Two appellate courts recently issued rulings that provide significant guidance to companies seeking to adopt federal or state forum provisions in their bylaws. One decision has implications for state-court class actions following their initial public offering (IPO), and the other decision impacts derivative claims.
In Lee v. Fisher, a shareholder of The Gap, a Delaware corporation, brought a derivative action in federal court asserting a proxy-law violation under § 14(a) of the Securities Exchange Act as well as violations of state law.1 The plaintiff alleged that The Gap and its directors “failed to create meaningful diversity within company leadership” and that the company made misstatements in its proxy statements about its diversity achievements. The Gap moved to dismiss, citing its forum-selection bylaw requiring that “any derivative action or proceeding brought on behalf of the Corporation” be adjudicated in Delaware Court of Chancery. The district court dismissed the action, and plaintiffs appealed.
On appeal, the Ninth Circuit affirmed, noting that under Supreme Court precedent, forum-selection clauses must be enforced except in “extraordinary circumstances.”2 The Ninth Circuit articulated three such extraordinary circumstances, one of which plaintiff argued was applicable in this case: enforcing the Forum Bylaw “would contravene a strong public policy of the forum in which suit is brought.” The plaintiff pointed to the Exchange Act of 1933’s (“Exchange Act”) anti-waiver provision and the exclusive federal jurisdiction over Exchange Act claims as evidence that enforcing the Forum Bylaw would violate public policy. The Ninth Circuit rejected these arguments because neither of these statutory provisions expressly stated that refusing to give effect to these provisions would violate public policy. Additionally, the Ninth Circuit noted it was relevant to its analysis that plaintiff failed to “identif[y] Delaware law clearly stating that she could not get any relief in the Delaware Court of Chancery.”3 The Ninth Circuit therefore affirmed because plaintiff failed to carry her “heavy burden” to overcome the forum provision.
However, it is important to note that this decision sets up a potential Circuit split. The Seventh Circuit previously refused to enforce a substantially similar forum provision against a derivative Section 14(a) claim.4
Discuss with your broker the value of including a forum selection clause in your bylaws and charters from the view of D&O underwriters as part of risk mitigation.
1 Lee v. Fisher, 2022 U.S. App. LEXIS 12941 (9th Cir., May 13, 2022)
2 Id. at 6
3 Id. at 9
4 Seafarers Pension Plan on behalf of Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022)
Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.
