California Federal Court Enforces Delaware Forum Bylaw and Dismisses Derivative Shareholder Suit Including Exchange Act Proxy Claims

Kramer Levin Naftalis & Frankel LLP

We have discussed in previous alerts a spate of shareholder lawsuits alleging corporate fiduciary breaches and securities law violations tied to the defendant company’s alleged failure to fulfill diversity aspirations. (See here and here.) In other alerts we have focused on charter and bylaw forum selection provisions and related court decisions which mandate that stockholders bring derivative and breach of fiduciary claims in the Delaware Court of Chancery, but also require that Securities Act of 1933 cases be filed in a federal district court (and not a state court). (See here and here.) These two trends converged in a recent California federal district court decision in which the court dismissed a derivative suit alleging diversity misrepresentations and breaches and enforced the Delaware Court of Chancery forum clause in the company’s bylaws, notwithstanding the presence of federal proxy claims. 

The case, Lee v. Robert J. Fisher et al., Case No. 20 Civ. 6163 (N.D. Ca.), is one of a growing number of derivative lawsuits brought against public companies (in this case, The Gap, Inc. (“Gap”)) alleging federal securities law and state-law fiduciary duty violations tied to the defendant issuer’s alleged failure to fulfill diversity aspirations. In Lee, Gap and the individual defendants moved to dismiss the claims on the merits, but also based on a provision in Gap’s bylaws that provided: 

“Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation. ...” 4.

Without reaching the merits, the Lee court granted the motion, relying on the forum selection clause. The key issue discussed in the decision concerned the enforceability of the forum clause as to the derivative claim the plaintiff had asserted under Section 14(a) of the Exchange Act, dealing with alleged proxy misrepresentations, as to which there was exclusive jurisdiction in the federal courts. The Exchange Act voids “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of” the Exchange Act. The court observed that “[i]t is undisputed that the Exchange Act contains an anti-waiver provision and that federal courts have exclusive jurisdiction over Exchange Act claims,” and thus plaintiff could not assert that claim in the Delaware Court of Chancery. Nevertheless, applying a traditional forum selection and forum non conveniens analysis, the court held that the forum selection clause would be unenforceable only if “[p]laintiff’s lost opportunity to bring a Section 14(a) claim violates the strong public policy of the forum in which she filed this lawsuit,” a showing the court found plaintiff had failed to make. 

The court also rejected plaintiff’s arguments that enforcement of the forum selection clause would (i) “contravene the federal courts’ exclusive jurisdiction over Exchange Act claims,” and (ii) violate the Supremacy Clause of the U.S. Constitution. The court found no support in the case law for either proposition. Lastly, the court noted that it was irrelevant whether plaintiff’s Section 14(a) claim was arguably distinguishable from the claims she could pursue in the Delaware Court of Chancery, as the relevant inquiry was not whether plaintiff could assert substantially the same claims in the Delaware court, but whether “‘the contractually selected forum affords the plaintiff[] no remedies whatsoever.’” (quoting Yei A. Sun v. Advanced China Healthcare, Inc., 901 F.3d 1081, 1092 (9th Cir. 2018)).

The Lee decision adds further support for the enforcement of corporate forum selection clauses, which enable corporations to avoid duplicative and inefficient litigation and to secure the benefits of a judiciary experienced in corporate law.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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