7th Circuit Rejects Company Bylaw Requiring That All Derivative Suits Be Brought in Delaware Chancery Court

A U.S. Appeals Court has struck down a company's bylaw requiring that all shareholder derivative suits be filed in Delaware’s Chancery Court, finding the provision effectively eliminated claims under the Securities Exchange Act of 1934, as amended (the Exchange Act) for which federal courts have exclusive jurisdiction. Seafarers Pension Plan v. Bradway, Case No. 20-2244 (7th Cir. Jan. 7, 2022).

Delaware Courts previously upheld bylaws requiring that stockholder litigation be brought in the state of incorporation or the courts of the state where the company has a significant interest (such as a principal place of business). Those decisions left open whether a bylaw could require that a federal law claim be brought in a state court.

Filed by a Boeing stockholder, the complaint alleged that proxy disclosures relating to two 737 Max jetliner crashes violated § 14(a) of the Exchange Act and Rule 14a-9 of the Exchange Act, which prohibit false or misleading statements in public company proxy statements. The district court dismissed the complaint, finding Boeing’s bylaws established the Chancery Court as the exclusive jurisdiction for derivative suits.

In reversing, the Seventh Circuit held that while Delaware General Corporation Law § 115 “gives corporations considerable leeway in writing bylaws,” it “does not empower corporations to use such techniques to opt out of the Exchange Act.” The court found that in enacting § 115, Delaware’s General Assembly “cautioned” that the measure “was 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 or the Superior Court.” The court stated that it understood the Delaware statute as authorizing bylaws requiring that federal law derivative claims be brought in a particular federal district court, but did not discuss whether such a bylaw would be valid.

Ballard Spahr’s Securities Enforcement and Corporate Governance Litigation attorneys can assist businesses in crafting forum selection bylaws that avoid pitfalls identified in rulings on the validity of such provisions. In addition, where necessary, our attorneys can help resolve disputes surrounding such provisions.

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