Saturday, May 1, 2021
Bylaws and Securities Claims - Mayday!
Last year, I blogged about the Boeing decision in the Northern District of Illinois. In sum, a district court ruled that Boeing’s forum selection bylaw – requiring that all derivative actions be filed in Delaware Chancery – applied even to federal securities claims brought under Section 14(a) of the Exchange Act. That matters because Delaware Chancery has no jurisdiction to hear Section 14(a) claims; dismissal in favor of the Delaware forum, as a practical matter, was a holding that the forum selection bylaw defeated plaintiffs’ ability to bring derivative Section 14(a) claims at all. Which would seem to be in tension with the anti-waiver provisions of the Exchange Act, which voids “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title.” 15 U.S.C. § 78cc(a).
The Boeing plaintiffs have appealed to the Seventh Circuit and while we all await the outcome of that case, another court has just reached a similar result – this time, a magistrate decision in Lee v. Fisher, N.D. Cal., No. 3:20-cv-06163. Section 14(a) claims were brought derivatively against The Gap and, just as in Boeing, the court dismissed the claims due to a forum selection bylaw designating Delaware Chancery as the forum for all derivative actions.
If you’ve been following this issue, you can guess what follows. First, the court assumed that a forum selection bylaw is enforceable as a contract in the first place, offering no analysis beyond a footnote that “the Delaware Supreme Court recently ruled that forum-selection clauses governing shareholder claims are valid and enforceable under Delaware’s General Corporation Law.” But Delaware law applies as a matter of corporate law and the internal affairs doctrine; the court made no attempt to determine whether Delaware law should apply as a matter of contract law when we’re outside the internal affairs doctrine.
Assuming the bylaw was a contractual provision, the court relied on Yei A. Sun v. Advanced China Healthcare, Inc., 901 F.3d 1081 (9th Cir. 2018) to hold that contractual forum selection provisions defeat anti-waiver provisions in the substantive governing law. Here is the court’s reasoning:
The Ninth Circuit has made clear that the strong federal policy in favor of enforcing forum-selection clauses supersedes the anti-waiver provisions in state and federal statutes… Because the anti-waiver provision standing alone does not supersede the forum-selection clause, “in order to prove that enforcement of such a clause would contravene a strong public policy of the forum in which suit is brought, . . . [P]laintiff must point to a statute or judicial decision that clearly states such a strong public policy.” …. Plaintiff does not point to any statute or judicial decision that clearly states that enforcing the forum selection clause would contravene a strong public policy.
(quoting Yei A. Sun, 901 F.3d at 1090).
In other words, the forum selection bylaw would be enforced because the plaintiff was unable to find evidence of a federal policy against enforcing it, other than the explicit anti-waiver provision in the Exchange Act itself. As the court put it:
[T]he Ninth Circuit has made clear that existence of an anti-waiver clause in a statute that the plaintiff intends to prosecute is insufficient to demonstrate the required strong public policy for purposes of overcoming a forum selection clause. Yei A. Sun, 901 F.3d at 1090 (“Because an antiwaiver provision by itself does not supersede a forum-selection clause, in order to prove that enforcement of such a clause would contravene a strong public policy of the forum in which suit is brought, . . . the plaintiff must point to a statute or judicial decision that clearly states such a strong public policy.”)
I’ve got to say, the logic – which originates in Yei A. Sun – baffles me. As I understand it, the federal policy in favor of forum selection clauses is so great that even if the statute says ‘’you may not waive this claim,” waivers that occur via the operation of a forum selection clause will still be respected unless there’s an additional statute or judicial decision that says “no, seriously, we weren’t kidding about the anti-waiver thing.” Why should the additional affirmation on top of the explicit anti-waiver provision be necessary? And if we’re talking about a federal rather than state anti-waiver provision (the original Yei A. Sun case dealt with a state law anti-waiver provision), aren’t the federal courts – in this case, the very federal court in which the plaintiff brought her claims – equipped to make a substantive determination as to what federal policy requires, which is evidenced by the anti-waiver provision in the federal statute? Why is it necessary for another court to do that first before the anti-waiver provision can be enforced, and which court should it be, if every federal court is waiting for another one to be the first mover? It’s one thing if you’re interpreting a state law rule so you need a state court to make clear how the state interprets its own policy, but if it’s a federal cause of action, isn’t a federal court competent to make a determination on its own?
Plus, all of this reasoning – about forum selection provisions trumping anti-waiver provisions – descends from the Lloyd’s of London cases, which I discussed in my prior post. You can go back and read that one if you’re interested, but my argument is they arose in a very different context and are quite distinguishable.
Anyway, yes, I do feel a bit like Don Quixote at this point – or perhaps the analogy should be more along the lines of Sisyphus – but I’m left kind of dumbstruck as I watch federal courts slowly develop a new rule that you can contractually waive securities law claims – despite literal decades of precedent holding that you can’t – if you’re clever enough to designate the waiver as a forum selection clause. Even arbitration law doesn’t go that far, and there actually is a federal statute that has been interpreted to represent a federal policy in favor of arbitration, unlike this “policy” in favor of forum selection which is entirely based on federal common law.
Finally, I just have to reiterate my concern about Delaware eating the world. Delaware decides how charters get amended, how bylaws get amended, what counts as an interested-party transaction, and how it will or will not be cleansed, whether it gets business judgment review or entire fairness or enhanced scrutiny, which means, so long as this line of cases continues, Delaware will be deciding critical questions regarding the validity of these bylaws and thus how federal securities law is administered. And since part of the federal courts’ reasoning is that it’s okay if shareholders waive federal claims so long as Delaware provides some similar state law remedy, they’re functionally delegating to Delaware the power to delineate the substantive contours of what federal securities law requires. I previously blogged about Omari Simmons’s article arguing that Delaware functions as a de facto federal agency, but this is a whole ’nother ballgame.
Great post—I agree these developments are really concerning.
Posted by: hardreaders | May 2, 2021 7:42:27 PM