Closing a Loophole in Exchange Act Enforcement: A Framework for Assessing the Enforceability of Delaware Forum Selection Bylaws in the Context of Derivative § 14(a) Claims
Over the past decade, a growing number of Delaware corporations have adopted forum selection bylaws. These bylaws often require that all derivative claims against a company’s officers or directors be resolved in Delaware state courts. But what happens when a shareholder brings a derivative claim that Delaware courts do not have jurisdiction to adjudicate?
This issue arises when Delaware forum selection bylaws are applied to derivative claims arising under § 14(a) of the Securities and Exchange Act of 1934, because the Exchange Act instructs that only federal courts may resolve such claims. In this context, Delaware corporations may seek to exploit forum selection bylaws as a jurisdictional loophole to bar shareholders from pursuing derivative Exchange Act claims in any court. In effect, the bylaws enable defendant corporations to designate a substitute referee—Delaware courts—that they already know is disqualified from adjudicating Exchange Act claims, which inevitably forfeits the game in their favor.
Circuits have split on whether to enforce Delaware forum selection bylaws when they are applied to derivative § 14(a) claims. This Comment proposes an alternative approach to resolve the circuit split. The proposed approach revives the historically underutilized “unreasonableness exception” to enforceability, which the Supreme Court established in M/S Bremen v. Zapata Off-Shore Co. This Comment contends that Bremen’s unreasonableness exception must be understood as a context-specific inquiry. It should be applied liberally to forum selection clauses contained in corporate bylaws, and as applied to derivative Exchange Act claims. Under this proposed approach, Delaware forum selection bylaws are unenforceable as applied to derivative § 14(a) claims.