NOELLE LEE V. ROBERT FISHER, ET AL, No. 21-15923 (9th Cir. 2023)
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Plaintiff brought an action against The Gap, Inc. and its directors “derivatively on behalf of Gap.” Plaintiff’s action alleged that Gap violated Section 14(a) of the Securities Exchange Act of 1934 (the Exchange Act) and Securities and Exchange Commission (SEC) Rule 14a-9 by making false or misleading statements to shareholders about its commitment to diversity. Gap’s bylaws contain a forum-selection clause stating that the Delaware Court of Chancery “shall be the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation.” Lee nevertheless brought her putative derivative action in a California district court. The district court granted Gap’s motion to dismiss Lee’s complaint on forum nonconveniens ground.
The Ninth Circuit affirmed the district court’s judgment. The en banc court rejected Plaintiff’s argument that her right to bring a derivative Section 14(a) action is stymied by Gap’s forum-selection clause, which alone amounts to Gap “waiving compliance with a provision of [the Exchange Act] or of any rule or regulation thereunder.” The en banc court explained that the Supreme Court made clear in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), that Section 29(a) forbids only the waiver of substantive obligations imposed by the Exchange Act, not the waiver of a particular procedure for enforcing such duties. McMahon also disposes of Plaintiff’s argument that Gap’s forum-selection clause is void under Section 29(a) because it waives compliance with Section 27(a) of the Exchange Act, which gives federal courts exclusive jurisdiction over Section 14(a) claims.
Court Description: Securities Exchange Act of 1934 The en banc court affirmed the district court’s judgment dismissing, on forum non conveniens grounds, Noelle Lee’s putative derivative action alleging that The Gap, Inc. and Gap’s directors (collectively “Gap”) violated § 14(a) of the Securities Exchange Act of 1934 (the Exchange Act) and Securities and Exchange Commission (SEC) Rule 14a-9 by making false or misleading statements to shareholders about its commitment to diversity.
Gap’s bylaws contain a forum-selection clause stating that the Delaware Court of Chancery “shall be the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation.” Lee, a Gap shareholder, brought the putative derivative action in a California district court. Lee first argued that the forum-selection clause in Gap’s bylaws is void because it violates the Exchange Act’s antiwaiver provision, § 29(a), 15 U.S.C. § 78cc(a), which provides that “[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, . . . shall be void.” The en banc court disagreed, because Lee can enforce Gap’s compliance with the substantive obligations of § 14(a) by bringing a direct action in federal court. The en banc court rejected Lee’s argument that her right to bring a derivative § 14(a) action is stymied by Gap’s forum-selection clause, which alone amounts to Gap “waiv[ing] compliance with [a] provision of [the Exchange Act] or of any rule or regulation thereunder.” The en banc court explained that the Supreme Court made clear in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), that §29(a) forbids only the waiver of substantive obligations imposed by the Exchange Act, not the waiver of a particular procedure for enforcing such duties. McMahon also disposes of Lee’s argument that Gap’s forum-selection clause is void under § 29(a) because it waives compliance with § 27(a) of the Exchange Act, which gives federal courts exclusive jurisdiction over § 14(a) claims.
Lee next argued that Gap’s forum-selection clause is unenforceable under M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), because enforcement would violate the federal forum’s strong public policy of allowing a shareholder to bring a § 14(a) derivative action. The linchpin of Lee’s argument was the Supreme Court’s decision in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), which first implied a private right of action allowing a shareholder to bring a “federal cause of action” to redress the injury caused by a proxy statement alleged to contain false and misleading statements violative of § 14(a) of the Exchange Act. A close look at Borak in its historical context and in light of subsequent Supreme Court developments, however, compels the conclusion that Borak does not establish a strong public policy to allow shareholders to bring § 14(a) claims as derivative actions. The en banc court also rejected Lee’s argument that the forum-selection clause conflicts with the federal forum’s strong public policy of giving federal courts exclusive jurisdiction over Exchange Act claims under § 27(a). The en banc court concluded that Lee did not carry her heavy burden of showing the sort of exceptional circumstances that would justify disregarding a forum-selection clause.
Lee next argued that Gap’s forum-selection clause is invalid as a matter of Delaware law under Section 115 of the Delaware General Corporation Law (DGCL). Because the effect of Section 115 is important to the en banc court’s decision here, it elected to exercise its discretion to decide the issue, notwithstanding that the three-judge panel deemed the Section 115 issue waived. Because the Delaware Supreme Court has indicated that federal claims like Lee’s derivative § 14(a) action are not “internal corporate claims” as defined in Section 115, and because no language in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), Section 115, or the official synopsis that accompanies Section 115, operates to limit the scope of what constitutes a permissible forum-selection bylaw under Section 109(b) of the DGCL, the en banc court concluded that Gap’s forum-selection clause is valid under Delaware law.
The en banc court acknowledged that its decision creates a circuit split with the Seventh Circuit, see Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022), and did not do so lightly.
Judge S.R. Thomas, joined by Chief Judge Murguia, Nguyen, Friedland, and Mendoza, dissented. Judge Thomas wrote that Gap’s forum-selection bylaw requires that any derivative actions brought pursuant to the Exchange Act be adjudicated in the Delaware Court of Chancery. But state courts lack jurisdiction to hear Exchange Act claims, so the bylaw provision is a litigation bridge to nowhere, depriving shareholders of any forum in which to pursue derivative claims. Judge Thomas wrote that a judge-made federal policy in favor of enforcing forum-selection clauses cannot supersede the clear antiwaiver provision enacted by Congress in the Exchange Act, which voids such a provision. He wrote that the majority’s conclusion that Gap’s bylaw is both valid and enforceable conflicts with the plain language of the Exchange Act.
This opinion or order relates to an opinion or order originally issued on May 13, 2022.
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