Seventh Circuit Holds Forum Selection By-Law Cannot Waive Section 14(a) Claim Under Delaware Law | Practical Law

Seventh Circuit Holds Forum Selection By-Law Cannot Waive Section 14(a) Claim Under Delaware Law | Practical Law

The Seventh Circuit Court of Appeals held in Seafarers Pension Plan v. Bradway that a by-law requiring derivative actions be filed in the Delaware Court of Chancery was unenforceable under Delaware law as applied to a claim brought under Section 14(a) of the Exchange Act.

Seventh Circuit Holds Forum Selection By-Law Cannot Waive Section 14(a) Claim Under Delaware Law

by Practical Law Corporate & Securities
Published on 17 Jan 2022Delaware, USA (National/Federal)
The Seventh Circuit Court of Appeals held in Seafarers Pension Plan v. Bradway that a by-law requiring derivative actions be filed in the Delaware Court of Chancery was unenforceable under Delaware law as applied to a claim brought under Section 14(a) of the Exchange Act.
Update: On June 1, 2023, the en banc court held that Gap's forum-selection clause was enforceable (Lee v. Fisher, (9th Cir. June 1, 2023)). The court found that the forum-selection clause was not void under the Exchange Act's anti-waiver provision because it did not constitute an express waiver of non-compliance, nor is Lee barred from bringing a direct action in federal court to enforce Gap's compliance with the substantive obligations of Section 14(a) of the Exchange Act. The court was also unpersuaded by Lee's public policy arguments.
In addition, while acknowledging that its decision creates a circuit split, the court disagreed with the Seventh Circuit's interpretation and application of Delaware state law and federal law in Seafarers and therefore declined to follow it.
Update: On October 24, 2022, the Ninth Circuit Court of Appeals ordered the case in Lee v. Fisher to be reheard en banc ( (9th Cir. Oct. 24, 2022). The three-judge panel opinion is vacated.
Update: On May 13, 2022, the Ninth Circuit Court of Appeals affirmed the district court's decision in Lee v. Fisher, holding the forum selection by-law was enforceable notwithstanding the Exchange Act's exclusive jurisdiction and anti-waiver provisions ( (9th Cir., May 13, 2022). For more information on the Ninth Circuit's decision, see Legal Update, Ninth Circuit Affirms Enforcement of Forum Selection By-Law that Precludes Section 14(a) Claim.
On January 7, 2022, the Seventh Circuit Court of Appeals held in Seafarers Pension Plan v. Bradway that a by-law requiring derivative claims be filed in the Delaware Court of Chancery (a forum selection by-law) was unenforceable under Delaware law as applied to a claim brought under Section 14(a) of the Exchange Act ( (7th Cir. Jan. 7, 2022)).

Background

Seafarers Pension Plan (Seafarers), a shareholder of The Boeing Company (Boeing), filed a derivative suit in the Northern District of Illinois following the crashes of the Boeing's 737 MAX planes and the subsequent grounding of all its 737 MAX fleet. Seafarers' action was brought under Section 14(a) of the Exchange Act (15 U.S.C. §78n(a)) and alleges that Boeing's current and formers officers and directors made materially false and misleading statements regarding 737 MAX planes in the company's proxy statements from 2017 through 2019.
Boeing filed motion to dismiss based on forum non conveniens because Boeing has a forum selection by-law providing that the Delaware Court of Chancery is the exclusive forum for any derivative action brought on behalf of the company. Seafarers could not bring its Section 14(a) claim in the Delaware Court of Chancery because Section 27 of the Exchange Act (15 U.S.C. §78aa) provides federal courts with exclusive jurisdiction over claims brought under the Exchange Act. Thus, Seafarers argued that the by-law violates the Exchange Act's anti-waiver provision in Section 29(a) (15 U.S.C. § 78cc(a)), as enforcing it would effectively preclude them from bringing a Section 14(a) claim. However, the district court sided with Boeing and enforced the forum selection by-law (Seafarers Pension Plan on behalf of Boeing Company v. Bradway, (N.D.Ill., 2020)).

Seventh Circuit Reverses, Holds By-Law Cannot Waive Section 14(a) Claim

The Seventh Circuit reversed the district court in a 2-1 decision, holding that Boeing's forum selection by-law was unenforceable as it would completely preclude Seafarers from bringing its Section 14(a) claim. Notably, the Seventh Circuit did not focus its holding on whether Boeing's by-law was unenforceable under federal securities laws for violating the Exchange Act's exclusive jurisdiction and anti-waiver provisions. Instead, the court focused its analysis and reasoning on whether Delaware law would permit a by-law that would violate the Exchange Act's exclusive jurisdiction and anti-waiver provisions.
Specifically, the court held that:
  • Boeing's by-law violates Section 115 of the Delaware General Corporation Law (DGCL) (8 Del. C. § 115) because it is inconsistent with the Exchange Act's anti-waiver provision. "Delaware corporation law gives corporations considerable leeway in writing bylaws, including bylaws with choice-of-forum provisions, but it respects federal securities law and does not empower corporations to use such techniques to opt out of the Exchange Act." (Seafarers, ).
  • The more general powers granted by DGCL Section 109 (8 Del. C. § 109) do not grant Boeing the right to effectively bar plaintiffs from bringing derivative claims under the Exchange Act.
The court also rejected Boeing's argument that Seafarers had sufficient remedies under Delaware law even if precluded from bringing a claim under Section 14(a). The court ruled that the Exchange Act's anti-waiver provision "does not invite a determination of whether state law offers alternative remedies that might be deemed sufficient against an inchoate standard. Non-waiver is woven into the public policy of the federal securities laws because it is the express statutory law." (Seafarers, ).

Practical Implications

The Seventh Circuit's decision in Seafarers raises significant questions about the enforceability of Delaware forum selection by-laws that would completely foreclose plaintiffs' ability to bring derivative claims under Section 14(a). However, questions also still remain about how federal courts are enforcing such by-laws. In April 2021, the Northern District of California, citing to the now reversed Northern District of Illinois decision in Seafarers, enforced a similar forum selection by-law that also had the effect of precluding the plaintiff's Section 14(a) claim (Lee v. Fisher, (N.D.C.A. April 27, 2021). For more information, see Legal Update, US District Court's Enforcement of Delaware Forum Selection By-Law Precludes Section 14(a) Claim. The plaintiff in that case appealed to the Ninth Circuit, but in May 2022, the Ninth Circuit upheld the district court's decision. For more information on the Ninth Circuit's decision, see Legal Update, Ninth Circuit Affirms Enforcement of Forum Selection By-Law that Precludes Section 14(a) Claim.
While the issue of forum selection by-laws that bar plaintiffs from bringing federal securities laws claims is likely to be litigated further, particularly since there is now a split between the Seventh and the Ninth Circuits regarding the Exchange Act's anti-waiver provision, companies should consider these decisions when drafting forum selection clauses for their certificates of incorporation or by-laws, and monitor future developments.
For more information on Section 14(a) claims, see Practice Note, Securities Act and Securities Exchange Act Liability Provisions: Overview: Section 14(a). For a sample Delaware forum selection provision for the certificate of incorporation or by-laws of a Delaware corporation, see Standard Clause, By-Laws or Certificate of Incorporation: Delaware Forum Selection.