Many companies incorporated in Delaware are following the modern trend of including forum selection clauses in their corporate bylaws. These clauses require shareholders to bring any derivative lawsuits against the corporation’s officers or directors in a Delaware state court. While generally enforceable, these clauses create confusion when shareholders attempt to bring derivative claims under the Securities Exchange Act of 1934 (“Exchange Act”), which vests exclusive jurisdiction over claims brought under its provisions in federal district courts. As a result, a shareholder seeking to sue corporate leaders derivatively on behalf of the corporation for violations of the Exchange Act faces a choice in light of a Delaware forum selection bylaw: either bring their claim in federal court contrary to the bylaw or bring their claim in a Delaware state court contrary to the Exchange Act’s jurisdictional requirements. In Seafarers Pension Plan v. Bradway, 23 F.4th 714 (7th Cir. 2022), and Lee v. Fisher, 70 F.4th 1129 (9th Cir. 2023), the Seventh and Ninth Circuits, respectively, split on the question of whether district courts must enforce a forum selection bylaw and dismiss a shareholder’s Exchange Act claim or hold the bylaw unenforceable to allow the claim to proceed. In Seafarers Pension Plan, the Seventh Circuit concluded that a forum selection clause contained in Boeing’s bylaws was unenforceable as applied to an Exchange Act derivative claim brought by shareholders when its application would result in an inability to bring the derivative suit in any forum. One year later, in Lee v. Fisher, the Ninth Circuit split with the Seventh on this issue and instead upheld Gap’s similar forum selection bylaw as enforceable under virtually the same circumstances. Both circuits rendered their decisions in split panels garnering dissents—the Seventh Circuit with a dissent from Judge Frank Easterbrook and the Ninth Circuit in an en banc panel with a dissent joined by five judges.
This Comment argues that district courts should hold forum selection bylaws directing claims to Delaware state court unenforceable when applied to shareholders seeking to bring derivative Exchange Act claims. In doing so, this Comment suggests that courts should adopt an approach similar to that taken by the Seventh Circuit, which concluded that the forum selection bylaw is unenforceable, when analyzing this question, with several modifications regarding that court’s treatment of Delaware law. Specifically, in reviewing Delaware caselaw on forum selection provisions in corporate bylaws, the Seventh Circuit erred in its application of section 115 of the Delaware General Corporation Law (“DGCL”) to Boeing’s forum selection bylaw because federal claims likely do not fall within the breadth of that section governing “internal corporate claims.” Instead, the proper approach to determining the validity of a forum selection bylaw according to the Delaware Supreme Court in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), is to determine whether it violates section 109 of the DGCL by being “inconsistent with [existing] law” and thus not authorized by the DGCL. Such an approach ensures that shareholders retain congressionally granted tools to hold corporate decisionmakers accountable for wrongdoing.
Under this approach, a reviewing court would likely determine that both bylaws at issue in Seafarers Pension Plan and Lee are unenforceable under section 109. Specifically, the bylaws violate the Exchange Act’s antiwaiver provision, which deems void “any . . . provision binding any person to waive compliance with any provision of [the Exchange Act] or of any rule or regulation thereunder.” A forum selection clause that results in a plaintiff being unable to bring a derivative Section 14(a) claim, a right found by the Supreme Court in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), as being part of the Exchange Act, must be contradictory to the language of the Exchange Act’s antiwaiver provision. Thus, by yielding a result that is inconsistent with existing law, Boeing’s and Gap’s forum selection clauses are consequently unauthorized by section 109 of the DGCL.
Furthermore, this result is consistent with Delaware jurisprudence on the issue in at least two ways. First, the Delaware Court of Chancery has explicitly hypothesized about this situation and posited that a forum selection clause foreclosing an Exchange Act suit in federal court may be “inconsistent with the antiwaiver provisions” of the Act in its decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). While the Chancery Court did not consider the precise situation from Seafarers whereby only a plaintiff ’s derivative claim would be foreclosed, the court did see the antiwaiver provision as a protection of plaintiff ’s rights to bring Exchange Act claims generally. Second, the Delaware Supreme Court in Salzberg discussed the legislative purpose of the 2015 amendments to the DGCL, adding section 115, as not intending to allow forum selection bylaws that foreclose suits in federal court based on jurisdiction. Although the Salzberg court derived this conclusion from the bill’s synopsis and not the text itself, its conclusion demonstrates that the General Assembly likely contemplated a situation similar to that in Seafarers where a forum selection bylaw would be used to close federal courthouse doors and would not endorse that result.
This approach empowers shareholders to effectively use tools at their disposal to hold corporate decisionmakers responsible for their material misstatements and omissions and prevent directors and officers from shielding themselves against accountability. The Boeing 737 MAX crashes still serve as a reminder of the need to police corporate fraud and nondisclosure and to punish corporate wrongdoers in preventing future misconduct. In a society where corporations are so pervasive and wield so much power over daily life, shareholder oversight over corporate leaders is paramount and federal courts, as authorized by Congress, are the proper fora to adjudicate these cases.
Andrew Crane, A Litigation Bridge to Nowhere: Analyzing the Enforceability of Forum Selection Clauses for Exchange Act Claims (May 7, 2024) (unpublished manuscript), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5184111.
