Seventh Circuit Says Delaware Companies May Not Bar The Door To Federal Court For Federal Proxy Fraud Derivative Claims

• Published date: 24 January 2022
• Law Firm: Sidley Austin LLP
• Author: Jim Ducayet and Thomas H. Collier

I. Introduction

The Seventh Circuit recently issued an important decision holding that an exclusive forum provision in a company's bylaws requiring that all derivative actions be brought in Delaware Chancery Court is unenforceable as applied to derivative cases brought under the federal proxy laws. On its face, Seafarers Pension Plan v. Bradway seems to foreclose the use of exclusive forum provisions for claims for which there is exclusive federal jurisdiction. As the Seventh Circuit notes, that would seem to be consistent with both federal proxy fraud law, which forbids contractual waivers of compliance with the law, as well as Delaware state law. But as discussed below, there is reason to believe that the decision may not be the last word on the topic, and, indeed, that it could end up before the U.S. Supreme Court.

II. The Seventh Circuit's Opinion

The Seafarers case arose out of the tragic crashes of two Boeing 737 MAX jets, and the subsequent grounding of all 737 MAX jets for more than one year. The plaintiff in the case, a pension fund and Boeing shareholder, filed a derivative suit asserting claims under Section 14(a) of the Securities Exchange Act of 1934, claiming that the Boeing officers and board members made materially false and misleading statements about the 737 MAX in several proxy materials. The suit was filed in federal court in Chicago, where Boeing is located.

The defendants'officers and directors of Boeing'moved to dismiss the suit for forum non conveniens, arguing that a Boeing bylaw required all derivative actions be brought...