In an en banc decision in Lee v. Fisher, No. 21-15923, the U.S. Court of Appeals for the Ninth Circuit recently ruled that a shareholder derivative action against The Gap filed in federal court had to be dismissed because a forum-selection provision in the company's bylaws requires all derivative actions to be filed in Delaware Chancery Court. This ruling is notable, as it effectively precludes shareholders from asserting derivative claims on behalf of the company for alleged violations of the Securities and Exchange Act of 1934 (the “Exchange Act”).
The Ninth Circuit Decision
The lawsuit against Gap stemmed from allegations that the company's proxy statements contained materially false and misleading statements concerning the company’s commitment to diversity in nominating directors and hiring executives. Plaintiff brought a derivative action on behalf of the company against former and current directors that alleged the company’s proxy statements violated Section 14(a) of the Exchange Act and SEC Rule 14a-9. The Ninth Circuit’s ruling did not delve into the merits of the case. Instead, the focus was on the procedural question: Can this case be litigated in federal court or must it be removed to Delaware Chancery Court pursuant to the bylaws?
In its decision, the Ninth Circuit noted that the complaint was consistent with the “modern trend in which plaintiffs frame corporate mismanagement claims that normally arise under state law (including challenges to corporate policies relating to ‘ESG [environmental, social, and governance] issues … such as environmentalism, racial and gender equity, and economic inequality’) as proxy nondisclosure claims under § 14(a), in order to invoke exclusive federal jurisdiction and avoid any forum-selection.”
The plaintiff asserted that because the complaint alleged a claim under the Exchange Act, the forum-selection clause violated that antiwaiver provision in Section 29(a) of the Exchange Act. But in a 6-5 decision, the Ninth Circuit held that the antiwaiver provision was not violated because the plaintiff could still enforce the substantive obligations under Section 14(a) and Rule 14a-9 by bringing a direct stockholder claim in federal court. Indeed, the court indicated that the alleged claim should have been brought as a direct action under Delaware law. Further, citing recent Supreme Court jurisprudence, the court stated that the forum-selection clause did not violate a strong public policy of permitting a shareholder to bring a Section 14(a) derivative claim in federal court. The court also held that the forum-selection provision did not violate Delaware law.
The dissent argued the forum-selection clause conflicts with the plain text of the Exchange Act and eliminates plaintiff's federal claims because Delaware did not have jurisdiction over them.
Conflict with the Seventh Circuit
The court acknowledged that it was disagreeing with a decision of the U.S. Court of Appeals for the Seventh Circuit that held that companies making claims under the federal securities laws could not use forum-selection clauses to avoid federal courts. In January 2022, the Seventh Circuit decided in favor of shareholders of The Boeing Company, allowing them to continue litigating derivative claims in federal court, despite Boeing’s forum-selection clause directing such cases to Delaware Chancery Court.
The circuit split may result in the U.S. Supreme Court weighing in on the enforceability of such forum-selection provisions.
Broader Implications
This case highlights the importance of provisions in corporate bylaws and commercial contracts that address jurisdictional and choice-of-law issues, which can have a significant impact on the outcome of litigation. There are also strategic considerations related to jurisdiction that must be taken into account, such as whether a federal or state court would be a better forum for a particular case, and whether, in the absence of federal question jurisdiction, there is a basis for diversity jurisdiction to bring a case in federal court.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
****
Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.
The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.
Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.