Seventh Circuit Denies Applicability of Boeing Forum Selection Rules, Relaunches Derivative Lawsuit | Kramer Levin Naftalis & Frankel LLP
As stated in a previous customer alert (here), The Boeing Company (Boeing) has faced shareholder litigation following the fatal crashes of two 737 MAX aircraft. In one such derivative lawsuit filed under Section 14(a) of the Securities Exchange Act of 1934 (the Exchange Act), a shareholder alleged that false and misleading proxy statements did not properly disclosed risks associated with the 737 MAX, which hurt Boeing by allowing the re-election of directors who tolerated poor safety, regulatory and risk management oversight, as well as preventing the bifurcation of CEO and President.
In a recent split decision, the Seventh Circuit revived this derivative lawsuit in federal district court, finding that a rule designating the Delaware Court of Chancery as the “sole and exclusive forum” for derivative claims was unenforceable as to relates to a federal claim filed under section 14(a).[1] As we wrote earlier (here), at least one other federal court has come to the opposite conclusion, holding that a similar choice of court provision has been enforceable with respect to derivative claims under Section 14(a). Judge Easterbrook wrote a dissenting opinion and commentators speculated that Boeing could now seek en banc review by the Seventh Circuit’s full panel.
The justification of the majority
The majority opinion articulated two grounds for concluding that the forum selection provision was inapplicable.
First of all, the court held that enforcing the settlement provision would mean that the action could not proceed in its only proper forum, which would violate the Delaware General Corporate Law (DGCL). Indeed, Section 27(a) of the Exchange Act grants the federal courts exclusive jurisdiction over claims under Section 14(a), the enforcement of which is irrevocable under Section 29(a). ) of the Exchange Act. Section 115 of the DGCL only permits forum selection by-laws if they “conform to applicable jurisdictional requirements”.[2] The majority pointed to the legislative history of s. Nor is section 115 intended to limit or extend the jurisdiction of the Court of Chancery or the Superior Court. The majority held that “[b]y eliminating federal jurisdiction over the [plaintiff’s] exclusively federal derivative claims, Boeing’s forum rules prohibit any suit in federal court based on federal jurisdiction,” which is “exactly what Section 115 was not intended to authorize.”
Although the defendants countered that section 109(b) of the DGCL generally authorizes any regulation relating to the activities or affairs of the company, including the choice of court provision in question, the majority found this argument unconvincing. On the one hand, “more specific legislative provisions, such as Article 115 for articles of association with choice of court clauses, generally take precedence over more general provisions such as Article 109”. Additionally, Section 109 contains the limiting phrase “not inconsistent with law,” which means that a corporation’s articles of association cannot circumvent the non-waiver provision of the Exchange Act.
Second, the majority interpreted the text of Section 115 of the DGCL to still treat the federal courts of Delaware as an authorized forum under any forum selection provision in a corporation’s articles of association. The court emphasized the choice of the preposition in the expression “courts in this State”, which includes the federal courts located in Delaware – as opposed to the expression “the courts of this State”.
Given all of this, the majority opinion rested on the premise that “Delaware is not inclined to allow corporations to shut courthouse doors entirely on derivative actions asserting federal claims subject to jurisdiction.” exclusively federal”.
Dissent
In his dissenting opinion, Justice Easterbrook offered an alternative solution to “the conundrum at this intersection of Crown corporation law, federal securities law, and federal rules of jurisdiction and venue”, which the majority has referred to as a “new proposal to send this dispute to the state court in Delaware.
First of all, Easterbrook J. disagreed with the majority’s conclusion that the application of the choice of court rules would preclude a shareholder from bringing an action under section 14(a) against Boeing. Rather, a shareholder retained the right to bring a direct action under section 14(a) in federal court. Boeing’s choice of court rules applied only to derivative disputes, brought on behalf of the company, and therefore did not deprive the shareholder of this direct right. [3]
Second, Justice Easterbrook disagreed that federal courts have exclusive jurisdiction over derivative claims under section 14(a) at all stages of litigation. As he explained, state law determines the first two steps in the investigation of whether a shareholder can bring a derivative action on behalf of the corporation; that is, “when demand is required and when investors can put themselves in a company’s shoes”. Further, “the third stage – in which a corporation, author of the power of attorney documents, sues its own directors – is also based on state law.” Although Section 14(a) “plays a role” in the shareholder’s theory that Boeing’s directors breached their duty of care, it “does not create the claim.”
Third, Judge Easterbrook also disagreed with the majority’s interpretation of Section 115 of the DGCL as still considering the federal courts in Delaware to be an authorized forum under any valid forum selection regulations. He noted that the majority failed to acknowledge that Section 115 provides that an authorized by-law may provide that derivative claims “shall be brought solely and exclusively in whole or in part of the courts of this State” (emphasis added). By definition, “all or part” may or may not include federal courts.
Based on this analysis, Justice Easterbrook concluded that, at least with respect to the first two stages of the inquiry into whether the plaintiff can bring a derivative action under section 14(a) at name of the corporation, the Delaware Court of Chancery has jurisdiction to hear plaintiff’s claim and, therefore, application of the choice of court provision would not deprive plaintiff of a forum in which to apply — so it was permitted under Delaware law and public order.
Notably, Judge Easterbrook acknowledged that the defendants did not advance his position that the Delaware Court of Chancery could hear a derivative claim under section 14(a). What the defendants argued instead, and what the lower district court and other courts held, was that “Delaware law offered a sufficient substitute that would allow the [plaintiff] to enforce its substantive rights under the Exchange Act. Yet Justice Easterbrook did not consider the court to be “bound by litigants’ beliefs as to the meaning of a jurisdictional provision such as [Section] 27(a)”.
Conclusion
This is another in a series of recent decisions regarding the enforceability of choice of court provisions in corporate charters and bylaws (as noted here, for example). As the majority opinion acknowledged, Delaware corporation law allows “considerable leeway in the drafting of articles, including articles with choice of forum provisions”. The split decision and pending comments suggest there will be ongoing litigation over the parameters and potential limits of these clauses.
[1] Seafarers Pension Plan c. Robert A. Bradway et al., No. 1:19-CV-08095 (7th Cir. Jan. 7, 2022).
[2] Article 115 provides in its relevant part:[B]ythe laws may require, consistent with applicable jurisdictional requirements, that all internal claims of the Companies be brought solely and exclusively in any or all of the courts of such State, and not . . . the statutes may prohibit bringing such claims in the courts of that state. 8 Del. C. § 115.
[3] Consistent with Justice Easterbrook’s emphasis that these are derivative claims brought on behalf of the company and that shareholders do not waive any direct and individual claims under s. 14(a) , the majority also does not question why the company on a clear day could not determine in advance that it is in the interests of the company that actions brought in its own name and for its own account are filed before a specific body (unless it consents otherwise). Such an argument would raise the question of whether the forum clause is a waiver, or at least the type of waiver imposed on a person that the Exchange Act was intended to avoid.
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