Where we last left off, a couple of companies had adopted forum selection bylaws purporting to shunt all derivative actions to the Delaware Court of Chancery – intending, I will swear with my last breath – to capture state law fiduciary claims. When they got hit with the relatively-uncommon federal law Exchange Act derivative claims (under Section 14(a)), they celebrated their fortune and sought to enforce the bylaws against those, as well, even though Chancery has no jurisdiction over Exchange Act claims, which would, of course, mean just immediate dismissal.
They lost in the Seventh Circuit, but prevailed in the Ninth, which ultimately resulted in Delaware passing a new statute prohibiting forum selection bylaws from denying access to any court in the state of Delaware with jurisdiction to hear the claim at all – a law that is currently working mischief on the SEC’s attempt to encourage the use of arbitration in order to break securities class actions.
Anyhoo, the latest on this concerns a pair of securities actions filed in the Northern District of California against Block, alleging that the board failed to ensure compliance with various anti-money laundering statutes and things of that nature. (Neither case appears to be available yet on Lexis or Westlaw, but Law360 reported on them here).
One case was a standard securities class action; earlier this week, the court denied Block’s motion to dismiss. The other was a derivative action against Block, alleging both Section 14(a) claims and Section 10(b) claims, and state law breach of fiduciary claims, including Caremark violations and an insider trading/Brophy claim.
But Block had adopted what is by now a fairly standard forum selection bylaw, requiring that derivative actions be filed in the Court of Chancery, except for Exchange Act claims. The exact text of the bylaw stated:
For the avoidance of doubt, nothing contained in this Section 7.7 shall apply to any action brought to enforce a duty or liability created by the Exchange Act or any successor thereto
What to do?
Well, in the derivative action, the company sought dismissal, alleging that this was fundamentally a state law breach of fiduciary action that belonged in state court, and the Exchange Act claims were tacked on to keep the case in federal court (and duplicative of the class action to boot).
The district court barely entertained the suggestion. In a broader opinion holding that the plaintiffs had stated a claim on the merits, the court quickly held that the action fell within the terms of the forum selection carveout because “Plaintiffs’ claims under the Exchange Act predominate in this action.”
So now, the California district court will hear both the state law derivative claims, and the Exchange Act derivative claims, in a single action.
I suppose Block was right, there is a risk now that plaintiffs will add Exchange Act claims to state law fiduciary claims if they want to be heard in federal court, which is why, at the very least, companies should seek to sever them. That could, I suppose, occur in the bylaw itself, or perhaps in briefing – in this case, Block mentioned the possibility of severance, but only in a footnote in its reply, and the court did not entertain the possibility. Maybe Block would have succeeded on that argument if it had tried harder, though there’s also a real possibility that federal district courts will only be inclined to sever if they’re dismissing the Exchange Act claims anyway, and that’s … the worst of all worlds for defendants.
And some other things.
New Shareholder Primacy podcast! This week, me and Mike Levin talk about the Delaware Supreme Court’s decision restoring Elon Musk’s pay, and about how activists recruit director candidates. Here at Apple, here at Spotify, and here at Youtube.
And also – if you just can’t get enough of me opining on DExit and related subjects, here’s me talking to Rob Du Boff of Bloomberg’s ESG Currents.