Plaintiff Noelle Lee brought this derivative action in the U.S. District Court for the Northern District of California against The Gap, Inc., a clothing retailer incorporated in Delaware. Lee alleged that The Gap’s 2019 and 2020 proxy statements included misstatements regarding corporate governance, which prevented shareholders from submitting fully informed votes. Although Lee brought the action in California, The Gap’s bylaws contained a forum selection clause requiring all derivative actions to be brought in the Delaware Court of Chancery.

Lee argued that The Gap’s forum selection clause was void because: (1) the clause violated the anti-waiver provision of § 29(a) of the Exchange Act; (2) enforcing the clause would go against the public policy of allowing shareholders to bring § 14(a) claims as derivative actions; and (3) the clause violated § 115 of the Delaware General Corporation Law (DGCL). The Ninth Circuit rejected all three arguments.

First, the Ninth Circuit concluded that § 29(a) of the Exchange Act only prohibits waivers of “substantive obligations” and only applies to “express waivers of noncompliance.” Here, the forum selection clause was not an express waiver of non-compliance despite § 27(a) of the Exchange Act giving federal courts exclusive jurisdiction over § 14(a) actions. The Ninth Circuit noted that this did not prohibit Lee from bringing a direct action, and concluded that the forum selection clause did not waive compliance with the substantive obligations of § 14(a) of the Exchange Act and SEC Rule 14a-9.

Second, the Ninth Circuit rejected Lee’s public policy argument that the federal forum strongly favors permitting shareholders to bring derivative claims under § 14(a). The Ninth Circuit, however, found that no such public policy existed. In addition, the Ninth Circuit noted two shifts in federal jurisprudence: (1) that “the [Supreme] Court now looks to state law rather than federal common law to fill in gaps relating to federal securities claims, and, under Delaware law, a § 14(a) action is direct, not derivative;” and (2) the Supreme Court “now views implied private rights of action with disapproval, construing them narrowly, and casting doubt on the viability of a corporation’s standing to bring a § 14(a) action.”

Third, the Ninth Circuit dismissed Lee’s argument that the forum selection clause is invalid under Delaware law. The court concluded that § 115 of the DGCL does not state that a forum selection clause cannot require a federal claim to be brought in Delaware state court. Using Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020) as support for its conclusion, the Ninth Circuit noted that § 115 does not cover whether bylaws are permitted to require federal claims to be brought in state court or whether forum selection clauses have to consider jurisdictional requirements. In Salzberg, the Delaware Supreme Court held that federal claims are not considered “internal corporate claims” under § 115.

With respect to the circuit split, the Seventh Circuit previously held in Seafarers held that a derivative § 14(a) action is considered an internal corporate claim and forum selection clauses must comply with jurisdictional requirements. The Ninth Circuit disagreed with this reasoning, noting in particular that the Seventh Circuit did not consider the holding in Salzberg, nor did the Seventh Circuit consider that a plaintiff could still bring a direct action even if they could not bring a derivative action.