In December 2019, the Seafarers Pension Plan (“Seafarers”), represented by Cohen Milstein, filed a derivative action in federal district court in Chicago under Section 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”), alleging that The Boeing Company’s (“Boeing”) board members and officers made materially false and misleading statements about the development and operation of the 737 MAX airplane in Boeing’s 2017, 2018, and 2019 proxy materials. Seafarers alleged that these false and misleading statements caused stockholders to reelect directors who for years had countenanced the poor oversight of passenger safety, regulatory compliance, and risk management during the 737 MAX’s development, to approve Boeing’s executive compensation plans, and to reject a shareholder proposal to separate the CEO and Chair positions, thereby causing massive harm to Boeing.
Boeing’s directors and officers moved to dismiss, seeking to enforce Boeing’s forum bylaw, which strips federal courts of their exclusive jurisdiction over derivative Exchange Act claims by designating the Delaware Court of Chancery—a state court without jurisdiction over these federal claims— as the exclusive jurisdiction for all derivative claims asserted on Boeing’s behalf. The district court agreed, and the Seafarers Pension Plan appealed the decision to the United States Court of Appeals for the Seventh Circuit. In January 2022, a panel of the Seventh Circuit issued a 2-1 opinion, Seafarers Pension Plan v. Bradway, No. 20-2244, — F.4th — (7th Cir. 2022) (“Seafarers”), reversing the district court’s decision to enforce Boeing’s forum bylaw against the Seafarers’ derivative Section 14(a) claims and finding the bylaw unenforceable under both Delaware and federal law.
The Seventh Circuit held that “[b]ecause 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. That result would be contrary to Delaware corporation law, which respects the non-waiver provision in Section 29(a) of the federal Exchange Act, 15 U.S.C. § 78cc(a).” Notably, the anti-waiver provision in the Exchange Act prevents parties from opting out of that federal law in favor of state law, regardless of any similarities between the laws.
The Seventh Circuit found Delaware law, including Section 115 of the Delaware General Corporation Law (“DGCL”), prohibits Delaware corporations from using a forum bylaw to “foreclose entirely” a stockholder’s derivative action under Section 14(a). The Seventh Circuit found two key phrases in Section 115 determinative: “consistent with applicable jurisdictional requirements” and “courts in this State.” First, the Seventh Circuit held that as applied, Boeing’s bylaw violates Section 115 because it is “inconsistent with” the Exchange Act’s jurisdictional requirement providing for cases to be heard in federal court. As support for this reading of the statute, the Seventh Circuit cited Section 115’s synopsis, stating, “Section 115 is also not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction, nor is Section 115 intended to limit or expand the jurisdiction of the Court of Chancery….” Second, the Seventh Circuit explained that references to courts “in” a state include both state and federal courts located in the state, as opposed to courts “of” a state. The Seventh Circuit also noted that the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), supported this interpretation, stating, “Salzberg expressly presumed the reference to ‘courts in the state’ in the bylaws authorized by the new Section 115 included federal courts,” and pointing out that Boeing’s bylaw did not include federal courts. Further, the Seventh Circuit rejected the defendants’ argument that Salzberg allows such a bylaw under Section 109(b) of the DGCL, emphasizing that Salzberg stressed the “harmony between Delaware corporation law and federal securities laws” when it stated: “This Court has viewed the overlap of federal and state law in the disclosure area as ‘historic,’ ‘compatible,’ and ‘complimentary.’”
Turning to federal law, the Seventh Circuit distinguished federal cases where the federal courts had enforced forum provisions in international agreements, including the seminal U.S. Supreme Court decision, M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Notably, the Seventh Circuit stated that “Bremen differs from this case most importantly in that it involved a purely private contractual dispute” and did not involve a federal claim or a federal statute with a nonwaiver provision like Section 29(a) of the Exchange Act. The Seventh Circuit further reasoned that in international business transactions, the “presumptive validity” of choice of law and forum provisions offer predictability. However, extending forum provisions to “domestic investments” where the provisions waive federal securities rights and remedies and limit available remedies to those under state law “would undermine the pivotal decisions by Congress in 1933 and 1934 to assume the dominant role in securities regulation after decades of ineffective state regulation.” The Seventh Circuit also looked to the U.S. Supreme Court’s warning in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Corp., 473 U.S. 614 (1985) that “in the event that the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to purse statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.”
The Seventh Circuit majority rejected the dissent’s “novel proposal” to allow a “Delaware state court to hear a derivative action under Section 14(a), despite the Exchange Act’s provision for exclusive federal jurisdiction” as inconsistent with Delaware law, the Exchange Act’s anti-waiver provisions, and U.S. Supreme Court decisions. Accordingly, the Seventh Circuit held that Boeing’s forum provision, as applied, “was contrary to Delaware corporation law and federal securities law” because it deprived the federal courts of their exclusive authority to hear derivative Exchange Act claims.
The Seventh Circuit’s decision is an important win for investors. It tells companies they cannot use a forum bylaw to close the courthouse doors to investors asserting federal only derivative claims.