70 F.4th 1129
9th Cir.2023Background
- The Gap’s bylaws designate the Delaware Court of Chancery as the exclusive forum for “any derivative action or proceeding brought on behalf of the Corporation.”
- Shareholder Noelle Lee filed a putative derivative suit in California federal court alleging §14(a)/Rule 14a-9 proxy nondisclosure claims about Gap’s statements on diversity; she sought equitable relief on behalf of Gap (no monetary damages claimed).
- The district court dismissed on forum non conveniens grounds pursuant to the bylaw; a three-judge Ninth Circuit panel affirmed and the en banc court granted rehearing.
- The en banc court considered three issues: whether the bylaw (1) violates the Exchange Act’s antiwaiver provision (§29(a)); (2) is unenforceable because enforcement would contravene federal public policy (M/S Bremen/Atlantic Marine analysis, with Borak as the linchpin); and (3) is invalid under Delaware law (DGCL §115).
- The Ninth Circuit (majority) held the bylaw valid and enforceable: a shareholder can still enforce §14(a) claims as a direct action in federal court (so §29(a) is not violated); Borak’s dictum does not create a strong federal policy favoring derivative §14(a) suits; and §115 (as interpreted in Salzberg) does not bar such bylaws.
- The decision creates a circuit split with the Seventh Circuit (Seafarers); Judge Thomas dissented, arguing the bylaw is a “bridge to nowhere” that violates the Exchange Act’s antiwaiver and §27 exclusive-jurisdiction protections.
Issues
| Issue | Plaintiff's Argument (Lee) | Defendant's Argument (Gap) | Held |
|---|---|---|---|
| Whether Gap’s forum-selection bylaw is void under the Exchange Act’s antiwaiver provision (§29(a)) | The bylaw functionally waives Lee’s right to bring a derivative §14(a) claim anywhere (state court will dismiss for lack of federal jurisdiction), so it unlawfully waives Exchange Act rights. | The bylaw does not waive substantive Exchange Act duties; plaintiffs can still pursue §14(a) claims as direct actions in federal court; McMahon allows procedure-selection without voiding §29(a). | Not void: §29(a) forbids waiver of substantive obligations, not procedures; availability of a direct federal action means no impermissible waiver. |
| Whether enforcement would contravene a strong federal public policy (M/S Bremen / Atlantic Marine) — especially considering Borak (private right) and §27 exclusive jurisdiction | Borak implies a federal policy protecting shareholders’ ability to bring derivative §14(a) suits in federal court; enforcing the bylaw would frustrate that policy and §27’s exclusive-federal forum. | Borak’s dictum on derivative §14(a) suits is outdated; subsequent Supreme Court decisions and Delaware law (Tooley, Kamen, Virginia Bankshares) undermine any strong federal policy requiring derivative §14(a) suits; enforcement does not bar federal enforcement because direct actions remain available. | Not an extraordinary circumstance: plaintiff failed to show enforcement would contravene a strong federal public policy; Borak’s dictum does not establish such a policy here. |
| Whether the bylaw is invalid under Delaware law (DGCL §115) | Section 115 and its synopsis (and Boilermakers reasoning) show Delaware did not intend bylaws to foreclose federal suits; §115 requires consistency with jurisdictional requirements. | Salzberg (Del. S. Ct.) interpreted “internal corporate claims” as state-law claims; §115 is permissive and does not preclude forum-selection bylaws that cover federal claims; Section 109(b) authorizes bylaws governing where stockholders sue. | Valid under Delaware law: Salzberg controls — §115 covers state-law internal corporate claims; nothing in §115, Boilermakers, or the synopsis forbids a §109(b)-based forum-selection bylaw like Gap’s. |
Key Cases Cited
- Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987) (§29(a) bars waiver of substantive Exchange Act duties but does not bar forum-selection/arbitration that preserves an adequate forum to vindicate rights)
- J.I. Case Co. v. Borak, 377 U.S. 426 (1964) (recognized implied private §14(a) enforcement and suggested availability of derivative and direct remedies; the Court’s statements on derivative suits were dicta and later jurisprudence narrowed their force)
- M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) (forum-selection clauses are presumptively enforceable absent strong public-policy or other extraordinary reasons)
- Atlantic Marine Constr. Co. v. U.S. Dist. Ct. for W. Dist. of Tex., 571 U.S. 49 (2013) (when parties agree to a valid forum-selection clause, courts ordinarily enforce it under forum non conveniens principles; plaintiff must show extraordinary circumstances)
- Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991) (federal courts should incorporate state law for corporate internal-affairs issues and to fill statutory gaps)
- Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) (limits on standing under §14(a) and caution about expanding implied private rights)
- Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020) (Delaware Supreme Court: §115’s “internal corporate claims” refers to claims under Delaware law; §115 is permissive and does not categorically bar forum-selection provisions for federal claims)
- Boilermakers Loc. 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) (upheld forum-selection bylaws under §109(b) as process-oriented rules regulating where stockholders may file suits)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (Delaware test for direct vs. derivative actions: who suffered the harm and who would benefit from recovery)
- Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022) (contrasting decision: Seventh Circuit held a similar bylaw invalid under §115 and §29(a), creating the circuit split)