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Recent Decisions Highlight the Broad Enforceability of Forum Selection Provisions in Bylaws, and Underscore their Benefit to Corporations and their Stockholders

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Ten years after the Delaware Court of Chancery issued its seminal Boilermakers decision first enforcing a forum selection provision in a Delaware corporation’s bylaws, this month Judge Robert Pittman of the United States District Court for the Western District of Texas issued perhaps the most expansive decision to date enforcing such a provision.  In Sobel v. Thompson, Judge Pittman enforced a provision requiring that the Delaware Court of Chancery “shall be the sole and exclusive forum . . . for any derivative action of proceeding brought on behalf of the Corporation,” even though two of the derivative claims at issue could never be brought in the Delaware Court of Chancery, thus foreclosing the stockholders’ ability to ever bring those claims.  Cause No. 1:21-cv-00272-RP (W.D. Tex. July 5, 2023).

The plaintiff, a stockholder in SolarWinds Corporation, asserted four derivative claims on behalf of SolarWinds against the company’s officers and directors.  These included not only state law claims for breach of fiduciary duty and misappropriation, but also federal claims for violation of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934.  By law those Exchange Act claims can be heard only in federal court and could never be filed in the Delaware Court of Chancery.  The plaintiff argued that enforcing the forum selection provision and dismissing the Texas federal action, leaving no home for his derivative Exchange Act claims, would thus violate both the federal public policy underlying the Exchange Act and Delaware law.

The court agreed that enforcing the provision would in fact bar the stockholder from ever bringing his derivative Exchange Act claims, but ruled that this result did not outweigh the presumption that forum provisions are valid or make enforcement of the provision here unreasonable:

While enforcing the COI’s venue provision would foreclose Plaintiff’s derivative Exchange Act claims, there is no indication that it would deprive him of all substantive rights under the statute.  First, as Defendants observe—and Plaintiff does not dispute—Delaware law recognizes derivative state law claims with available remedies that are commensurate to those available under Plaintiff’s federal derivative claims.  Moreover, Plaintiff does not dispute that the COI’s venue provision only applies to derivative claims—it does not prevent him from directly pursuing Exchange Act claims in any federal court.

In other words, while there was no dispute that SolarWinds’ forum selection provision made it impossible for the plaintiff to bring his two derivative Exchange Act claims anywhere, because among other reasons he still had the ability to seek similar remedies through state law-based derivative claims, or to bring Exchange Act claims as direct actions, enforcing the provision did not violate federal policy or Delaware law.

The Thompson ruling comes on the heels of a similar but slightly narrower June 2023 ruling from the en banc Ninth Circuit, also enforcing a Delaware corporation’s forum selection provision that made the Delaware Court of Chancery “the sole and exclusive forum” for any derivative action.  Lee v. Fisher, 70 F.4th 1129 (9th Cir. 2023).  In Fisher, a stockholder asserted derivative claims against The Gap, Inc.’s directors under Section 14(a) of the Exchange Act, alleging that the corporation’s proxy statements included false and misleading statements about its commitment to diversity.  Like Judge Pittman, the Ninth Circuit was unmoved by the fact that enforcing the provision would leave the plaintiff unable to bring her derivative Section 14(a) claim in any forum—including because she could still bring a Section 14(a) claim as direct actions in an appropriate forum of her choosing or bring similar state law derivative claims in the Court of Chancery.  Id. at 1139 & n. 5.  Unlike in Thompson, the plaintiff in Fisher did not bring claims under Section 10(b) of the Exchange Act, and so the Ninth Circuit did not explicitly decide whether claims and remedies comparable to Section 10(b) remained available to the plaintiff under Delaware law.

Thompson and Fisher are not the last word on whether forum selection provisions that effectively foreclose a stockholder from bringing derivative Exchange Act claims will be universally accepted.  There is now a circuit split between the Ninth and Seventh Circuits on that question that will have to be resolved; last year, the Seventh Circuit ruled a similar provision unenforceable in Seafarers Pension Plan v. Bradway, 23 F.4th 714 (7th Cir. 2022).  And future plaintiffs may try to take issue with whether available Delaware state law claims truly provide similar remedies to the foreclosed Exchange Act claims.  While the Ninth Circuit undertook a comprehensive analysis of this question as to the Section 14(a) claim in Fisher, the plaintiff in Thompson did not dispute the availability of Delaware state law claims with similar remedies to his Exchange Act claims, so no court has yet wrestled with whether the same is true for Section 10(b) claims.

It is likely that courts across the country will follow to the reasoning of Thompson and Fisher and enforce these provisions as those courts did.  The Ninth Circuit’s extensive analysis of Delaware and federal law in determining that The Gap’s forum selection provision was enforceable, and that Seafarers had been wrongly decided, is compelling. Moreover, it is in the best interests of corporations and their stockholders that provisions like SolarWinds’ and The Gap’s be given effect.

The long line of cases enforcing Delaware corporations’ forum selection provisions are founded both on a board’s broad statutory authority under DGCL Section 109(b) to adopt bylaws that are “not inconsistent with the law” relating to “its rights or powers or the rights or powers of its stockholders,” and on the reasonableness of the determination that adopting a forum selection provision is in the best interests of the corporation and its stockholders.  In Boilermakers, for example, the Court of Chancery recognized that the corporation’s ability to restrict the forum for all state law derivative claims to Delaware’s state courts was in stockholders’ best interests because it permitted boards to “minimize or eliminate the risk of what they view as wasteful duplicative litigation” by removing the potential that the corporation would have to participate in multiple parallel derivative suits in separate venues.  Boilermakers Loc. 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 944 (Del. Ch. 2013).  Eight years later in Salzberg, the Delaware Supreme Court held that so-called “federal forum provisions”—requiring that all federal claims against the corporation brought under the Securities Act of 1933 be heard in Delaware’s federal courts—were also permissible.  Salzberg v. Sciabacucchi, 227 A.3d 102, 117 (Del 2020).  Corporations had adopted such federal forum provisions following the United States Supreme Court’s 2018 ruling in Cyan, Inc. v. Beaver Co. Empls. Ret. Fund, in which the Court held that certain Securities Act claims (unlike Exchange Act claims) could be brought in either federal or state court, resulting in an increasing number of plaintiffs filing parallel Securities Act claims in state court.  The Salzberg court, like the Boilermakers court before it, was moved by the benefits corporations gain through adoption of forum selection provisions that “allow for consolidation and coordination of . . . claims to avoid inefficiencies and unnecessary costs.”  Id. at 114-15, 137.  As the Delaware Supreme Court highlighted in its opinion: “The costs and inefficiencies of multiple cases being litigated simultaneously in both state and federal courts are obvious. The possibility of inconsistent judgments and rulings on other matters, such as stays of discovery, also exists.”  Id. at 115.

The same is true for provisions like those enforced in Thompson and Fisher.  While enforcement may mean that stockholders can never bring derivative Exchange Act claims against the corporation, as both of these courts recognized, stockholders still have the ability to seek similar relief through derivative state law claims or to bring their Exchange Act claims directly.  Enforcement of these provisions thus does not bar a stockholder from seeking redress for any alleged wrong or unnecessarily limit the important place derivative litigation has in monitoring corporate action.  It does limit the venues in which some such claims may be brought, and thus decreases the likelihood that inefficient litigation will unnecessarily sap corporate resources or produce inconsistent rulings, to the detriment of the corporation and its stockholders. In a litigation climate where corporations and their directors often face parallel direct and derivative claims from multiple plaintiffs in multiple venues, this benefit is meaningful and material.

The adoption and enforcement of broad appropriate forum selection provisions is in all stakeholders’ best interests, and we recommend that any corporation that has not adopted such a provision consider doing so.

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