September 18, 2023

Rule 14a-9: Federal Courts Continue to Chip Away at Private Right of Action

Although the Northern District of Illinois held that non-compliance with Item 303 can serve as a basis for a Rule 14a-9 claim, it’s becoming increasingly difficult to find a court that will entertain such a claimt.  Earlier this year, in Lee v. Fisher, the 9th Cir. upheld a forum selection bylaw at Gap that designated the Delaware Court of Chancery as “the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation.” Because Exchange Act claims can only be brought in federal court, that ruling had the effect of precluding stockholders in Delaware corporations with that exclusive forum language from bringing derivative Rule 14a-9 claims.

Now, Prof. Ann Lipton has cited a recent decision by a Texas federal magistrate that tightens the screws on Section 14(a) claims even more. Here’s an excerpt from her Twitter thread on the decision:

Shareholders of an acquiring company sued under Section 14, claiming the proxy statement misled them into approving the merger. A federal magistrate court just said Delaware law governs the direct/derivative distinction, though the injury is direct, the damages from a stock price drop are derivative, and therefore, plaintiff cannot bring claims directly. Edwards v. McDermott, 4:18-cv-04330 SD Tex.

This is the next step in allowing Delaware law to supersede federal securities law. Previously, CA9 held that derivative 14(a) claims – – can functionally be waived in bylaws, bc they really shouldn’t exist at all. Which means, if this decision stands, we’re really cutting off most avenues for Section 14 claims, outside the target-side merger context.

The bottom line is that the SCOTUS has done everything but formally overrule its 1964 decision in J.I. Case v. Borak finding an implied private right of action under Section 14(a), and it looks like the federal courts are determined to finish the job.

John Jenkins