Opinion ID: 5288684
Heading Depth: 1
Heading Rank: 3

Heading: Applying Delaware Corporation Law

Text: The most straightforward resolution of this appeal is under Delaware corporation law, which we read as barring application of the Boeing forum bylaw to this case invoking nonwaivable rights under the federal Exchange Act. We ﬁrst address in Part III-A the nature of plaintiﬀ’s derivative Exchange Act claim and then in Part III-B the relevant Delaware statutes and case law on such forum-selection bylaws. A. Plaintiﬀ’s Derivative Claims Under the Exchange Act of 1934 Plaintiﬀ’s derivative suit under Section 14(a) is straightforward. Section 14(a) and its implementing regulation, SEC Rule 14a-9, prohibit material misstatements or omissions in a proxy statement. 15 U.S.C. § 78n(a)(1); 17 C.F.R. § 240.14a- 9(a). To state a claim under Section 14(a), a plaintiﬀ must allege that (i) the proxy statement contained a material misstatement or omission, which (ii) caused plaintiﬀ’s injury, and (iii) that the proxy solicitation itself, rather than the particular defect in the solicitation, was an essential link in the accomplishment of the transaction. Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384–85 (1970). As noted, the Exchange Act provides that only federal courts may exercise jurisdiction over claims that arise under the Act. 15 U.S.C. § 78aa. Section 14(a) may be enforced in private actions by shareholders asserting their own rights and in derivative actions asserting rights of a corporation harmed by a violation. J.I. Case Co. v. Borak, 377 U.S. 426, 431−32 (1964). No. 20-2244 7 In a derivative suit under Section 14(a), the theory “is that a corporation’s board has been so faithless to investors’ interests that investors must be allowed to pursue a claim in the corporation’s name.” Robert F. Booth Trust v. Crowley, 687 F.3d 314, 316–17 (7th Cir. 2012). A derivative suit is considered “an asset of the corporation” and permits “an individual shareholder to bring ‘suit to enforce a corporate cause of action against oﬃcers, directors, and third parties.’” Kamen v. Kemper Financial Servs., Inc., 500 U.S. 90, 95 (1991), quoting Ross v. Bernhard, 396 U.S. 531, 534 (1970); Lefkovitz v. Wagner, 395 F.3d 773, 776 (7th Cir. 2005), quoting Kennedy v. Venrock Assocs., 348 F.3d 584, 589 (7th Cir. 2003). Here, plaintiﬀ alleges that the false and misleading proxy statements caused harm to Boeing by enabling the improper re-election of directors who had for years tolerated poor oversight of passenger safety, regulatory compliance, and risk management during the development of the 737 MAX airliner. Plaintiﬀ further alleges that the proxy statements provided misleading recommendations to shareholders and caused shareholders to vote down a shareholder proposal calling for bifurcation of the CEO and chairman positions. Regardless of the ultimate merits of the claims, plaintiﬀ’s chosen forum in the federal district where Boeing is headquartered seems appropriate for the case. To avoid that chosen forum and defeat the claims entirely, defendants invoked Boeing’s forum bylaw. If it can be applied to this case, the bylaw will force plaintiﬀ to raise its claims in a Delaware state court, which is not authorized to exercise jurisdiction over Exchange Act claims. 15 U.S.C. § 78aa; Cottrell v. Duke, 737 F.3d 1238, 1247−48 (8th Cir. 2013). If that’s correct, checkmate for defendants. That result would be diﬃcult to reconcile with 8 No. 20-2244 Section 29(a) of the Exchange Act, which deems void contractual waivers of compliance with the requirements of the Act. 15 U.S.C. § 78cc(a). B. Delaware Corporation Law on Forum-Selection Bylaws We read Delaware corporation law as rejecting Boeing’s use of its forum bylaw to foreclose entirely plaintiﬀ’s derivative action under Section 14(a). Section 115 of the Delaware General Corporation Law addresses speciﬁcally bylaws that impose choices of forums for litigation involving corporate affairs. Section 115 provides in relevant part that “bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State.” 8 Del. C. § 115. Section 115 deﬁnes “internal corporate claims” to include derivative claims like this one: “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or oﬃcer or stockholder in such capacity … .” 8 Del. C. § 115. For present purposes, the two key phrases in Section 115 are “consistent with applicable jurisdictional requirements” and “courts in this State.” As applied here, Boeing’s forum bylaw violates Section 115 because it is inconsistent with the jurisdictional requirements of the Exchange Act of 1934, 15 U.S.C. § 78cc(a). Further, federal courts in Delaware are courts “in” that State, as distinct from courts “of” that State. The statutory language shows that Section 115 does not authorize application of Boeing’s forum bylaw to close all courthouse doors to this derivative action. No. 20-2244 9 First, regarding the “jurisdictional requirements” phrase, guidance from the Delaware General Assembly supports this reading of Section 115. The synopsis accompanying the 2015 Amendments to the Delaware General Corporation Law anticipated the question posed in this case. It cautioned that the new Section 115 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.” S.B. 75, 148th Gen. Assemb., Reg. Sess. (Del. 2015) (synopsis). By eliminating federal jurisdiction over the Seafarers Plan’s exclusively federal derivative claims, Boeing’s forum bylaw forecloses suit in a federal court based on federal jurisdiction. That’s exactly what Section 115 was “not intended to authorize.” 2 Second, while we might hesitate to place decisive weight solely on a choice of preposition in the statute, we must also note that the choice is consistent with the Delaware Supreme Court’s and our understanding of the Delaware statute. The United States District Court and Bankruptcy Court for the District of Delaware are certainly, in the statute’s words, “courts in this State” of Delaware. In Salzberg v. Sciabacucchi, 227 A.3d 102, 119 (Del. 2020), the Delaware Supreme Court addressed Section 115 and said it presumed that the reference 2 Delaware law holds that a bill synopsis is a proper source from which to glean legislative intent where the statutory language seems ambiguous. Board of Adjustment of Sussex Cty. v. Verleysen, 36 A.3d 326, 332 (Del. 2012); Carper v. New Castle Cty. Bd. of Ed., 432 A.2d 1202, 1205 (Del. 1981). Section 115 as enacted was not materially different from the language described in the synopsis. 10 No. 20-2244 to “courts in this State” included federal courts located in the state. If the statute had said “courts of this State,” the statutory language might have given defendants a better toehold. Most circuits treat forum-selection clause references to courts “of” a state as not including federal courts in the state, but references to courts “in” a state as including both state and federal courts located in the state. See, e.g., New Jersey v. Merrill Lynch & Co., 640 F.3d 545, 549 (3d Cir. 2011) (collecting cases, including FindWhere Holdings, Inc. v. Sys. Env't Optimization, LLC, 626 F.3d 752, 755 (4th Cir. 2010), and Dixon v. TSE Int’l Inc., 330 F.3d 396, 398 (5th Cir. 2003)); cf. Regis Associates v. Rank Hotels (Management) Ltd., 894 F.2d 193, 195−96 (6th Cir. 1990) (construing contractual clause consenting to “jurisdiction of the Michigan Courts” as not clearly waiving statutory right to remove case from state courts to a federal court in Michigan). Similarly, for example, the federal Tax Injunction Act bars federal district courts from enjoining state tax collections when “a plain, speedy and eﬃcient remedy may be had in the courts of such State.” 28 U.S.C. § 1341 (emphasis added). That statutory language means that such cases must ordinarily be heard in state courts, as distinct from language designating courts “in” a state as suitable forums. See City of Fishers v. DirecTV, 5 F.4th 750, 753 (7th Cir. 2021) (discussing Tax Injunction Act). From these signals in the statutory text and Delaware case law, we conclude that Section 115 does not authorize use of a forum-selection bylaw to avoid what should be exclusive federal jurisdiction over a case, particularly under the Exchange Act. No. 20-2244 11 Defendants counter that Section 115 does not matter because the Boeing bylaw is authorized under Section 109(b), which provides broadly that a corporation’s “bylaws may contain any provision, not inconsistent with law or with the certiﬁcate of incorporation, relating to the business of the corporation, the conduct of its aﬀairs, and its right or powers or the rights or powers of its stockholders, directors, oﬃcers or employees.” 8 Del. C. § 109(b). We are not persuaded that Section 109(b) saves this bylaw in this case. We start with the general principle, which Delaware law adopts, that more speciﬁc statutory provisions, like Section 115 for bylaws with forum-selection clauses, ordinarily take precedence over more general provisions like Section 109. E.g., Turnbull v. Fink, 668 A.2d 1370, 1377 (Del. 1995) (“Where possible, a court will attempt to harmonize two potentially conﬂicting statutes dealing with the same subject. If they cannot be reconciled, however, the speciﬁc statute must prevail over the general.”) (citations omitted). Section 109 includes the limit “not inconsistent with law,” which does not invite corporations to avoid non-waiver provisions like Section 29(a) of the Exchange Act. Defendants counter that principle, however, by arguing that in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the Delaware Supreme Court held that the more general Section 109 actually provides broader authorizations than Section 115. Defendants read too much into Salzberg, which does not allow enforcement of Boeing’s forum bylaw in this case. In Salzberg, several Delaware corporations wrote charters with provisions requiring that any actions arising under the Securities Act of 1933 be ﬁled in federal courts. Id. at 109. Unlike the Exchange Act of 1934, the Securities Act of 1933 allows 12 No. 20-2244 plaintiﬀs to ﬁle suit in state or federal court and, signiﬁcantly, bars removal from state to federal court. 15 U.S.C. § 77v(a); Cyan, Inc. v. Beaver County Emps. Ret. Fund, 138 S. Ct. 1061, 1078–79 (2018). A shareholder brought a facial challenge to those federal forum clauses. The Court of Chancery held them invalid. The Delaware Supreme Court reversed, but on narrow grounds. Salzberg held only that the challenged provisions were facially valid under Section 102(b)(1) of the Delaware General Corporation Law, which broadly deﬁnes what corporate charters and bylaws may contain. 8 Del. C. § 102(b)(1); Salzberg, 227
Accordingly, Salzberg neither applies to claims brought under the Exchange Act of 1934 nor bars securities plaintiﬀs from bringing as-applied challenges to federal forum provisions. Nothing in Salzberg suggests it would extend Section 109 (or Section 102(b)(1), for that matter) to allow application of the forum bylaw to a case like this one, where it would effectively bar plaintiﬀ from bringing its derivative claims under the 1934 Act in any forum. To the contrary, the Delaware court stressed the harmony between Delaware corporation law and federal securities law: “This Court has viewed the overlap of federal and state law in the disclosure area as ‘historic,’ ‘compatible,’ and ‘complimentary.’” 227 A.3d at 114, quoting Malone v. Brincat, 722 A.2d 5, 13 (Del. 1998). Even more to the point here, as noted above, Salzberg expressly presumed that the reference to “courts in this State” in the bylaws authorized by the new Section 115 included federal courts, 227 A.3d at 119, which the Boeing forum bylaw does not. Defendants also contend that in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), the No. 20-2244 13 Delaware Court of Chancery held that Section 109(b) authorized a forum selection bylaw identical to the Boeing forum bylaw. Not quite, for there were critical diﬀerences. In Boilermakers Fund, the boards of two Delaware corporations, Chevron and FedEx, had adopted bylaws designating the Delaware Court of Chancery as the exclusive forum for four types of suits: derivative suits, ﬁduciary duty suits, suits under Delaware corporation law, and internal aﬀairs suits. Id. at 942–43. Plaintiﬀs were shareholders of Chevron and FedEx who alleged that the boards lacked statutory authority to adopt the bylaws. They sought a declaration that the bylaws were facially invalid and amounted to breaches of ﬁduciary duty. The Court of Chancery rejected the facial challenges, emphasizing that plaintiﬀs were required to show that the bylaws could not “operate lawfully or equitably under any circumstances.” Id. at 948. In so holding, the court oﬀered important observations about the purpose of Section 109(b), the nature of forumselection bylaws, and hypothetical as-applied challenges— like this case—based on the enforcement of a forum-selection bylaw to eliminate federal jurisdiction. These observations make clear that Section 109(b) and Boilermakers Fund do not authorize enforcement of a forum-selection provision like the Boeing forum bylaw in a case like this one. First, the Court of Chancery noted that Section 109(b) “has long been understood to allow the corporation to set ‘selfimposed rules and regulations [that are] deemed expedient for its convenient functioning.’” 73 A.3d at 951, quoting Gow v. Consolidated Coppermines Corp., 165 A. 136, 140 (Del. Ch. 1933). Generally speaking, the court continued, forum bylaws ﬁt that description because they are “procedural” and 14 No. 20-2244 “process-oriented” rather than substantive. Boilermakers Fund, 73 A.3d at 951, quoting CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 236–37 (Del. 2008). The court determined that the challenged forum-selection bylaws—directing shareholders to ﬁle their internal aﬀairs claims in the state of Delaware (Chevron) and in the Delaware Court of Chancery (FedEx)—also ﬁt that description: they regulated “where stockholders may ﬁle suit, not whether the stockholder may ﬁle suit or the kind of remedy that the stockholder may obtain on behalf of herself or the corporation.” Boilermakers Fund, 73 A.3d at 952; see also Salzberg, 227 A.3d at 115 n.51 (reiterating Boilermakers Fund point that forum bylaws may regulate where—not whether—shareholders may ﬁle suit). The Boilermakers Fund court then provided important guidance for this case. The court addressed the plaintiﬀs’ attempts to identify hypothetical situations where the challenged bylaws would operate unreasonably by precluding plaintiﬀs from bringing claims—such as derivative claims under the Exchange Act of 1934—that must be brought in federal court. Boilermakers Fund, 73 A.3d at 961–62. The court explained that facially, “neither of the forum selection bylaws purports in any way to foreclose a plaintiﬀ from exercising any statutory right of action created by the federal government.” Id. at 962. In fact, the Chevron bylaw had been amended to avoid the problem we face here by expressly allowing cases to be ﬁled in federal court in the state of Delaware. Id. at 961. The plaintiﬀs asked a hypothetical question. Suppose the board of FedEx sought to enforce the forum bylaw to foreclose a plaintiﬀ from bringing a claim within the exclusive jurisdiction of the federal courts? That’s this case. The Delaware No. 20-2244 15 Court of Chancery explained that in such a case, the board “would have trouble” for two reasons: First, a claim by a stockholder under federal law for falsely soliciting proxies does not ﬁt within any category of claim enumerated in FedEx’s forum selection bylaw. Thus FedEx’s bylaw is consistent with what has been written about similar forum selection clauses addressing internal aﬀairs cases: “[Forum selection] provisions do not purport to regulate a stockholder’s ability to bring a securities fraud claim or any other claim that is not an intra- corporate matter.” Second, the plaintiﬀ could argue that if the board took the position that the bylaw waived the stockholder’s rights under the Securities Exchange Act, such a waiver would be inconsistent with the antiwaiver provisions of that Act, codiﬁed at 15 U.S.C. § 78cc. Id. at 962 (footnotes omitted). The ﬁrst reason would not apply to plaintiﬀ’s derivative action here, but the second reason applies directly to it. While the Court of Chancery declined to “wade deeper into imagined situations” so as not to risk issuing an advisory opinion, its brief foray into how a hypothetical plaintiﬀ might protect her not-so-hypothetical rights under the federal securities laws signals clearly enough that Delaware law would not look kindly on defendants’ eﬀort to apply the Boeing bylaw here. In future cases, Delaware courts may address broader questions such as whether Section 109(b) would authorize a bylaw that violates Section 115, but it is suﬃcient for our purposes that the reasoning of Boilermakers Fund does not 16 No. 20-2244 authorize application of the Boeing forum bylaw to this case, where it would eﬀectively foreclose a claim under federal securities law. The Court of Chancery made clear that enforcement of a forum bylaw to foreclose a plaintiﬀ from exercising her rights under the Exchange Act of 1934 would be inconsistent with the anti-waiver provision of that Act. 73 A.3d at 962. No Delaware law, at least to our knowledge, authorizes such an inconsistency. To the contrary, Salzberg, Boilermakers Fund, and the new Section 115 codifying that decision signal clearly that Delaware is not inclined to enable corporations to close the courthouse doors entirely on derivative actions asserting federal claims subject to exclusive federal jurisdiction.