchange Act. The court held that Gap’s forum provision did not waive such rights because shareholders could still enforce compliance with Section 14(a) through a direct action in federal court.
Second, the Court held that enforcing Gap’s forum selection clause does not violate a supposed “strong public policy of allowing a shareholder to bring a Section 14(a) derivative action.” The court held that Supreme Court precedent did not establish any such policy, and in no events a policy so strong that it could justify disregarding a company’s forum-selection clause.
Third, the court held that Gap’s forum selection clause is valid under Delaware law, and that the Delaware case law and statutory provisions cited by plaintiff did not limit the scope of permissible forum-selection clauses under Delaware General Corporation Law Section 109(b). The court acknowledged that its ruling conflicted with the Seventh Circuit’s 2022 opinion in Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, but explained that the Seventh Circuit’s interpretation of both the Exchange Act’s anti-waiver provision and Delaware corporate law were “flawed.”
Five judges on the eleven-judge panel dissented. The dissent reasoned, principally, that enforcement of the bylaw provision conflicted with the anti-waiver provision of the Exchange Act and improperly elevated judge-made federal policy over congressional intent.
The Ninth Circuit’s en banc decision is an important development for companies with exclusive forum provisions in their charters and bylaws, and particularly for Delaware corporations with provisions requiring that derivative lawsuits be brought in the Delaware Court of Chancery. Such companies will have even stronger case law to support the enforceability of those provisions, even if that means plaintiffs are left with no forum in which to pursue their Exchange Act claims derivatively. And it is a reminder to Delaware companies that have not implemented such forum selection clauses of their significant potency. We will continue to monitor for further developments, including a possible petition for Supreme Court review to resolve the circuit split, and decisions from Delaware courts clarifying the disputed interpretation of Delaware corporate law.
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