1. The Seventh Circuit’s Decision in Seafarers
Seafarers addressed a derivative Borak claim against Boeing’s directors and officers following the loss of 346 lives in two separate accidents involving Boeing’s new 737 MAX aircraft and the subsequent grounding of 737 MAX planes worldwide. Specifically, the plaintiff claimed that Boeing’s proxy statements made materially false or misleading statements concerning the directors’ and officers’ oversight of the 737 MAX’s design and manufacturing. As a derivative claim, the lawsuit alleged “the false and misleading proxy statements caused harm to Boeing by enabling the improper re-election of directors who had for years tolerated poor oversight of passenger safety, regulatory compliance, and risk management during the development of the 737 MAX airliner.”
In denying Boeing’s motion to dismiss, a divided Seventh Circuit panel reasoned that enforcing Boeing’s forum provision “would mean that plaintiff ’s derivative [Borak] action may not be heard in any forum.” That result would be “contrary to Delaware corporate law and federal securities law.”
With respect to Delaware law, the Seventh Circuit explained that Boeing’s “forum bylaw is unenforceable as applied to [the plaintiff ’s derivative Borak claim] because its application would violate Section 115 of the [DGCL].” DGCL section 115 authorizes forum provisions in corporate charters and bylaws, but only to the extent that such a provision is “consistent with applicable jurisdictional requirements.” Because federal courts have exclusive jurisdiction over Exchange Act lawsuits, the Seventh Circuit reasoned, enforcing Boeing’s forum provision against the plaintiff ’s derivative claim would violate this facet of the Delaware statute. Thus, the circuit court ruled that “[s]ection 115 does not authorize application of Boeing’s forum bylaw” to “close the courthouse doors entirely on derivative actions asserting federal claims subject to exclusive federal jurisdiction.”
As for federal law, the Seventh Circuit held that enforcing Boeing’s forum bylaw against the plaintiff ’s derivative Borak lawsuit would violate Exchange Act section 29(a), which invalidates any contract term that would waive rights arising under the statute. Relying on this anti-waiver provision, the court distinguished other precedents enforcing contractual forum selection clauses, most significantly M/S Bremen v. Zapata Off-Shore Co., in which the Supreme Court established a strong presumption in favor of enforcing forum selection clauses. “Bremen differs from this case most importantly in that it involved a purely private contractual dispute. It did not involve any claim under a federal statute, let alone a federal statute with a non-waiver provision like Section 29(a) of the Exchange Act.” This distinction proved critical for the Seventh Circuit. “While the Supreme Court has generally been receptive to enforcing contractually valid forum-selection clauses, neither Bremen nor other decisions have endorsed such clauses as paths to avoid otherwise applicable federal statutes.”
The Seafarers decision is particularly notable because the court’s ruling came over a dissent by Judge Frank Easterbrook, an immensely influential jurist who is also America’s most cited corporate law scholar. In dissent, Judge Easterbrook observed that barring the federal Borak claim did not bar plaintiffs from pursuing direct Section 14(a) claims and therefore did not shut them out of federal court when pursuing the Section 14(a) remedy. Judge Easterbrook further observed that the derivative Borak claim is defined by state corporate law. Elements such as the demand requirement and the definition of the underlying duties of care and loyalty are all matters of state, not federal, law. State law thus creates the cause of action even if the claim is pursued in federal court. Judge Easterbrook also recounted Borak’s questionable pedigree as creating a disfavored implied private right of action and described Borak as “derelict.” Enforcing the intra-corporate forum selection provision therefore would not, in Judge Easterbrook’s view, frustrate either the text or the intent of the federal securities laws. Accordingly, Judge Easterbrook reasoned that the correct outcome should be to enforce Boeing’s forum provision and allow the plaintiff ’s derivative Borak suit to be adjudicated before the Delaware Chancery Court. The panel majority, however, rejected Judge Easterbrook’s analysis, noting that “a state court would have to be bold indeed to adopt that solution and to exercise jurisdiction over this derivative claim despite Section 29(a) [and] the lack of support from either side in this lawsuit.”
Aside from a pointed dissent by a venerable corporate law scholar, Seafarers bears another dubious distinction: since Boilermakers first affirmed the validity of intra-corporate forum provisions, Seafarers is the first major ruling by any court refusing to enforce such a provision. After the Ninth Circuit’s Lee decision, Seafarers remains alone as the only such ruling to date.
2. The Ninth Circuit’s Decision in Lee
Lee addressed a derivative Borak lawsuit against the directors and officers of The Gap alleging failures in management’s efforts to promote racial diversity within the ranks of the company’s leadership. As a derivative suit, the Lee plaintiff alleged that The Gap’s proxy statements included materially false or misleading statements about the company’s efforts to pursue diversity, which in turn harmed The Gap by enabling re-election of the company’s incumbent directors and approval of the officers’ compensation packages.
In contrast to Seafarers, the Ninth Circuit in Lee enforced The Gap’s forum provision and dismissed plaintiff ’s derivative complaint, first in a unanimous panel ruling and then in a closely divided en banc decision. Citing the pre-publication draft of this Article, the Ninth Circuit en banc wholeheartedly embraced this Article’s reasoning in Parts III and IV below.
Specifically, concurring with the analysis in Part IV, the en banc court reasoned that enforcement of The Gap’s forum provision would not violate the Exchange Act’s anti-waiver provision because the plaintiff-shareholder still retained the right to bring the same Borak claim as a direct or class action, squarely contradicting Seafarers’ holding to the contrary. More significantly, the Ninth Circuit also ruled that the enforcement of the forum provision to entirely preclude derivative Borak suits would not violate federal public policy. The en banc court reasoned that (i) Borak’s recognition of an implied derivative claim under Section 14(a) was “dicta,” not a binding holding; and (ii) the Supreme Court’s post-Borak decisions strongly signal that the implied right of action under Section 14(a) is limited to direct claims only.
As to Delaware law, the Ninth Circuit en banc concurred with the analysis set forth in Part III, ruling that DGCL section 115, which was central to the Seventh Circuit’s decision in Seafarers, was in fact irrelevant to the enforceability of The Gap’s forum provision as applied to the plaintiff ’s federal securities claim. Relying on the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi, the Ninth Circuit explained that “[o]n its face, [DGCL] Section 115 is inapplicable here, because it does not address the validity of a forum-selection clause’s effect on federal claims.” Instead, again relying on Salzberg, the en banc court ruled that The Gap’s forum provision was valid under Delaware law.
In holding the plaintiff ’s derivative complaint was properly dismissed, the Ninth Circuit recognized the conflict with Seafarers. “We acknowledge that our decision creates a circuit split [with the Seventh Circuit], and we do not do this lightly.” Nevertheless, “[b]ecause Seafarers failed to apply Salzberg correctly, and did not consider the implications of the availability of a direct § 14(a) action,” and because Seafarers “overlooked . . . the post-Borak developments in the Supreme Court’s jurisprudence,” the Ninth Circuit concluded that the Seventh Circuit decision was “flawed” and “mistaken.”
Given the resulting circuit split, corporate practitioners predict that the plaintiff ’s bar will increasingly file derivative Borak suits against corporations headquartered in the Seventh Circuit. For a plaintiff ’s attorney seeking to avoid the watchful scrutiny of Delaware’s bench, Seafarers establishes a roadmap to circumventing the intra-corporate forum provisions that would otherwise channel derivative lawsuits into Delaware.
It appears equally certain that, given the ubiquity of intra-corporate forum selection provisions, and the incentives for plaintiffs’ counsel to seek a share of fees available in large cases alleging some form of corporate mismanagement, the questions presented in Seafarers and Lee will be raised in other circuits. Seafarers and Lee are thus unlikely to be the last words on this subject.
III. Corporate Forum Provisions Under State Corporate Law
As reflected by both Seafarers and Lee, the enforceability of a corporate forum provision against derivative Borak claims raises issues of both state corporate law and federal securities law. Reserving analysis of the federal law issues for Part IV below, this Part evaluates the enforceability of a corporate forum provision against derivative Borak claims strictly as a matter of Delaware law and demonstrates that the Seventh Circuit’s application of Delaware law was demonstrably incorrect. Indeed, a venerable cadre of former Delaware Chief Justices, Justices, Chancellors, and Vice Chancellors submitted a letter to the Ninth Circuit en banc in Lee stating as much. The Delaware Supreme Court’s 2020 decision in Salzberg v. Sciabacucchi compels this conclusion.
Part A describes the Salzberg decision. Part B applies Salzberg to demonstrate that DGCL section 115, which the Seventh Circuit interpreted to prohibit a forum provision precluding derivative Borak claims, is in fact irrelevant to that question. Instead, as Part C explains, Salzberg establishes that an intra-corporate forum selection provision is both valid and enforceable against shareholders.
A. Salzberg v. Sciabaccuchi
Salzberg addressed the validity of a forum provision that sought to solve a problem very different from the forum challenge at issue in Boilermakers. Boilermakers addressed an intra-corporate forum selection provision that sought to resolve challenges caused by plaintiffs filing intra-corporate claims away from the courts of the defendant-corporation’s state of incorporation. The provisions at issue in Boilermakers thus regulated shareholder litigation over state corporate law claims. In contrast, the forum provision at issue in Salzberg, a “federal forum provision,” addressed the challenge that arose when plaintiffs, relying on the concurrent jurisdiction available under the Securities Act of 1933, filed Securities Act claims in state courts, where the judiciary was less familiar with class actions securities fraud litigation. Federal forum provisions provide that Securities Act claims must be brought in federal court, the court with greater expertise in the resolution of those claims, and also prevent duplicative litigation of essentially identical claims filed in federal and state court. Because Securities Act claims do not arise under Delaware corporate law and lie beyond the internal affairs doctrine, questions arose as to whether Delaware law authorized a forum provision that regulated Securities Act claims.
Building on the contractual framework articulated by Boilermakers, Salzberg affirmed federal forum provisions, and expressly addressed the relevance of DGCL section 115 to the analysis. The court explained that DGCL section 115 neither authorizes nor prohibits a forum provision governing federal securities law claims. Instead, the statute merely authorizes forum provisions regulating “internal corporate claims,” which are shareholder claims arising under Delaware law. Because “[Securities Act] claims are not ‘internal corporate claims,’” Salzberg explained, “Section 115 does not apply.” Thus, if a forum provision governs “‘internal corporate claims’ . . . requiring the application of Delaware corporate law as opposed to federal law,” then the forum provision is subject to DGCL section 115. But if a forum provision “govern[s] … claims that do not fall within the definition of ‘internal corporate claims,’” such as Securities Act claims, then DGCL section 115 is irrelevant.
Rather than relying on DGCL section 115, Salzberg held that a forum provision covering Securities Act claims is authorized under DGCL section 102(b)(1), the provision governing corporate charters, and its sister provision governing corporate bylaws, DGCL section 109(b). DGCL section 102(b)(1) broadly permits a corporation’s charter to contain “[a]ny provision for the management of the business and . . . affairs of the corporation . . . and regulating the powers of the corporation, the directors, and the stockholders.” In similarly broad language, DGCL section 109(b) permits a corporation’s bylaws to include “any provision . . . relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” Salzberg held that a forum provision regulating the forum in which shareholders can file Securities Act claims “easily fall[s] within” the permissible scope of DGCL sections 102(b)(1) and 109(b).
As the following subparts explain, Salzberg offers two clear lessons for a corporate forum provision governing derivative Section 14(a) Borak claims. First, DGCL section 115 is irrelevant to the analysis. Second, forum selection provisions directing derivative Section 14(a) Borak claims to state courts are valid and enforceable against shareholders. Seafarers thus misapplied Delaware law when holding to the contrary.
B. DGCL Section 115 Is Irrelevant
Salzberg establishes that the Seventh Circuit in Seafarers clearly erred in its analysis of DGCL section 115 because that provision is irrelevant to determining the validity of a forum provision governing federal securities law claims. Seafarers’ fundamental error is its incorrect assumption that derivative Borak claims are “internal corporate claims” as that term is used in DGCL section 115. Salzberg makes clear that because Borak claims, like Securities Act claims, arise under federal law rather than Delaware law, Borak claims cannot be “internal corporate claims,” even if they involve “intra-corporate” disputes. Thus, like a federal forum provision governing Securities Act claims that was challenged in Salzberg, DGCL section 115 is inapplicable to a forum provision governing Borak claims.
The Seventh Circuit sought to distinguish Salzberg by observing that Salzberg’s holding did not extend to Exchange Act claims. But this is a distinction without a difference. While it is true that Salzberg addressed only Securities Act claims, and not Exchange Act claims, the reasoning that Salzberg applied to the former plainly also applies to the latter—a point the Seventh Circuit neither considered nor refuted. As Salzberg explains, “internal corporate claims” cover only shareholder “claims requiring the application of Delaware corporate law as opposed to federal law.” Because federal securities law claims—whether Securities Act or Exchange Act claims—require the application of federal law, these claims are not “internal corporate claims.” DGCL section 115 is therefore inapplicable to a forum provision governing either Securities Act or Exchange Act claims.
One might still argue—although the Seventh Circuit did not—that Salzberg is actually a bit more ambiguous as it applies to a derivative Borak suit because, although the substance of a Borak claim is governed by federal law, when the claim is framed as a derivative action, and not as a direct action, Delaware corporate law governs critical substantive and procedural elements of the claim. Plaintiffs might thus argue that a derivative Borak claim does, in fact, “requir[e] the application of Delaware corporate law” and is, therefore, an “internal corporate claim” subject to DGCL section 115.
The legislative history of DGCL section 115, however, discredits this argument. The official synopsis that accompanied the bill enacting section 115 equates “internal corporate claims” with “claims arising under the DGCL, including claims of breach of fiduciary duty by current or former directors or officers or controlling stockholders of the corporation.” The legislative history thus makes clear that the phrase “internal corporate claims” covers only claims that “aris[e] under” Delaware law. It does not cover claims arising under federal law, even if the claims incorporate elements of Delaware law.
The Seventh Circuit was aware of this legislative history, but in an effort to justify its holding, the panel quoted language in the bill’s synopsis stating that “Section 115 is also not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction.” Relying on this language, the panel reasoned that “[b]y eliminating federal jurisdiction over the [plaintiff ’s] exclusively federal derivative claims, Boeing’s forum bylaw forecloses suit in a federal court based on federal jurisdiction. That’s exactly what Section 115 was not intended to authorize.”
The flaw in this reasoning is obvious: the panel conflated “not intended to authorize” with “intended to prohibit.” But, as Salzberg explained, federal securities law claims are not “internal corporate claims,” and DGCL section 115 concerns only “internal corporate claims.” Accordingly, DGCL section 115 neither authorizes nor prohibits a forum provision governing federal securities law claims. DGCL section 115 is simply irrelevant. Instead, to evaluate the validity of a provision governing federal law claims, Salzberg explained that the analysis must look outside DGCL section 115.
C. Validity and Enforceability
Rather than being barred by DCGL section 115, Salzberg confirms that a forum provision governing derivative Borak suits is authorized by DGCL sections 102(b)(1) and 109(b). Just as the Securities Act claims at issue in Salzberg “aris[ed] out of the Board’s disclosures to current and prospective stockholders,” so too do Borak claims. As Salzberg explained, Securities Act claims concern “litigation arising out of the Board’s disclosures to current and prospective stockholders. . . . The drafting, reviewing, and filing of [those disclosures] by a corporation and its directors is an important aspect of a corporation’s management of its business and affairs and of its relationship with its stockholders.” The very same is true of Borak claims that arise because of alleged defects in proxy disclosures by the corporation to its shareholders. A forum provision governing Borak claims thus “easily fall[s] within” the broad scope of DGCL sections 102(b) and 109(b) and is, therefore, facially valid.
The only limit that Delaware law places on a forum provision authorized by DGCL sections 102(b) and 109(b) is based in equity. Delaware law requires that “all corporate acts must be ‘twice-tested’—once by the law and again in equity.” Consequently, even a facially valid forum provision is unenforceable if it would operate inequitably as applied to shareholders. Both Salzberg and Boilermakers recognized that equity—the judicial power “to do right and justice”—is an essential backstop to the freedom of contract afforded by DGCL sections 102(b) and 109(b).
Enforcing a forum provision that directs all derivative claims to the courts of the chartering state raises no serious equitable concerns. To be sure, such a provision bars shareholders from bringing Borak claims in a derivative action—a fact that was central to the panel’s reasoning in Seafarers. But that alone does not make enforcing the provision inequitable or unjust. For one, as explained in Part IV below, there is substantial reason to conclude that under the Supreme Court’s post-Borak precedents, shareholder suits under Section 14(a) are cognizable only as direct or class actions, but not as derivative claims. These precedents suggest that a forum provision precluding derivative Borak actions merely precludes a type of claim that shareholders have no right to bring in the first place. The Seafarers panel failed, however, to consider any of this post-Borak precedent.
But even if one ignores the Court’s post-Borak jurisprudence, there is nothing inequitable in a forum provision that precludes shareholders from bringing derivative Borak claims. After all, as recognized by both the Ninth Circuit en banc in Lee and Judge Easterbrook in his Seafarers dissent, shareholders would still retain other options, all of which effectively replicate all of the remedies that would otherwise be available in a derivative Borak claim. Shareholders are not barred from alleging the same facts that give rise to the Borak claim in federal court as a direct or class action. Thus, they are not shut out of federal court. Shareholders can also bring a derivative action in Delaware state court, where they can obtain all the relief that would be available to them in a federal derivative action. Indeed, the courts of the chartering state will have greater expertise in interpreting the law at issue in the resolution of an intra-corporate dispute. They will also have a greater interest in consistent interpretation of the relevant doctrine than will any federal court. Given these alternatives, there is no equitable reason to deny the enforceability of an otherwise lawful forum provision precluding derivative Borak claims. Indeed, it is hardly inequitable to require that shareholders who voluntarily and knowingly purchased stock issued by a corporation chartered in Delaware, that is governed by the corporate laws of Delaware, to litigate Delaware law claims in Delaware courts.
For similar reasons, enforcing a forum provision precluding derivative Borak claims would not “offend federal law and policy.” In Matsushita Electric Industrial Co. v. Epstein, the U.S. Supreme Court held that, despite the federal courts’ exclusive jurisdiction over Exchange Act claims, Delaware courts can approve a settlement that extinguishes federal claims. Citing Matsushita, Salzberg reasoned that if Delaware state courts may extinguish federal claims, “then it follows that a provision in a Delaware corporation’s charter requiring stockholders to litigate federal claims in federal court is not violative of federal policy.” This same reasoning applies to a forum provision requiring that shareholders litigate all derivative actions in Delaware state courts. Such a provision neither precludes nor extinguishes federal Borak claims in federal courts. Instead, it merely requires that these claims be framed as direct or class actions, while still allowing derivative claims alleging corporate harm arising from internal mismanagement to be brought under state corporate law in Delaware courts. In this respect, the forum provision would reinforce, not offend, established federal policy, which holds that shareholder claims of “internal corporate mismanagement” or breach of fiduciary duty should be adjudicated under state corporate law, not federal securities law.
Consider Boeing’s case. Before Seafarers was decided, Boeing’s shareholders had already brought at least two other lawsuits alleging mismanagement in the wake of the 737 MAX crashes. In a derivative action filed in Delaware Chancery by shareholders represented by one set of lawyers, Boeing’s directors faced breach of fiduciary duty claims arising from their oversight of the ill-fated airliner. And in a separate class action filed in federal district court by shareholders represented by a different set of lawyers, Boeing and its officers faced direct claims that they had misrepresented the 737 MAX’s safety risks in the company’s public disclosures. The derivative Borak suit brought by the Seafarers plaintiffs, themselves represented by yet another set of lawyers, thus represented at least the third lawsuit concerning the 737 MAX. Between the state law derivative action brought on behalf of the corporation and the federal securities class action brought on behalf of the shareholders, it is not obvious what this third lawsuit, arising from identical events, could accomplish for Boeing, its shareholders, or society more broadly. Every remedy available to every party was already on the table. Only the plaintiffs’ lawyers who filed the claim at issue in Seafarers stand uniquely to benefit from that duplicative, wasteful litigation.
“In general, equity is reluctant to create remedies when adequate legal remedies already exist.” Moreover, federal securities law eschews expansive interpretations that would create remedies that “overlap” or “interfere” with available state corporate law claims. It is therefore difficult to contend that enforcing Boeing’s forum provision would be inequitable or infringe on federal policy. To the contrary, by requiring that all derivative suits be filed in Delaware’s state courts, the forum provision eliminates the duplicative litigation apparent in the Seafarers derivative Borak claim. And it would do so without materially impairing the rights of Boeing’s shareholders to bring direct and derivative claims that just as effectively compensate shareholders, vindicate the corporation’s right, hold management accountable, and impose therapeutic remedies that improve corporate governance on a going-forward basis.
In this respect, Boeing’s forum provision operates no differently than forum provisions that arise in other contexts, “regulat[ing] where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain.” Precluding derivative Borak claims thus does not preclude shareholder litigation. Rather, it simply bifurcates a shareholder’s litigation options: If a shareholder seeks a remedy for misrepresentations made in the corporation’s public disclosures, then she may bring a direct action, individually or as a class, in federal court alleging federal securities law claims. If, instead, the shareholder seeks redress for harm to the corporation caused by its officers’ and directors’ fiduciary breach, then she may bring a derivative action in Delaware Chancery Court asserting state corporate law claims. This bifurcation accomplishes two important goals. First, it ensures that derivative lawsuits concerning internal corporate affairs are more efficiently adjudicated in Delaware’s state courts. Second, it eliminates duplicative derivative lawsuits raising federal securities law claims that cannot be consolidated with either a closely related—or essentially identical—state corporate law derivative action or a federal securities class action arising from the same facts or events, thereby creating an additional efficiency.
Salzberg was explicit: Delaware law aims “to achieve judicial economy and avoid duplicative efforts among courts in resolving disputes.” Like the forum provisions affirmed in Salzberg, a provision eliminating derivative Borak claims advances these aims by offering “a corporation with certain efficiencies in managing the procedural aspects of securities litigation.” It would “allow for litigation of federal [securities] claims in a federal court of plaintiff ’s choosing, but also allow for consolidation and coordination of such claims to avoid inefficiencies and unnecessary costs.” Given the practical effects of a forum provision directing all derivative lawsuits to Delaware’s state courts, Salzberg makes clear that such provision is both valid and enforceable against plaintiffs asserting derivative Borak claims.
IV. Corporate Forum Provisions Under Federal Securities Law
Having established the enforceability under Delaware law of a corporate forum provision precluding derivative Borak claims, this Part turns to consideration of federal law. After all, the Supremacy Clause ensures that state law cannot conflict with federal law, and that, in the event of a conflict, federal law prevails.
As to federal law, Seafarers rests on the premise that Borak creates a right for shareholders under Section 14(a) to bring derivative lawsuits. Because enforcing Boeing’s forum provision would functionally extinguish federal derivative Section 14(a) claims, the Seafarers panel reasoned that the forum selection provision is prohibited by the Exchange Act’s anti-waiver provision.