J.I. Case Company v. Borak is perhaps unique in contemporary Supreme Court jurisprudence. Although the Court has “abandoned” the 1964 precedent, Borak has never been formally reversed, and it continues to generate circuit splits, most recently concerning the enforceability of a forum selection provision.
Borak held that shareholders enjoy a private right of action under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 14(a), as implemented by Rule 14a-9, broadly prohibits any material misrepresentation or omission in connection with the solicitation of proxy votes from public company shareholders. However, neither the statutory provision nor its implementing rule expressly empowers shareholders to enforce the ban on false or misleading proxy solicitations. Nonetheless, Borak held a private right of action is implied.
Suffice it to say that Borak has not gracefully aged. In the six decades since, the Court has repeatedly distanced itself from Borak, even making it clear that the case would be decided differently today. Still, while chipping away at its doctrinal foundations, the Court has never had the occasion to expressly overrule the beleaguered precedent.
Surprisingly then, despite its “derelict” status, the Seventh Circuit Court of Appeals recently relied on Borak in ruling that a corporation may not cutback against wasteful, frequently meritless shareholder litigation through a forum selection provision in its governing documents, specifically one that requires all derivative lawsuits to be brought in the state courts where the corporation is chartered. In Seafarers Pension Plan v. Bradway, a divided Seventh Circuit panel reasoned that because federal courts enjoy exclusive jurisdiction over all Exchange Act claims, limiting derivative lawsuits to state court would effectively bar shareholders from bringing a Borak claim in a derivative action. Consequently, the divided panel held, over the dissent of Judge Easterbrook, that the enforcement of a corporate forum provision to preclude derivative Borak claims would violate shareholders’ rights under the Exchange Act and the underlying state corporate law authorizing forum provisions.
Only five months later, a unanimous Ninth Circuit panel evaluating an identical corporate forum provision in Lee v. Fisher arrived at the opposite conclusion. Pointing to federal law’s strong presumption in favor of enforcing contractual forum selection clauses, the Lee court reasoned that a corporate forum provision is enforceable as applied to Borak claims, even if enforcement would effectively preclude shareholders from bringing such claims in a derivative capacity.
While Lee is pending en banc review by the Ninth Circuit (with oral arguments scheduled for December 12), it seems certain that the legal questions presented in both Lee and Seafarers will be raised in other circuits. Those legal questions, in turn, point to a more basic policy question: whose interest are served by preserving derivative Borak claims? In practice, it is seldom the interests of a corporation’s shareholders, the intended beneficiary of federal proxy regulation. Instead, Borak suits, like other types of representative shareholder litigation, are dominated by plaintiff’s attorneys, frequently bringing strike suits that can be settled for nuisance value and, of course, a payout of the attorney’s fees.
In recent years, as the state courts of Delaware—the jurisdiction in which most public companies are incorporated—have clamped down on meritless shareholder lawsuits targeting public corporations, plaintiff’s attorneys have increasingly sought refuge in the federal courts, relying on Borak in particular. Indeed, the lawsuits in both Seafarers and Lee exemplify this trend.
In Seafarers, the plaintiff’s derivative suit alleged failures by the board of the aerospace manufacturer, The Boeing Company, in overseeing the design and production of the company’s 737 MAX airliner. In Lee, the plaintiff’s derivative suit lodged a similar complaint, alleging failures by the board of the apparel retailer, The Gap, to improve racial diversity within the company’s management ranks. Thus, in both cases, the essence of the plaintiffs’ claims was that corporate harm was caused by the board’s mismanagement. But rather than litigate a state law breach of fiduciary duty claim in the courts of Delaware, where both Boeing and The Gap happen to be incorporated, both suits repackage the allegations into federal proxy claims under Section 14(a). Because federal courts have exclusive jurisdiction over all Exchange Act claims, doing so enables the suit to sidestep the scrutiny of the Delaware bench, whose specialized judges have long experience in dispatching meritless shareholder litigation. The result has been a new wave of dubious attorney-driven suits in federal courts, replacing the wave that the Delaware courts only recently abated.
Given this context, policy considerations caution a healthy skepticism against Borak claims under Section 14(a), particularly where such claims are brought as a derivative action against a corporation’s management. Such skepticism only reinforces the principal legal claims that we make in a forthcoming article and separate amici curiae brief filed in connection with the Ninth Circuit’s en banc review of Lee. Specifically, we argue that nothing in either state corporate law or federal securities law prohibits a corporate forum provision that would preclude derivative Borak claims.
Starting first with the corporate law of Delaware, a corporate forum provision governing derivative Borak claims is valid and lawful. The Delaware Supreme Court’s recent decision in Salzberg v. Sciabacucchi makes this point clear. Conceiving of a corporation’s charter and bylaws as a contract between the corporation and its shareholders, Salzberg held that a forum provision in the corporate contract is enforceable against shareholders, even if the provision governs a federal securities law claim. Moreover, the equitable constraints that Salzberg recognized might limit the enforceability of corporate forum provisions are inapplicable to a provision that bars derivative Borak claims. After all, such a provision would still permit shareholders to bring direct Borak claims in federal court, individually or as a class action, as well as derivative state corporate law claims in the courts of Delaware. Given these alternatives, there is no equitable reason to deny the enforceability of an otherwise lawful forum provision precluding derivative Borak claims. Indeed, a venerable cadre of former Delaware Chief Justices, Justices, Chancellors, and Vice Chancellors submitted a separate letter to the Ninth Circuit concurring with our interpretation of applicable Delaware law.
Turning next to federal securities law, even assuming that the implied right of action created by Borak in 1964 survives as good law today, the Supreme Court’s subsequent precedents have discredited the notion that that right of action can be brought as a derivative claim. Instead, those precedents establish that Borak must be narrowly interpreted, that the right of action implied by Borak belongs to only shareholders, and that shareholder standing to assert that right is limited to direct, not derivative, claims. In each instance, the implication is the same: barring derivative actions in federal courts does not violate the rights of shareholders under Section 14(a).
Thus, the present circuit split offers an opportunity to reexamine Borak in light of the subsequent six decades of Supreme Court precedent. A sober assessment of the Court’s post-Borak decisions suggests that at minimum, a corporate forum provision waiving derivative Borak claims is valid and enforceable, notwithstanding the Exchange Act’s anti-waiver provision. More forcefully, it suggests that there is no derivative right of action under Section 14(a). Ultimately, it suggests that should the Supreme Court ever resolve the circuit split, it might well take the opportunity to revisit Borak and squarely overrule it.
In all cases, it also means that Seafarers was wrongly decided and should be disregarded. The panel decision in Lee was correct, should be affirmed en banc by the Ninth Circuit, and should be followed by other circuits. Where shareholders are able to bring (i) the same Borak claim as a direct or class action to recover any damage they suffered personally and (ii) a derivative action under state corporate law to recover any damage suffered by the corporation, then a third lawsuit, making a derivative Borak claim, does nothing to benefit the corporation, its shareholders, or society more broadly.
We elaborate on all of these points in our forthcoming article here.
Our amici brief along with the letter submitted by the former Delaware Chief Justices, Justices, Chancellors, and Vice Chancellors concurring with our interpretation of applicable Delaware law is available here.