July 14, 2023

Exclusive Forum Bylaws: Here We Go Again…

I blogged just last month about the 9th Circuit’s decision to uphold an exclusive forum bylaw that effectively extinguished a shareholder derivative suit brought under Section 14 of the Exchange Act, on the basis of allegedly misleading proxy statement disclosure. That case created a circuit split with the 7th Circuit.

Now, a federal district court in the 5th Circuit has upheld a forum selection clause at SolarWinds that kicks a Section 10(b) derivative claim to Delaware Chancery Court – which, again, does not have jurisdiction to hear that federal claim. The anti-fraud allegations stem from the company’s 2020 cyber breach.

Alison Frankel analyzes the case in this Reuters article. Here’s an excerpt, which pulls in thoughts from Tulane’s Ann Lipton:

Pitman’s SolarWinds decision breaks new ground, said law professor Ann Lipton of Tulane University, because it extends forum selection enforcement to derivative 10(b) claims.

Shareholder derivative suits accusing board members of violating Section 10(b) are rare, Lipton said, so the ruling may not foreclose many cases. (Plaintiffs lawyers filed a spate of 10(b) derivative suits in the early 2000s against directors and officers of companies engaged in stock options backdating. More recently, shareholders alleged derivative 10(b) claims against Wells Fargo executives after revelations about fake bank accounts.)

But what Pitman’s decision signals, Lipton said, is the creeping effect of forum selection clauses. Companies first adopted them to channel M&A breach-of-duty suits to Delaware so businesses would not be forced to litigate the same claims in multiple courts. Then, after the U.S. Supreme Court confirmed in 2018 that shareholders can file Securities Act suits in either state or federal court, corporations used forum selection clauses to mandate federal court jurisdiction for litigation over allegedly misleading disclosures in offering documents.

Now the clauses have become a weapon to kill Exchange Act derivative claims — whether shareholders are alleging proxy violations or, as per Pitman’s new decision, 10(b) fraud claims.

This writeup from Cooley’s Cydney Posner provides even more context. It’s worth noting that there are strong views that derivative Exchange Act claims don’t provide any remedy that isn’t already available via a direct federal claim or a derivative state law claim. For companies, the bottom line is that it’s probably worthwhile right now to have an exclusive forum bylaw…

Liz Dunshee