July 16, 2020

The Seafarers Pension Plan has filed a new derivative suit in Delaware Chancery Court against Boeing’s board of directors, alleging that Boeing board members are preventing shareholders from exercising their substantive right to bring a derivative claim asserting federal law.

The suit will test an important open question under Delaware law: Can corporations use forum selection clauses to preclude shareholders from bringing federal derivative claims? But that’s a bit of a circular question, so you need some background.

Last December, the Seafarers fund’s lawyers at Cohen Milstein Sellers & Toll filed a shareholder derivative complaint in federal court in Chicago. The suit, like all shareholder derivative actions, asserted claims against Boeing directors on behalf of the corporation. But unlike typical derivative suits alleging that directors breached state-law fiduciary duties, the complaint asserted claims under the Securities and Exchange Act of 1934, claiming that Boeing board members violated Section 14 (a) by issuing misleading proxy statements that failed to disclose the looming crisis over 737 MAX planes.

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Asserting federal claims in a derivative suit is not the standard course, but according to management liability guru Kevin LaCroix of the D&O Diary, such claims are not uncommon. (LaCroix pointed, for instance, to federal claims in recently-filed derivative complaints alleging that Facebook and Oracle directors failed to promote diversity on the companies’ boards.)

Boeing has a clause in its bylaws mandating that derivative suits must be litigated in Delaware Chancery Court. That’s not unusual, of course. Beginning about 10 years ago, corporations embraced these clauses as a cure for multiforum M&A litigation. In 2013, Delaware courts concluded that the provisions for derivative suits are facially valid in Boilermakers Local 154 Retirement Fund v. Chevron.

So Boeing lawyers at Kirkland & Ellis moved to dismiss the Seafarers derivative suit in Illinois federal court, citing the company’s forum selection clause for derivative suits. Cohen Milstein opposed the motion. It argued that Delaware Chancery Court – the exclusive jurisdiction for derivative suits under Boeing’s forum selection clause – does not have jurisdiction over federal Exchange Act claims. Enforcing the forum selection clause, shareholders said, was effectively depriving them of the ability to assert Exchange Act claims at all. (Both state and federal courts, you’ll recall, have jurisdiction to hear claims under the Securities Act of 1933 but Exchange Act jurisdiction is strictly federal.)

U.S. District Judge Harry Leinenweber of Chicago granted Boeing’s motion to dismiss in June. The judge said no precedent was directly on point. But he looked at the 7th U.S. Court of Appeals’ 1993 decision in Bonny v. Society of Lloyd’s. In that case, the appeals court upheld the enforceability of forum selection clauses requiring Lloyd’s investors to bring claims in England despite investors’ arguments that English law did not provide all of the substantive protections in U.S. securities laws. Judge Leinenweber noted that a trial court in Illinois extended Bonny to domestic agreements in 2008’s Spenta Enterprises v. Coleman.

The Chicago judge said he sympathized with Boeing shareholders’ arguments that they would lose a substantive right under federal law if he enforced the forum selection clause. But he said there were policy arguments justifying forum selection provisions, which protect corporations from scattershot litigation in multiple jurisdictions.

The Seafarers fund has filed a notice of appeal of Judge Leinenweber’s ruling to the 7th Circuit. But Cohen Milstein also filed the Delaware Chancery Court suit as an alternative route to reviving its federal derivative claims. Notably, the Chancery suit alleges not just that the forum selection clause is invalid and unenforceable because it curtails shareholders’ right to assert a federal cause of action, but also that the current Boeing board is breaching its state-law duty by enforcing the forum selection clause that led to the dismissal of the Illinois derivative suit. (I know: it’s dauntingly meta.)

In a nutshell, Cohen Milstein wrote, “The forum selection bylaw has served as an illegally designed mechanism for Boeing’s directors and officers to escape personal liability … for the directors’ and officers’ alleged wrongdoing under the Exchange Act while at the same time also harming its stockholders’ interests … by depriving them of their substantive rights to assert derivative lawsuits under those same federal securities laws.”

Tulane law professor Ann Lipton, who closely follows forum selection issues, told me via email that Judge Leinenweber’s dismissal of the Seafarer fund’s federal derivative claims raises concerns under both federal and Delaware law. (Lipton also blogged extensively about the decision last month.) On the federal side, she said, securities laws have anti-waiver provisions. Judge Leinenweber acknowledged those provisions, but, Lipton said, “rather thoughtlessly borrowed caselaw developed in the context of international transactions to enforce (Boeing’s) bylaw.”

On the Delaware front, Lipton said, there’s language in the 2013 Boilermakers ruling that suggests board members might be breaching their fiduciary duties by forcing shareholders into forums that don’t have jurisdiction to hear their claims – precisely the scenario Boeing shareholders are alleging. In the Boilermakers case, the Chevron forum selection provision at issue directed all derivative claims to Delaware, which presumably allowed federal claims to be filed in Delaware federal court. By contrast, the Boeing provision steers all cases to Chancery Court. In fact, Boeing has invoked the forum selection bylaw in a motion to dismiss an Exchange Act shareholder derivative suit filed in Delaware federal court.)

Lipton also said Delaware’s corporate code may preclude forum selection bylaws that leave shareholders with no jurisdiction for federal derivative claims, just as Cohen Milstein asserts in the new Chancery Court suit. The suit seeks a declaration that the Boeing bylaw cannot be enforced.

The complete article can be viewed here.