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Abstract

In 2022 and 2023, two cases were litigated in the Seventh and Ninth Circuits, respectively. Each of those cases involved a corporate bylaw providing that a Delaware state court was the exclusive forum for derivative actions. Each case also included a claim that the corporation’s board of directors had made false or misleading proxy statements in violation of 15 U.S.C. § 78n. The Exchange Act, which provides for these proxy solicitation claims, states that federal courts have exclusive jurisdiction over claims brought under the Act. Thus, if these forum selection bylaws were used as a basis for dismissal, the plaintiff would be unable to bring a derivative action alleging that a board of directors made false or misleading statements in proxy solicitation materials. This is because federal courts would refuse to hear the action based on the forum selection bylaw, and Delaware state courts would refuse to hear the action because of the federal courts’ exclusive jurisdiction over such actions.

The Ninth Circuit held that this was an acceptable outcome, and that the bylaw was valid and enforceable. Meanwhile, the Seventh Circuit held that the bylaw was invalid and that a federal court was an appropriate forum, despite the existence of the bylaw. If the Ninth Circuit’s view is correct, then these types of forum selection clauses will essentially become a complete bar to derivative actions based on the Exchange Act.

This Comment seeks to resolve the validity and enforceability of these types of corporate bylaws once and for all. Neither the Ninth nor the Seventh Circuit was wholly correct in its application of relevant law. The question of such a bylaw’s validity and enforceability turns on three issues: (1) whether the Exchange Act’s anti-waiver provision voids the bylaw; (2) whether the bylaw is authorized under Delaware General Corporation Law; and (3) if there is an unreasonableness exception that renders such a bylaw unenforceable.

In answering these questions, this Comment will show that these types of provisions in corporate bylaws are voided by the Exchange Act’s anti-waiver provision and are not authorized by Delaware General Corporation Law Sections 109(b) or 115. Further, while these provisions are rendered invalid by federal and Delaware law, there is no unreasonableness exception that would render these types of bylaws unenforceable. Therefore, corporations are unable to create a “litigation bridge[] to nowhere” for Exchange Act claims, and shareholders should be free to bring these claims in federal court without having them dismissed on the grounds of forum non conveniens.

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