Securities Regulation Daily Boeing bylaw effectively foreclosed federal lawsuit
Friday, June 12, 2020

Boeing bylaw effectively foreclosed federal lawsuit

By Mark S. Nelson, J.D.

The U.S. district court judge expressed sympathy with the derivative plaintiff’s predicament in not being able to exercise a federal law right but nevertheless dismissed the case.

A U.S. district court judge in Chicago concluded that The Boeing Company’s forum selection bylaw that required derivative suits to be brought only in Delaware state court prevented a Boeing shareholder from bringing an Exchange Act Section 14(a) suit against the company in federal court. The shareholder, thus, faced the horns of a dilemma: per the bylaw, the suit must be brought in a Delaware court, but the Exchange Act grants federal courts exclusive jurisdiction over Section 14(a) suits. Despite expressing sympathies with the shareholder’s dilemma, the court concluded that the weight of authority favored Boeing and, thus, the case was dismissed on grounds of forum non conveniens (Seafarers Pension Plan v. Bradway, June 8, 2020, Leinenweber, H.).

Delaware cases inapt. Chicago-based Boeing is a Delaware company that adopted a bylaw that limits derivative suits to being brought in Delaware state courts. A Boeing shareholder sued the company under Exchange Act Section 14(a) for allegedly making materially false and misleading proxy statements. Boeing sought to have the case dismissed on the ground of forum non conveniens because of the bylaw.

Boeing had argued that the Delaware cases of Sciabacucchi and Boilermakers favored dismissal of the Section 14(a) suit. However, the court quickly rejected this approach because in Sciabacucchi it was held that a Securities Act suit could be brought in either federal or state court, although under the Boeing bylaw, such a suit could only be brought in Delaware. The court noted that the Securities Act has historically allowed for concurrent federal-state jurisdiction. Although not mentioned by the court, much of the debate in Sciabacucchi centered on the extent to which the U.S. Supreme Court’s Cyan decision (suit alleging only Securities Act claims can be brought in state court and cannot be removed to federal court) prevented a group of companies from enforcing a federal forum selection provision in their IPOs. Boilermakers, the court noted, held that a derivative suit could be brought in either federal or Delaware courts. But the court here concluded that neither Sciabacucchi nor Boilermakers applied to the instant case.

Public policy and international comity. The shareholder, by contrast, argued that another precedent addressing the validity of forum selection clauses applied and that Boeing should lose. Here, the court rejected two of the three possible theories because they were inapt (i.e., logistics were not a big issue and the shareholder did not allege fraud or overreaching). The remaining possibility was that the Boeing bylaw might be against public policy. Boeing countered that a Seventh Circuit opinion holding that an international arbitration award could not be challenged in the U.S. because British law afforded investor protections similar to those available under U.S. law supported its bid to enforce its bylaw.

The Boeing shareholder then further argued that the seventh Circuit case was inapplicable because derivative suits under Section 14(a) and under Delaware law diverge regarding the applicable standard: the former turns on negligence while the latter requires a showing of bad faith. But the court only noted that the main difference between the Seventh Circuit precedent and the instant case was the former addressed both forum selection and choice of law, while Boeing’s bylaw only addressed forum selection.

The court then articulated several reasons why forum selection clauses may be desirable to companies. Specifically, such clauses can help to avoid multi-jurisdictional litigation, can reduce litigation costs, and may avoid inconsistent results across multiple cases.

Then, returning to the parties’ arguments, the court addressed the shareholder’s assertion that the anti-waiver provision contained in Exchange Act Section 29 barred Boeing’s bylaw. Here, the court instead cited a district court opinion that extended the Seventh Circuit’s reasoning from an international context to a domestic context in which Illinois’ securities laws and common law fraud were deemed valid substitutes for federal securities laws.

The court ultimately dismissed the Section 14(a) suit against Boeing, although not before expressing a degree of sympathy with the Boeing shareholder, who is seemingly without anywhere to bring its federal claim.

The case is No. 19-cv-08095.

Attorneys: Carol V. Gilden (Cohen Milstein Sellers & Toll PLLC) for Seafarers Pension Plan. Joshua Z. Rabinovitz (Kirkland & Ellis LLP) for Robert A. Bradway.

Companies: Seafarers Pension Plan; The Boeing Company

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