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The Business Lawyer

Fall 2023 | Volume 78, Issue 4

Abandoned and Split, But Never Reversed: Borak and Federal Derivative Litigation

Mohsen Manesh and Joseph A Grundfest

Abandoned and Split, But Never Reversed: Borak and Federal Derivative Litigation

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J.I. Case Company v. Borak is perhaps unique in contemporary Supreme Court jurisprudence. Section 14(a) of the Securities and Exchange Act of 1934, as implemented by Rule 14a-9, broadly prohibits misrepresentations in proxy statements, but does not expressly recognize a private right of action to enforce the statute. Borak purported to fill that gap and is commonly cited to support the existence of both an implied direct private right of action and an implied derivative private of action to enforce Section 14(a).

But the law governing implied private rights has changed dramatically since Borak was issued in 1964. Courts today are far less inclined to recognize implied private rights. Indeed, the Supreme Court has expressly “abandoned” and denigrated Borak’s logic. Justices describe Borak as “aberrant” and “erroneous,” while influential circuit judges call it “derelict.” Nonetheless, Borak has not been formally reversed. Thus, Borak curiously and uncomfortably stands as repudiated but controlling law.

Notwithstanding this questionable pedigree, Borak now generates a consequential circuit split over the enforceability of forum selection provisions requiring that all derivative claims be litigated in the courts of a corporation’s chartering state. Because these forum provisions effectively preclude federal derivative shareholder litigation under Section 14(a), the Seventh Circuit ruled that they are unenforceable as a matter of both federal securities law and Delaware corporate law. Citing the pre-publication draft of this Article, the Ninth Circuit reached precisely the opposite conclusion.

The resulting circuit split offers an opportunity to reexamine Borak in light of six subsequent decades of Supreme Court precedent. That precedent establishes that corporate forum provisions waiving derivative Borak claims are valid and enforceable. More forcefully, Borak’s implication of a federal derivative Section 14(a) claim would likely fail to survive further Supreme Court review. The prospect thus arises that if the Supreme Court addresses this circuit split over the enforceability of forum selection provisions, much more could be at stake: the Court could easily use the occasion to squarely overrule Borak, at least with regard to the implication of a federal derivative Section 14(a) claim.

But, in any event, the Seventh Circuit’s reliance on Borak was clearly mistaken. Where shareholders can bring (i) Borak claims either as direct or class actions to recover any damage they personally suffered and (ii) derivative actions under state corporate law to recover damage suffered by the corporation, then a third lawsuit, asserting an implied federal derivative Borak claim, does nothing to benefit the corporation, its shareholders, or society more broadly. It simply propagates wasteful litigation designed to advance the parochial interests of plaintiff ’s counsel seeking a share of attorneys’ fees.

I. Introduction

J.I. Case Company v. Borak is perhaps unique in contemporary Supreme Court jurisprudence. The Court has “abandoned” the logic of this 1964 precedent. Justices describe Borak as an “erroneous,” “aberrant” decision “unprecedented and incomprehensible as a matter of policy.” Borak is labelled “derelict,” but it has never been formally reversed. Borak is, instead, alive and well in the lower courts, and today continues to generate new circuit splits with significant implications for corporate governance and litigation over shareholder rights.

Borak held that shareholders enjoy a private right of action under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 14(a), as implemented by Rule 14a-9, broadly prohibits any material misrepresentation or omission in connection with the solicitation of proxy votes from public company shareholders. However, neither the statutory text nor the implementing rule expressly empowers shareholders to enforce the ban on false or misleading proxy solicitations. There is also no evidence that Congress, when enacting Section 14(a), or the Securities and Exchange Commission, when adopting Rule 14a-9, intended to imply a private right of action to enforce Section 14(a) or Rule 14a-9. But notwithstanding the absence of supporting text or evidence of legislative or administrative intent, Borak implied the existence of a private right of action under Section 14(a).

The contours of that implied private right are, however, highly contestable. Borak recognized that implied private actions under Section 14(a) can be brought as either direct claims, on behalf of individual shareholders, or as derivative claims, on behalf of the corporation. As the Borak Court stridently asserted:

The injury which a stockholder suffers from corporate action pursuant to a deceptive proxy solicitation ordinarily flows from the damage done to the corporation, rather than from the damage inflicted directly upon the stockholder. The damage suffered results not from the deceit practiced on him alone but rather from the deceit practiced on the stockholders as a group. To hold that derivative actions are not within the sweep of the section would therefore be tantamount to a denial of private relief.

Suffice it to say that Borak has not gracefully aged. In the six decades since, the Court has repeatedly distanced itself from Borak, even making it explicit that the case would be decided differently today. Still, while chipping away at its doctrinal foundations, the Court has never had the occasion to expressly overrule this beleaguered precedent.

Borak’s tenuous doctrinal vitality has not, however, prevented it from generating consequential circuit splits, most recently between the Seventh and Ninth Circuits. The split concerns the enforceability of essentially identical intra-corporate forum selection provisions that would direct all derivative claims to state court, even if those claims are stated as Borak implied federal Section 14(a) claims, and not as state law claims.

In Seafarers Pension Plan v. Bradway, a divided panel of the Seventh Circuit, with Judge Frank Easterbrook dissenting, refused to enforce the forum selection provision at issue. The panel majority reasoned that because federal courts enjoy exclusive jurisdiction over all Exchange Act claims, limiting derivative lawsuits to state court would effectively bar shareholders from bringing a derivative Borak claim. Consequently, Seafarers held that the enforcement of a corporate forum provision to preclude derivative Borak claims would violate shareholders’ rights under the Exchange Act and the underlying state corporate law authorizing forum provisions.

Evaluating an essentially identical corporate forum provision in Lee v. Fisher, the Ninth Circuit en banc arrived at precisely the opposite conclusion. Citing the pre-publication draft of this Article and embracing its analysis, the Ninth Circuit ruled that a forum provision directing all derivative claims to state court is enforceable, even if enforcement would effectively preclude shareholders from bringing federal Borak claims in a derivative capacity.

Because of the ubiquity of intra-corporate forum selection provisions, the legal questions presented in both Lee and Seafarers will almost certainly arise in other circuits. Those legal questions, in turn, point to a more basic policy question. Enforcing the forum selection provisions at issue in Seafarers and Lee does not extinguish shareholder rights to pursue identical derivative claims in state courts. Those courts have a comparative advantage in interpreting the substantive law that is always at issue in a derivative claim, whether prosecuted in state or federal court. Given the greater expertise, efficiency, and consistency of interpretation available in the state venue, the natural question arises as to whose interests are served by preserving derivative Borak claims? In practice, it is seldom the interests of a corporation’s shareholders, the intended beneficiary of federal proxy regulation. Instead, Borak suits, like other types of representative shareholder litigation, are dominated by plaintiff ’s attorneys, frequently bringing strike suits that can be settled for nuisance value and, of course, a payout of the attorney’s fees.

In recent years, the state courts of Delaware—the jurisdiction in which most public companies are incorporated—have clamped down on meritless shareholder lawsuits targeting public corporations. In response, plaintiff ’s attorneys have increasingly sought refuge in the federal courts, relying on Borak in particular. Indeed, the lawsuits in both Seafarers and Lee exemplify this trend.

In Seafarers, the plaintiff ’s derivative suit alleged failures by the board of the aerospace manufacturer, The Boeing Company, in overseeing the design and production of the company’s 737 MAX airliner. In Lee, the plaintiff alleged failures by the board of the apparel retailer, The Gap, to improve racial diversity within the company’s management ranks. Thus, in both cases, the essence of the plaintiffs’ claims was that corporate harm was caused by the boards’ mismanagement—classic state law derivative claims of a sort traditionally litigated in state court, and that support remedies as robust as those available in federal court. But rather than litigate a state law breach of fiduciary duty claim in the courts of Delaware, where both Boeing and The Gap are incorporated, both suits repackage the allegations as derivative Section 14(a) federal proxy claims. Litigating in the federal venue enables plaintiffs to sidestep the scrutiny of the Delaware bench, whose specialized judges have long experience in dispatching meritless shareholder litigation. The result has been a new wave of dubious attorney-driven suits in federal courts, replacing the wave that the Delaware courts only recently abated.

Given this context, policy considerations caution a healthy skepticism of derivative Section 14(a) Borak claims. This skepticism reinforces this Article’s principal legal claim—that nothing in either state corporate law or federal securities law prohibits an intra-corporate forum provision that, as a practical matter, precludes derivative Borak claims in federal court when effectively identical remedies are available in the chartering state’s courts. By this logic, Seafarers was wrongly decided. Lee got it exactly right and should be followed by other circuits.

First, applying the corporate law of Delaware, a corporate forum provision governing derivative Borak claims is valid and lawful. The Delaware Supreme Court’s recent decision in Salzberg v. Sciabacucchi makes this point clear. Conceiving of a corporation’s charter and bylaws as a contract between the corporation and its shareholders, Salzberg held that a forum provision in the corporate contract is enforceable against shareholders, even if the provision governs a federal securities law claim. Moreover, the equitable constraints that Salzberg recognized might limit the enforceability of corporate forum provisions are inapplicable to a provision that waives derivative Borak claims. After all, such a provision would still permit shareholders to bring direct Borak claims in federal court, individually or as a class action, as well as derivative state corporate law claims in Delaware courts. Given these alternatives, there is no equitable reason to deny the enforceability of an otherwise lawful forum provision precluding derivative Borak claims.

Second, as a matter of federal securities law, even assuming that the implied right of action created by Borak in 1964 survives as good law today, the Supreme Court’s subsequent precedents have discredited the notion that such right can be brought as a derivative claim. Instead, those precedents establish that Borak must be narrowly interpreted, that the right of action implied by Borak belongs to only shareholders, and that shareholder standing to assert that right is limited to direct, not derivative, claims. In each instance, the implication is the same: A corporate forum provision precluding derivative actions in federal courts does not violate the rights of shareholders under Section 14(a).

This circuit split offers an opportunity to reexamine Borak at three different levels, as informed by six decades of subsequent Supreme Court precedent. At the most modest level, the Court’s post-Borak jurisprudence, particularly M/S Bremen v. Zapata Off-Shore Co. and its progeny, suggests that an intra-corporate forum selection provision that causes the extinction of the federal derivative claim while preserving the state law derivative claim is valid and enforceable, notwithstanding the Exchange Act’s anti-waiver provision. At a deeper level, the opportunity to revisit Borak in the derivative context presents a chance to hold that Borak does not support the implication of a private right to pursue derivative Section 14(a) litigation. The implied direct Section 14(a) right of action could, on this logic, be preserved or simply not addressed. Put another way, the debate over where to hear a federal derivative complaint can be reframed as a debate over where to hear a claim that should not exist in the first instance. Most aggressively, an occasion to revisit Borak could lead to its complete reversal, and the elimination of implied private direct Section 14(a) claims, a result that would be unnecessary to resolve the question presented by the conflict apparent in Seafarers and Lee.

In all cases, it suggests that the Seventh Circuit’s reliance on Borak was fundamentally mistaken. Where shareholders are able to bring (i) the same Borak claim as a direct or class action to recover any damage they suffered personally and (ii) a derivative action under state corporate law to recover any damage suffered by the corporation, then a third lawsuit, making a derivative Borak claim, does nothing to benefit the corporation, its shareholders, or society more broadly. Instead, it only opens the door to wasteful, attorney-driven litigation.

This Article proceeds in four parts. Part II describes the context in which corporate forum provisions first emerged and the divergent treatment of the identical forum provisions at issue in Seafarers and Lee. Part III evaluates those decisions against the relevant state corporate law. It demonstrates that the Seventh Circuit in Seafarers erred in its application of Delaware law governing corporate forum provisions because, under the Delaware Supreme Court’s Salzberg decision, a forum provision precluding derivative Borak claims is both valid and enforceable against shareholders.

Part IV addresses federal law questions and observes that the Supreme Court’s post-Borak precedent undercuts the notion that Borak claims can be brought as a derivative action. Indeed, Borak’s observations as to implied derivative claims are better characterized as dicta than as holdings. Narrowing the contemporary understanding of Borak’s implications to preclude federal derivative Section 14(a) claims, while preserving direct claims, can therefore be accomplished without addressing the question of stare decisis. This narrowing of Borak is entirely consistent with an independent string of Supreme Court precedent that calls for narrow interpretation of all implied private rights. Part V offers a brief conclusion.

II. The Circuit Split over Intra-Corporate Forum Provisions

The fact that a circuit split concerning intra-corporate forum provisions has only recently emerged reflects, in part, the novelty of these provisions. Although commercial and consumer contracts commonly include forum selection clauses that stipulate the forum in which disputes between the contracting parties must be litigated, the use of such clauses in a corporation’s governing documents is a relatively recent innovation.

Part A describes the context in which corporate forum provisions have recently emerged. Part B explains why the emergence of intra-corporate forum provisions has caused the recent surge in federal shareholder litigation alleging Borak claims. Part C explains the divergent treatment of intra-corporate forum provisions as applied to Borak claims by the Seventh and Ninth Circuits.

A. The Rise of Intra-Corporate Forum Provisions

Intra-corporate forum provisions emerged only in the last decade in response to the proliferation of meritless shareholder lawsuits targeting Delaware corporations, but filed in courts outside of Delaware. Although these lawsuits asserted Delaware corporate law claims, plaintiff ’s attorneys aimed to avoid the perceived hostility of the Delaware courts by filing out-of-state. By bringing suit out-of-state, in a court less familiar with Delaware’s corporate law, plaintiffs sought to increase their leverage over corporate defendants in order to extract larger settlements for claims often described as nuisance litigation. Corporate defendants also frequently faced multiple lawsuits making essentially identical allegations, but filed in different jurisdictions by competing plaintiff ’s lawyers, each seeking to wrest control of the litigation and a piece of any settlement. According to judicial and academic assessments, the resulting dynamic principally benefitted the plaintiff ’s bar at the expense of corporate defendants and, ultimately, shareholders, whose interests the plaintiff ’s bar are purportedly protecting.

To address this growing problem, starting in 2010, several public corporations added a forum selection provision to their corporate bylaws or charter. These provisions aimed to ensure that any shareholder lawsuits making Delaware law–based claims would be brought exclusively in the state courts of Delaware. Doing so would have several salutary effects. First, channeling all shareholder lawsuits into the Delaware courts would curb the inefficiencies of multi-forum litigation. Second, it would ensure that the forum with the greatest interest and expertise in the substantive law underlying the shareholder’s claims would be the forum adjudicating the case. Finally, it would enable the Delaware courts to retain control over the interpretation, application, and development of the state’s corporate law and, thus, regulatory oversight of the corporations chartered by the state.

When these newly adopted forum provisions were first challenged in 2013, the Delaware Court of Chancery had little difficulty upholding them. Boilermakers Local 154 Retirement Fund v. Chevron Corp. explained that a corporation’s charter and bylaws together constitute a “binding broader contract among the directors, officers, and stockholders.” Consequently, a forum selection clause in the corporate contract “is valid and enforceable under Delaware law to the same extent as other contractual forum selection clauses.”

Two years later, in 2015, the Delaware General Assembly codified Chancery’s decision by amending the Delaware General Corporation Law (“DGCL”) to add a new section 115 expressly authorizing the intra-corporate forum provisions that were upheld in Boilermakers. Specifically, section 115 statutorily establishes that a corporation’s “certificate of incorporation or [] bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State.”

Since Boilermakers and its subsequent codification, forum provisions have become a common feature in corporate bylaws and charters. Moreover, these provisions have been enforced by nearly every state and federal court that has confronted them, with the Seventh Circuit’s Seafarers decision standing as a conspicuous exception.

All of this should be unsurprising. Sound policy considerations support the use and enforcement of forum provisions to regulate shareholder litigation. These provisions avoid wasteful inefficiencies caused by duplicative shareholder lawsuits filed in multiple jurisdictions. By channeling these suits into the court likely to be the most expert in the substantive law underlying the shareholders’ claims—namely, for Delaware-chartered corporations, Delaware’s own state courts—corporate forum provisions make it more likely that meritorious claims prevail while frivolous claims are dismissed, thereby incentivizing plaintiff ’s counsel to focus on the merits of shareholder lawsuits, rather than on procedural maneuvers aimed at maximizing their fees. The result ultimately benefits corporations and, consequently, their shareholders.

B. The Consequent Surge in Borak Claims

Once widely embraced, corporate forum provisions initially accomplished their intended aim. Unable to shop for a favorable forum outside of Delaware, the plaintiff ’s bar retreated. Meritorious claims continued to be filed in Delaware, but the volume of meritless litigation filed out-of-state declined.

This retreat was short-lived, however. Forced to litigate state corporate law claims before Delaware courts, where strike suits went to die, many plaintiff ’s attorneys adopted a new litigation tactic. Relying on Borak in particular, plaintiff ’s attorneys increasingly repackaged their state corporate law claims into Section 14(a) federal securities law claims.

Drafting a complaint as a federal Borak claim offers a plaintiff ’s attorney a number of potential advantages, assuming the claim remains in federal court and the intra-corporate forum selection provision is not enforced to require that the claim proceed in Delaware state court. In particular, unlike the more typical federal securities lawsuit brought under Exchange Act Rule 10b-5, a plaintiff making a Borak claim need not always show that the defendant acted with scienter. In most circuits, mere negligence suffices. In addition, the heightened pleading standards imposed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) to reign in plaintiff-side abuses in securities class actions do not apply to Borak claims, at least in some jurisdictions. Accordingly, as compared to a Rule 10b-5 claim, if all other factors are equal, a Borak claim is more likely to survive a motion to dismiss.

Finally, where a plaintiff ’s attorney is unable or unlikely to be appointed lead counsel in a federal securities class action, a Borak claim brought as a federal derivative action offers a fee-seeking attorney an alternative path to a share of a settlement. This opportunity arises because the PSLRA requires that competing securities class actions alleging common facts or events be consolidated and led by a single plaintiff, but those reforms are inapplicable to copycat derivative actions based on the same facts or events. Thus, where a corporate defendant already faces a Rule 10b-5 class action, a parallel derivative Borak claim offers a plaintiff ’s attorney another bite at the apple when it comes to negotiating for attorneys’ fees.

Given these advantages, it is therefore unsurprising that once intra-corporate forum provisions effectively channeled state corporate law claims into the courts of Delaware, the plaintiff ’s bar would turn to Borak. The result has been a surge in federal proxy lawsuits concerning matters that are traditionally litigated as state corporate law claims.

Consider, for example, a recent hotbed of Borak lawsuits: deal litigation. Traditionally, shareholder suits challenging a pending merger or acquisition were brought in state courts and asserted state corporate law claims. In 2016, however, as Delaware courts began to clamp down on meritless deal litigation, plaintiff ’s attorneys retreated to federal courts, repackaging their state corporate law claims as federal Borak claims. To illustrate, in 2014, plaintiffs filed only twelve Borak-based suits in federal courts challenging a proxy disclosure made in connection with a proposed corporate merger or acquisition. By 2017, that number mushroomed to 198 Borak-based suits, with a handful of plaintiff ’s firms accounting for the vast majority of those filings. Despite the changed venue and legal theory, the prospects of these dubious lawsuits has remained largely unchanged. Between 2011–20, more than 800 Borak claims were filed challenging corporate transactions, and all but 8 percent were dismissed.

But the rise in Borak claims has not been limited to deal litigation. As Seafarers and Lee illustrate, the plaintiff ’s bar has recently brought Borak lawsuits as derivative actions challenging all aspects of corporate management—ranging from executive compensation, to board oversight of regulatory compliance, including workplace safety, product safety, and sexual impropriety and discrimination, to corporate policies concerning diversity, equity, and inclusion.

As derivative claims, these lawsuits allege that the corporation was somehow harmed by mismanagement at the hands of the corporation’s directors or officers. Stated differently, these derivative suits concern internal corporate affairs—matters that are traditionally governed by state corporate law and, therefore, more sensibly litigated in state courts, most commonly in Delaware. But rather than simply claiming a managerial breach of state law fiduciary duties owed to the corporation, these suits also make the more tortured argument that the alleged corporate harm was a result of the shareholders being misled by the company’s proxy statement. By bootstrapping a federal Borak claim onto state corporate law claims, these derivative lawsuits transparently aim to establish federal court jurisdiction and, thereby, avoid the likely fate that such suits would face before a skeptical Delaware jurist. Even so, like their deal litigation counterparts, these internal affairs claims seldom fare better in the federal courts than in Delaware.

Nevertheless, the surge in federal proxy lawsuits targeting internal corporate affairs has raised a range of novel questions regarding the interaction between federal securities law and state corporate law. Among them is whether a forum provision in a corporation’s bylaws or charter, by stipulating that all derivative lawsuits must be filed in state court, may effectively preclude derivative Borak claims. That question divided the circuit courts in Seafarers and Lee.

C. The Circuit Split

The essential facts in Seafarers and Lee are strikingly similar. In both cases, a plaintiff-shareholder brought a derivative Borak lawsuit in federal district court. In both cases, the target corporation sought to dismiss the plaintiff ’s suit by invoking a forum provision set forth in the corporation’s bylaws. In both cases, the forum provision used language identical to the provision affirmed in Boilermakerslanguage that is now standard in the forum provisions of myriad public companies. That language simply provides that the Delaware Court of Chancery “shall be the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation.”

Relying on that language, the defendant corporations in both cases argued that the forum provision required the plaintiff to file any derivative lawsuits in Delaware Chancery Court, even if that requirement would entirely foreclose plaintiff ’s derivative Borak claim. In both cases, the federal district courts agreed with defendants’ analysis and enforced the forum provision by dismissing the complaint. On appeal, however, the two cases would diverge.

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.

The Supreme Court’s post-Borak decisions, however, make clear that this premise is incorrect. Part A explains that Borak is a relic of a bygone era, and its rationale has been expressly rejected by the Court’s subsequent precedents. To the extent Borak survives, Part B shows that under the Court’s post-Borak decisions, shareholder claims under Section 14(a) are either cognizable only as direct actions or, at least, that Borak must be interpreted narrowly to permit the waiver of derivative claims.

A. Borak Has Been Repudiated, But Not Reversed

By the standards of later Supreme Court decisions, Borak is an anachronism. Although Borak has never been formally reversed, Borak’s rationale has been repeatedly repudiated and multiple justices have questioned its continued viability. By relying on Borak, Seafarers thus builds on a crumbling foundation.

Borak is a vestige of an era when the Court’s attitude toward judicially implied rights was far more permissive than it is today. Emphasizing the “broad remedial purposes” of the Exchange Act, the Borak Court believed it was the judiciary’s role to imply rights into the statute if that would further Congress’s underlying policies. As Borak asserted, “it is the duty of the courts to be alert [and] provide such remedies as are necessary to make effective the congressional purpose.” Applying this interpretative approach to Section 14(a), Borak reasoned that “[w]hile the [statutory] language makes no specific reference to a private right of action, among its chief purposes is ‘the protection of investors,’ which certainly implies the availability of judicial relief where necessary to achieve that result.” As support, Borak pointed to section 27(a) of the statute, which grants federal courts exclusive jurisdiction over Exchange Act lawsuits. Without elaboration, the Court baldly asserted that “[i]t appears clear that private parties have a right under [section] 27 to bring suit for violations of [Section] 14(a).”

In subsequent decisions—starting first with Cort v. Ash and more recently Alexander v. Sandoval—the Court has conspicuously distanced itself from Borak. In deference to constitutional separation of powers, the Court has adopted “a far more cautious” approach toward implying private rights of action. Rather than asking whether a judicially implied right would further the legislative policy embodied by a federal statute, the Court today focuses exclusively on whether the express statutory text evinces a legislative intent to create a private remedy. “[W]hat must ultimately be determined is whether Congress intended to create the private remedy asserted.” And that determination “must begin with the language of the statute itself.” “[A] private right of action under federal law is not created by mere implication, but must be unambiguously conferred.”

Under Borak’s “ancien regime,” courts would “as a routine matter . . . imply causes of action not explicit in the statute” if they believed they could “improve upon” Congress’s legislative handiwork. By contrast, under today’s more rigorous standard, courts have repeatedly declined to imply new private remedies, “no matter how desirable it might be as a policy, or how compatible with the statute.” Indeed, it has been more than four decades since the Supreme Court implied a new private right of action under federal securities law.

Consider, for example, the Court’s 1979 decision in Touche Ross & Co. v. Redington. The Court there declined to imply a private remedy under section 17(a) of the Exchange Act, which requires brokerage firms to file financial statements with the SEC. Rather than asking whether a judicially implied right would further the statute’s underlying purpose, the Court explained that its analysis was “limited solely to determining whether Congress intended to create the private right of action.”

Turning to the statutory text, Touche Ross expressly rejected Borak’s appeal to the “broad remedial purposes” of the Exchange Act. “That a federal statue has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person.” Accordingly, the Court ruled that “the mere fact that § 17(a) was designed to provide protection for brokers’ customers does not require the implication of a private damages action in their behalf.” In equally pointed language, Touche Ross also discredited Borak’s bald assertion that Exchange Act section 27 supports an implied remedy. Section 27 is merely a “jurisdictional provision” that “creates no cause of action of its own force and effect; it imposes no liabilities.”

Recognizing the unmistakable conflict with Borak, Touche Ross candidly concluded:

We do not now question the actual holding of [Borak], but . . . [t]o the extent our analysis in today’s decision differs . . . , it suffices to say that in a series of cases since Borak we have adhered to a stricter standard for the implication of private causes of action, and we follow that stricter standard today. The ultimate question is one of congressional intent, not one of whether this Court thinks that it can improve upon the statutory scheme that Congress enacted into law.

When the Court returned to Borak more than a decade later, it explicitly sidestepped the question of whether the beleaguered precedent remains good law. Focusing squarely on the issues presented by the litigants, Virginia Bankshares, Inc. v. Sandberg stated simply that “the object of our enquiry does not extend further to question the holding of . . . [Borak], at this date, any more than we have done so in the past.” Nevertheless, the Court emphasized that its post-Borak decisions affirmatively reject Borak’s expansive approach to judicially implied rights of action. “The rule that has emerged in the years since Borak … is that recognition of any private right of action for violating a federal statute must ultimately rest on congressional intent to provide a private remedy.”

Precedent following Virginia Bankshares has been at least as emphatic. In Sandoval, the Court explained it has “abandoned” Borak’s logic. Indeed, during recent oral arguments, the chief justice observed that “we now know that [Borak] was not the right approach,” that “Borak would not be decided the same way today,” and that, “from today’s perspective, what we did back then [in Borak] was a mistake.”

B. The Implications of the Post-Borak Decisions

Under the Court’s subsequent decisions, all that remains of Borak is its holding, which “has no basis in current law, but . . . has not yet been overruled.” Given its “derelict” status, some have questioned whether it is only a matter of time before the Court expressly reverses the 1964 decision.

But even if Borak is not expressly reversed, the Court’s post-Borak precedents offer three unmistakable lessons about the implied private right of action under Section 14(a). First, the right must be narrowly interpreted. Second, the right belongs to only shareholders. And third, shareholder standing to assert the right is limited to direct, not derivative, claims. In each instance, the implication is the same: Seafarers’ reliance on Borak is mistaken. A corporate forum provision precluding derivative actions in federal court does not violate shareholders’ implied rights under Section 14(a).

1. Borak Must Be Narrowly Interpreted

The Supreme Court has repeatedly explained that existing judicially implied private rights of action must be narrowly interpreted. A strict interpretation is an essential “corollary” to the Court’s more rigorous, post-Borak skepticism toward implying rights in the first instance. “Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for [the courts]” to make. Because “any private right of action for violating a federal statute must ultimately rest on congressional intent to provide a private remedy,” it follows that “the breadth of right once recognized should not, as a general matter, grow beyond the scope congressionally intended.”

Applying this narrowing interpretation to the implied right of action under Rule 10b-5 in particular, the Court has repeatedly declined to expand the scope of that right beyond its “present boundaries.” In addition to separation-of-powers concerns, the Court has also cited “practical consequences” that flow from judicial expansion of Rule 10b-5 in the absence of congressional intent. Such expansion risks inviting “strike suits” that have “little chance of success,” but are instead brought by plaintiff ’s attorneys only for “settlement value.” Enabling “plaintiffs with weak claims to extort settlements from innocent companies . . . rais[es] the cost of doing business,” the Court has explained. “This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.” Consequently, expanding the private right of action under Rule 10b-5 risks creating “a social cost rather than a benefit.”

Importantly, the Court has applied the same narrowing strategy to the private right of action implied under Section 14(a). In declining to “extend the scope of Borak actions beyond the ambit” established by previous decisions, Virginia Bankshares explained that it could “find no manifestation of [congressional] intent” in the text or legislative history of Section 14(a) to authorize a private cause of action, let alone one as broad as the plaintiff-shareholder had claimed. With regard to “policy considerations,” the Court cautioned that expanding the Section 14(a) implied private right of action, like Rule 10b-5, would risk inviting the “same threats” of “strike suits” based on “speculative claims.”

A strict interpretation of Borak presents obvious problems for the Seventh Circuit’s analysis in Seafarers. As recognized by both the Ninth Circuit in Lee and Judge Easterbrook’s Seafarers dissent, nothing in Borak expressly holds that the right to bring a derivative action under Section 14(a) cannot be waived so long as shareholders retain the right to bring a direct or class action. Instead, Borak simply stated that “a right of action exists as to both derivative and direct causes” because denying derivative standing would be “tantamount to a denial of private relief.” But as Boeing’s experience demonstrates, where shareholders are able to bring (i) a federal securities class action to recover any damage they suffered personally and (ii) a derivative action under state corporate law to recover any damage suffered by the corporation, shareholders are not “deni[ed] . . . private relief ” without derivative standing under Section 14(a). To the contrary, a derivative Borak action accomplishes nothing more than the creation of inefficient duplicative litigation for the benefit of plaintiffs’ attorneys seeking a fee award that is unavailable to them in parallel litigation that would generate all the remedies available in a Section 14(a) derivative claim.

A second, more fundamental problem for Seafarers is that Borak’s statements concerning derivative actions are nonbinding dicta, and not a part of Borak’s actual holding. This interpretation comports with the Borak Court’s own statement of the question presented in the case: “We consider only the question of whether [section] 27 of the Act authorizes a federal cause of action for rescission or damages to a corporate stockholder . . . . This being the sole question . . . , we will not consider other questions . . . .” This purposefully narrow articulation of the question before the Court suggests that Borak’s sole holding is that a federal cause of action does in fact exist. Any subsequent musings by the Court as to the precise nature of that action, whether direct or derivative, were unnecessary to answer the question presented. Indeed, the Court would later characterize Borak in precisely these terms, explaining in Virginia Bankshares that “[Borak] did not itself . . . define the class of plaintiffs eligible to sue under § 14(a). But its general holding [is] that a private cause of action was available to some shareholder class.” Thus, the holding of Borak is agnostic as to whether a derivative or direct action may be brought under Section 14(a). Rather, it merely establishes that some private right of action exists.

A third problem with the Seventh Circuit’s reliance on Borak is that it wholly fails to recognize that a half century of subsequent Supreme Court precedents has substantially qualified the 1964 decision. A narrow interpretation of Borak, which is today required, would account for post-Borak jurisprudence that sharply challenges the vitality of the derivative Section 14(a) claim under federal law.

2. Shareholders Alone Have Section 14(a) Standing

The Court’s post-Borak decisions establish that Section 14(a) standing extends only to shareholders, and not to the corporation whose shareholders are solicited.

Borak itself signals as much. The Borak Court was emphatic that the primary aim of Section 14(a) is the protection of shareholders. As the Court explained, Section 14(a) was enacted to protect the “free exercise of the voting rights of stockholders.” When a shareholder’s vote is secured through a false or misleading proxy statement, it is the shareholder’s personal right to “fair corporate suffrage” that is violated. “The damage suffered results … from the deceit practiced on the stockholders as a group.”

Although this point is marbled throughout Borak, it becomes confused by the Court’s observation, which was not required to resolve the question presented, that shareholders can enforce Section 14(a) through a derivative action. A derivative lawsuit is brought by shareholders on behalf of the corporation to vindicate a right that belongs to the corporation. By contrast, a direct lawsuit is brought by shareholders on their own behalf to vindicate a right that is personal to the shareholders. Accordingly, if a lawsuit aims to vindicate the “free exercise of the voting rights of stockholders,” then the lawsuit is direct, not derivative. Indeed, even the plaintiff in Borak explained that his suit was direct and not derivative. Nonetheless, the Court said: “[W]e need not embrace that view, because we believe that a right of action exists as to be both derivative and direct causes.”

In characterizing the private right implied under Section 14(a) to include derivative actions, perhaps the Borak Court was concerned that direct suits would be ineffective in protecting shareholders. After all, Borak was decided two years before the federal rules of civil procedure governing class actions were modernized, shifting from an opt-in to an opt-out model and thus enabling shareholder class actions with potential damages (and resulting fees) worthwhile for plaintiff ’s attorneys. By contrast, in a successful derivative action, a plaintiff ’s attorney would be entitled to have its fees paid by the corporation, the attorney’s nominal client, even in a suit that results in no monetary damages. If the deficiencies of class action procedure motivated the Borak Court to include derivative actions within the sweep of Section 14(a), then subsequent procedural developments undermine this logic.

Whatever the reason for Borak’s insistence on derivative actions, lower courts soon thereafter extended Section 14(a) standing from shareholders whose proxies were solicited to the corporate entity at the center of a proxy contest. As Judge Friendly reasoned in Studebaker Corp. v. Gittlin, “[i]f [the] Exchange Act authorizes a stockholder to assert [a derivative] claim on the corporation's behalf, as held in Borak, it must also authorize the corporation to do so on its own.” To justify this conclusion, Gittlin echoed Borak’s “broad remedial” spirit, explaining that “in . . . contests for [corporate] control” Congress anticipated “the corporation, as represented by its management has a role to play” in protecting shareholders from “irresponsible outsiders seeking to wrest control of [the] corporation.”

Perhaps Gittlin’s logic was defensible in an era when the Court encouraged expansive interpretations of judicially implied rights of action. However, it is indefensible today, when the Court has repeatedly cautioned against the judicial creation or expansion of implied rights. Worse yet, Gittlin’s logic relies on the discredited notion that, in a contest for corporate control, a corporation’s incumbent managers are well positioned to protect shareholders’ interests. Since the 1980s rise of tender offers, courts led by Delaware have instead recognized that when a corporation’s managers face potential ouster by a hostile outsider, management actions become inherently suspect because of the “omnipresent specter” of self-interest. Consequently, in a battle for corporate control, the “corporation, as represented by its management,” is a “poor representative of shareholder interests.”

Putting aside Gittlin’s merits, the Court has never expressly endorsed Borak’s expansion from shareholders to the corporation owned by the shareholders. The Court’s post-Borak precedents are instead far better read to confirm that Section 14(a) standing is limited to shareholders only.

Piper v. Chris-Craft Industries, Inc., reinforces this point. There, both the majority and dissent acknowledged the awkward tension created by Borak’s recognition of a derivative action. Piper held that Exchange Act Section 14(e)—a sister provision to Section 14(a) that prohibits any false or misleading statements in connection with a tender offer—does not imply a private right of action on behalf of a tender offeror. To justify this conclusion, the Court reasoned that “the sole purpose of [Section 14(e)] was the protection of investors. . . . [T]here is … no indication that Congress intended to create a damages remedy” in favor of any other parties. In dissent, Justice Stevens noted that the majority’s reasoning conflicted with Borak. Although Borak “held that a derivative suit on behalf of the corporation could be brought under [Section] 14(a), it seems clear that the primary beneficiaries of that section [are] individual stockholders.” Applying Borak’s logic, Justice Stevens reasoned, the Court should also imply a private right of action for tender offerors. The Piper majority brushed away this apparent tension by correcting the dissent’s “misreading of Borak.” As the Piper majority explained, “The Borak Court was . . . focusing on all stockholders[,] the owners of the corporation[,] as the beneficiaries of [Section] 14(a).” Thus, the majority recast Borak as “a case in which the remedy was afforded to shareholders[,] the direct and intended beneficiaries of the legislation.”

Later, in Virginia Bankshares, the Court sharpened the focus on shareholders by narrowing in on voting rights as a prerequisite for Section 14(a) standing. Virginia Bankshares refused to extend Borak to shareholders whose votes were unnecessary to authorize the corporate action for which their proxy was solicited. Instead, the Court ruled that only shareholders whose “votes [are] legally required to authorize a [corporate] action” have Section 14(a) standing. Thus, under Virginia Bankshares, standing does not extend to minority or nonvoting shareholders who, even if misled by a proxy solicitation, lack the votes necessary to affect the outcome of a corporate election.

By anchoring standing in a shareholder’s voting rights, Virginia Bankshares makes clear that the corporate entity itself lacks standing to bring a claim under Section 14(a). After all, a corporation has no voting rights. A corporation cannot legally vote its own shares in any election for which its shareholders are solicited. Only the shareholders whose “votes [are] legally required” have standing under Section 14(a).

This restrictive approach to Section 14(a) standing “also accords with the narrow scope that we must give … implied private right[s] of action.” As Borak itself acknowledged, Section 14(a) is about the “protection of investors.” Nothing in either Borak or the statutory text suggests that Section 14(a) was intended to protect a corporation whose shareholders are solicited. To the contrary, both Borak and the legislative history recognized that the “free exercise of the voting rights of stockholders” could be manipulated by outsiders as well as by the corporation, acting through its “unscrupulous corporate officials, seeking to retain control of the management.” Thus, extending Section 14(a) standing to a corporation whose shareholders are solicited is tantamount to extending standing to the very party against whom Section 14(a) aims to protect shareholders. In the language of Virginia Bankshares, it would impermissibly “expand the class of plaintiffs entitled to bring Borak actions” beyond its original ambit.

Citing Piper and Virginia Bankshares, both the Ninth Circuit in Lee and Judge Easterbrook’s Seafarers dissent recognized that Section 14(a) standing is limited to only shareholders and does not extend to the corporation whose shareholders are solicited. While Lee is the first circuit court decision to explicitly reach this conclusion, it is not the first court to do so. Since Virginia Bankshares, at least three federal district courts have arrived at the same conclusion, ruling that a corporation lacks standing to challenge a proxy solicitation directed at the corporation’s shareholders. In doing so, Lee and these three district courts have conspicuously departed from Gittlin and its progeny, which were decided before Virginia Bankshares changed the doctrinal landscape.

By contrast, the majority decision in Seafarers fails to mention Virginia Bankshares. This is a troubling omission because recognizing that a corporation lacks Section 14(a) standing has obviously negative implications for shareholder standing to bring derivative Borak claims. After all, “[a] derivative suit is brought by shareholders to enforce a claim on behalf of the corporation.” It is brought by shareholders “to enforce a corporate cause of action.” Thus, “one precondition for the suit [is] a valid claim on which the corporation could have sued.” If this precondition fails because the corporation has no valid Section 14(a) claim, then a shareholder cannot bring a derivative action on behalf of the corporation. And if a shareholder cannot bring a derivative action in the first instance, then a forum provision precluding such actions cannot violate shareholders’ Section 14(a) rights.

3. Shareholder Standing Is Limited to Direct Actions

Accordingly, a narrow reading concludes that Borak creates no implied right to bring derivative Section 14(a) claims, and the only right it implies is to bring direct Section 14(a) claims. A separate line of post-Borak precedent reinforces this conclusion.

Burks v. Lasker and Kamen v. Kemper Financial Services, Inc., hold that, absent express congressional intent to the contrary, federal courts must look to state corporate law when adjudicating derivative claims brought under federal securities law. Both cases involved derivative claims asserting implied rights of action under the Investment Company Act of 1940. In both cases, the Court reasoned that because a derivative lawsuit “relates to the allocation of governing power within the corporation” as between directors and shareholders, and because state law “is the font of corporate . . . powers,” state law dictates the rules governing derivative litigation.

Burks and Kamen thus direct federal courts to look to state corporate law to determine whether a Borak claim is direct or derivative. State law, here the law of Delaware, clearly holds that Section 14(a) claims are direct, not derivative. To distinguish between direct and derivative claims, Delaware asks “(1) who suffered the alleged harm (the corporation or the stockholders); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually).” Applying this test, Delaware’s Supreme Court has plainly explained that “where it is claimed that a duty of disclosure violation impaired the stockholders' right to cast an informed vote, that claim is direct.” The claim is direct, not derivative, because “where a shareholder has been denied one of the most critical rights he or she possesses—the right to a fully informed vote—the harm suffered is almost always an individual, not corporate, harm.”

Consequently, deference to state corporate law, which Burks and Kamen dictate, reinforces what Piper and Virginia Bankshares already suggest: a shareholder claim under Section 14(a) is not cognizable as a derivative action. It is cognizable, if at all, only as a direct action.

Heeding this message, the Ninth Circuit before Lee had twice ruled that shareholder claims under Section 14(a) are direct, not derivative. Citing controlling Delaware precedent, these previous Ninth Circuit decisions explained that where shareholders are “deprived of the right to a fully informed vote,” the claim is direct because “[the] claimed injury is independent of any injury to the corporation and implicates a duty of disclosure owed to shareholders.” Reinforcing these precedents, Lee cited to Kamen and Burks and bluntly stated that “Delaware’s rule as stated in Tooley supersedes the federal common law rule proclaimed in Borak.”

In contrast, the majority opinion in Seafarers, despite a perfunctory citation to Kamen, never considers how Delaware law would characterize shareholder Section 14(a) claims. This error is fatal. As recognized by Lee, Delaware law unambiguously classifies Section 14(a) claims as direct. Consequently, a forum provision precluding Section 14(a) derivative claims cannot infringe upon the rights of shareholders because shareholders have no right to bring Section 14(a) derivative claims in the first instance.

None of this is to deny the real damage that a corporation can itself suffer when its shareholders are deceived by a misleading proxy solicitation disseminated by the corporation’s management. As Borak itself recognized, “[t]he injury which a stockholder suffers from . . . a deceptive proxy solicitation ordinarily flows from the damage done to the corporation.” But the Court’s post-Borak decisions, which are consistent with controlling Delaware precedent, establish that the right secured by Section 14(a) is the right of shareholders to “fair corporate suffrage,” and not any right of the corporation. If a shareholder lawsuit aims to redress damage to the corporate entity, then those damages must be pursued in a derivative lawsuit brought under state law asserting breach of fiduciary duty claims against the corporation’s managers, and not in a federal derivative claim alleging violations of Section 14(a).

The Exchange Act “implement[s] a ‘philosophy of full disclosure,” and does “not seek to regulate . . . internal corporate mismanagement.” To permit derivative shareholder suits under Section 14(a) alleging internal corporate mismanagement by bootstrapping such allegations onto disclosure claims would be to “federalize the substantial portion of the law of corporations.” The post-Borak Court has cautioned precisely against this result:

The result would be to bring within [the scope of Section 14(a)] a wide variety of corporate conduct traditionally left to state regulation. . . . In addition to posing a “danger of vexatious litigation which could result from a widely expanded class of plaintiffs . . . , this extension of the federal securities laws would overlap and quite possibly interfere with state corporate law.”

Where “the cause of action (is) one traditionally relegated to state law,” and where the relevant state’s law provides ample remedies for managerial harm caused to the corporation, “it is entirely appropriate . . .to relegate [shareholders] to whatever remedy is created by state law.” After all, “[c]orporations are creatures of state law, and investors commit their funds to corporate directors on the understanding that, except where federal law expressly requires [otherwise], state law will govern the internal affairs of the corporation.” “Congress has never indicated that the entire corpus of state corporation law is to be replaced simply because a plaintiff ’s cause of action is based upon a federal statute.”

V. Conclusion

If Seafarers were decided under Borak’s “ancien regime,” one might not quibble with it. But since 1964 the times have changed. Delaware courts have accepted that a corporate forum provision is contractually binding on shareholders. Moreover, with Salzberg, Delaware law has made it clear that such a provision can determine the forum in which shareholders must litigate federal securities law claims. At the federal level, the Supreme Court has firmly embraced the enforceability of contractual forum provisions. More importantly, the Court has also established that the implied private right of action under Section 14(a) must be narrowly construed and that these claims can only be brought by shareholders as direct or class actions.

Together, these post-Borak developments wholly discredit the Seventh Circuit’s conclusion in Seafarers. As recognized by the Ninth Circuit en banc in Lee, nothing in the corporate law of Delaware or the Exchange Act precludes the enforceability of a forum provision requiring that all derivative shareholder actions be brought exclusively in the courts of the state where a corporation is chartered. Thus, much like the 1964 decision upon which it is based, Seafarers rests on logic long “abandoned” by the Supreme Court and should not guide other courts’ interpretation of intra-corporate forum selection provisions as applied to Section 14(a) federal derivative claims.

The authors wish to thank Jessica Erickson, Anitha Reddy, and Steve Bigler for their insights and comments on earlier drafts of this article.