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 "[b]oth 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" "[a]s 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.
Seafarers Pension Plan v. Bradway
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