A recent decision of the Seventh Circuit in Seamen’s Pension Scheme c. Bradway addresses the issue of where derivative shareholder suits can be brought when the company in question has a choice of court clause in its articles of association. The Seventh Circuit ruling is the latest in a series of high-profile rulings that analyze whether companies can require lawsuits to be filed in courts of their choice.1 But unlike previous rulings, this decision may encourage plaintiff shareholders to seek to bring derivative suits in the Seventh Circuit courts, notwithstanding settlements that suggest otherwise.
Unlike a direct claim in which an individual seeks compensation for legal harms directly suffered, derivative lawsuits allow shareholders to use their stock ownership to bring – on behalf of the company itself – a legal action against directors and officers. company for alleged misdeeds against the company. In this case, the Seafarers Pension Plan, a shareholder of the Boeing Company, sued Boeing board members and officers in the Northern District of Illinois on Boeing’s behalf for allegedly issuing power of attorney documents. false and misleading to shareholders regarding two accidents involving the Boeing 737. MAX passenger jets and exposing Boeing to damage.
Boeing has challenged the lawsuit as violating its forum selection policy2 which limits shareholder derivative claims in the Chancery Court of Delaware. The shareholder countered that the Securities Exchange Act of 1934 purports to give the federal courts exclusive jurisdiction over claims under Section 14(a) of the Securities Exchange Act of 1934, so the settlement could not prevent their federal prosecution.3 Defendants acknowledged that the impact of the forum selection clause was to bar derivative suits under the Securities Exchange Act of 1934, such as that brought by the Seafarers Plan[]
In a split decision, the Seventh Circuit ruled that the forum selection clause was unenforceable in violation of Section 115 of Delaware’s general corporate law.
The majority (Circuit Judges Diane Wood and David Hamilton) held that while Delaware’s corporate law allows companies “considerable leeway in drafting articles of association”, it does not allow companies to “close entirely from the gates of the courthouse” on derivative actions in federal claims that are subject to exclusive federal jurisdiction.5Specifically, the court focused on the text of section 115, which states that “the articles of association may require, in accordance with applicable jurisdictional requirements, that all or part of the companies’ internal claims be brought solely and exclusively before the one or all of the courts of that State”.6 The court held that the reference to the courts in this State, as opposed to the courts
of that state, testified to the intention of the legislator to include the federal courts.seven As such, the court concluded that Section 115 “does not authorize the use of a choice of court rule to avoid what should be exclusive federal jurisdiction over a case.”8 Enforcing such a forum selection rule, the majority explained, would be inconsistent with the anti-waiver provision of the Securities Exchange Act.9
In coming to this conclusion, the court rejected Boeing’s assertion that prior cases M/S Breman v Zapata Off-Shore Co. and Bonny v. Company of Lloyd’s,tendecided by the United States Supreme Court and the Seventh Circuit, respectively, supported the application of the settlement. The court explained that the choice of court clause in Bream, unlike the forum selection clause at issue, was held to be valid because it involved a “purely private contract dispute” and did not involve federal law.11 In Beautiful, the court was satisfied that while the choice of court provision excluded plaintiff’s claims under federal securities law, due to the international nature of the litigation, further relief was available to plaintiffs. under English law.12
The majority was remarkably careful in rejecting what it called the “defendant’s preferred outcome” to bar derivative suits under Section 14(a) of the Securities Exchange Act “by any forum.”[3]The court emphasized that the decision was limited to the specific facts of this case,14 and accepted that he was reading
dictated of a decision of the Court of Chancery as “important guidance for this case”.15
Writing in his dissent, Justice Frank Easterbrook challenged the premise advanced by the majority that the defendants’ position would result in a total exclusion of claims under Section 14(a) of the Securities Exchange Act.16 Acknowledging that he was making an argument that had not been advanced by the defendants, Judge Easterbrook argued that there was no federal statutory right to bring a derivative action under section 14(a ) and that the Supreme Court had declined to extend private rights of action under securities laws, so barring such claims is not inherently problematic. He also noted that derivative suits can begin in state court, cannot be transferred to federal court (per 15 USC § 77p(f)(2)(B)), and that these federal courts do not actually have no exclusive jurisdiction over derivative claims.17Additionally, Judge Easterbrook interpreted the exclusivity provision of the Exchange Act as applying only to claims arising under federal law, and not to derivative suits based on state law, and construed the statute of Delaware as allowing a company to bar derivative lawsuits or restrict where they could be filed. (if applicable).18
Going forward, the matter may remain pending for some time, pending a possible rehearing by a panel, a rehearing en banc, or a petition for certiorari to the U.S. Supreme Court. Other courts may also intervene. In the meantime, companies with forum selection regulations should prepare for the increased likelihood of having to defend shareholder derivative suits in federal court and, in particular, in the Seventh Circuit courts. Companies defending choice of court rules in Federal Court should consider raising and further developing the arguments made by Justice Easterbrook, in conjunction with other arguments, to provide additional grounds for the application of their regulations.
Footnotes
1. See, for example, Lee v. Fisher, no. 20-cv-06163, 2021 WL 1659842 (ND Cal. April 27, 2021), appeal pending, no. 21-15923 (dismissing a shareholder’s lawsuit against The Gap, Inc., because the company’s designate the Delaware Court of Chancery as the exclusive forum); Salzb erg c. sciab acucchi, 227 A.3d 102 (Del. 2020) (stating that the provisions of the statutes designating the federal courts as the exclusive forum for claims under the Securities Act are apparently valid under Delaware law).
2. The Bylaws read in relevant part: “In respect of any action arising out of any act or omission occurring after the adoption of these Bylaws, unless the Company consents in writing to the election of an alternate forum, the Court of Chancery for the State of Delaware shall be the sole and exclusive forum for … any action or derivative proceeding brought on behalf of the Company.” Seamen’s Pension Scheme c. Bradway, no. 20-2244, 2022 WL 70841 at *1 (7th Cir. January 7, 2022).
3. 15 USCS § 78aa.
4. Seamen’s Pension Scheme c. Bradway, no. 20-2244, 2022 WL 70841 at *2 (7th Cir. January 7, 2022).
5. sailors, to *2.7.
6. sailors, at *4 (citing 8 Del. C. § 115).
seven. sailors, at 5.
8. sailors, at 5.
9. sailors, at 7 O’clock.
ten. M/S Breman v Zapata Off-Shore Co., 407 US 1 (1972); Bonny v. Company of Lloyd’s, 3 F.3d 156 (7th Cir. 1993).
11. sailors, at 8.
12. sailors, at 9 o’clock.
13. sailors, to *11 (emphasis in original).
14. sailors, to *2, 4, 7, 10.
15. sailors, at 6.
16. sailors, to *12 (Easterbrook, J., dissenting).
17. sailors, at *12-13 (Easterbrook, J., dissenting).
18. sailors, to *14 (Easterbrook, J., dissenting).
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
