On January 7, 2022, a split panel of the United States Court of Appeals for the Seventh Circuit reversed the dismissal of claims under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) against the current and former officers and directors (the “Defendants”) of a major aerospace company (the “Company”). Seafarers Pension Plan v. Bradway, No. 20-2244, 2022 WL 70841 (7th Cir. Jan. 7, 2022). Relying on a bylaw that gave the Company the right to insist that any derivative actions be filed in the Delaware Court of Chancery, Defendants obtained a forum non conveniens dismissal in the United States District Court for the Northern District of Illinois. The Seventh Circuit reversed, holding that the Company’s bylaw could not be applied to Section 14(a) claims, which are subject to exclusive federal jurisdiction.
Plaintiff’s derivative suit alleged that Defendants made false and misleading statements in proxy materials from 2017 through 2019 in violation of Section 14(a) of the Exchange Act. According to plaintiff, these false and misleading statements harmed the Company by allowing the reelection of directors who tolerated “poor oversight of passenger safety, regulatory compliance, and risk management” during the development of a high-profile new airliner that ultimately cost the Company billions of dollars after two high-profile crashes killed 346 people in 2018 and 2019. Plaintiff brought suit in the federal district in which the Company is headquartered, and Defendants moved to dismiss based on a choice-of-forum provision in the Company’s bylaws. Specifically, the bylaws of the Company stated that “the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation . . . .” Defendants conceded that, because only federal courts may exercise jurisdiction over claims under the Exchange Act, applying the choice-of-forum provision would leave shareholders with no means to file a federal derivative suit at all. Defendants, however, argued that forum non conveniens dismissal was nonetheless appropriate because Delaware law offered a “sufficient substitute that would allow [plaintiff] to vindicate its substantive rights under the Exchange Act of 1934.”
A divided panel of the Seventh Circuit held that the Company’s bylaw was not enforceable as applied under either Delaware law or federal securities law. The Court explained that Delaware law “gives corporations considerable leeway in writing bylaws,” but “respects federal securities law and does not empower corporations to use such techniques to opt out of the Exchange Act.” First, the Court examined Section 115 of the Delaware General Corporation Law, which addresses the appropriate scope of choice-of-forum provisions. Section 115 provides that a company’s “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.” The Court began by holding that the Company’s choice-of-forum provision violated Delaware law because it was “inconsistent with the jurisdictional requirements of the Exchange Act.” According to the Court, Section 115 was “not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction,” which is exactly what application of the Company’s choice-of-forum provision would do. The Court then explained that, while Section 115 expressly authorizes choice-of-law provisions that require shareholders to file derivative suits “in” the state of Delaware, it does not authorize bylaws that restrict such suits to courts “of” the state of Delaware. The Court held that Delaware law “does not authorize application of [the Company’s] forum bylaw to close all courthouse doors to this derivative action.”
Next, the Court held that enforcing the Company’s choice-of-forum provision would violate federal law. “Because the federal Exchange Act gives federal courts exclusive jurisdiction over actions under it, applying the bylaw to this case would mean that plaintiff’s derivative Section 14(a) action may not be heard in any forum.” The Court emphasized that “both federal [Securities] Acts contain anti-waiver provisions that prevent parties from opting out of the federal laws in favor of state law, no matter how similar or strong the state-law rights and remedies are.”
Judge Frank L. Easterbrook filed a dissenting opinion, arguing that “exclusivity under § 27(a) [of the Exchange Act] [is] a right that people may waive” and that “derivative suits related to securities matters may begin in state court—and, if they begin there, stay there.” The Court’s majority noted that Judge Easterbrook’s proposal of dismissing the case in favor of adjudication in Delaware state court “might well be a reasonable outcome” “as a matter of policy,” but that it was not “consistent with [the majority’s] reading of . . . Delaware law, the Exchange Act’s exclusive federal jurisdiction,” or Supreme Court precedent. According to the majority, “a state court would have to be bold indeed to adopt [Judge Easterbrook’s] solution and to exercise jurisdiction over this derivative claim.”
The Court reversed the dismissal and remanded the action to the district court for further proceedings.
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Seafarers Pension Plan v. Bradway