January 13, 2022
Boeing shareholders still have an uphill fight ahead after winning a Seventh Circuit ruling that ran right through the crossroads of corporate law and a Catch-22 company bylaw restricting federal derivative claims to Delaware’s Chancery Court, which is barred from hearing them.
Experts said the decision last week in Seafarers Pension Plan v. Robert Bradway, if upheld, closes a loophole in securities law seen as limiting stockholder rights, potentially reducing the risk federal regulators or Congress will see the state’s corporation law as tilted too far in favor of big corporations.
Boeing can still appeal the split decision by a three-judge circuit panel that sent the case back to the U.S. District Court for the Northern District of Illinois. It is already pushing for the dismissal of a shareholder suit in Chancery Court seeking a state law declaration that the same forum-selection bylaw is invalid.
Stakes are enormous for both sides.
The suits all focus on the company’s multiyear record of alleged safety failures and regulatory violations while managing the rollout of the new 737 Max jetliner. Those problems were tied to two deadly crashes and were alleged to have cost the company billions, including costs stockholders are seeking to recover from directors and officers through derivative actions pursued on behalf of the corporation.
Minor Myers, a University of Connecticut School of Law professor, described the federal court reversal as an important development in the “ongoing struggle” at the intersection of Delaware corporate law and stockholder rights under federal securities laws.
“There’s a tangle of confusion lurking in much federal securities law — but Delaware bylaws aren’t a vehicle for opting out of the Exchange Act, as Boeing tried to do,” Myers told Law360.
“The lower court had flubbed the initial decision, allowing Boeing to use Delaware corporate law to generate an outcome that’s straightforwardly inconsistent with common understandings of the federal securities laws,” he added.
Myers said the Seventh Circuit potentially “saved the day” while also potentially averting the need for the Chancery Court to weigh in. He added: “The odd thing is that Boeing tried to use its bylaw to achieve something that both the Delaware General Assembly and courts have clearly telegraphed is out of bounds.”
At issue is a Boeing forum-selection bylaw that requires filing all stockholder derivative claims under Section 14(a) of the Securities Exchange Act of 1934 — which prohibits material misrepresentations and omissions in proxy statements — in Delaware’s Chancery Court.
Federal law, however, gives the federal government exclusive jurisdiction for 1934 Exchange Act claims, potentially snuffing out avenues for suits against Boeing in Delaware courts and dead-ending federal cases like the one in Illinois because of Boeing’s state-preference bylaw.
Targeted in recent shareholder cases are Boeing’s actions before and after catastrophic crashes of the new 737 Max jetliners in late 2018 and early 2019 that killed 346 people, as well as alleged negligence and fraud in issuing false proxies and public statements from 2017 to 2019 on the program, the crashes, and subsequent investigations and costs.
The episode and scandals cost the company some $9 billion, with the federal suit in Illinois seeking damages on the company’s behalf for oversight and disclosure failures, fiduciary duty breaches, and unjust enrichment.
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U.S. District Judge Harry D. Leinenweber, while expressing sympathy for the stockholders’ effort to litigate federal law in a federal court, ruled in 2020 that “the weight of authority backs Boeing’s position” that the company’s bylaws required dismissal under Delaware law.
Circuit Judges Diane P. Wood and David F. Hamilton reversed the lower court, pointing to exclusive federal jurisdiction over Exchange Act matters and the risk that Boeing’s bylaw would lead to dead-end suits under the 1934 Act. The remand remains subject to a full Seventh Circuit review and a potential U.S. Supreme Court appeal, however.
Waiting in the wings, meanwhile, is a Delaware Chancery Court case, stayed pending the Seventh Circuit decision, filed by the same plaintiff in the federal action, seeking a state court rejection of the same Boeing forum-selection bylaw at issue in the federal court dispute.
Boeing in both cases defended its bylaw as permissible and accused the stockholders of using the Chancery Court suit to relitigate the dismissal in Illinois. The stockholders in turn accused Boeing of using its bylaw to improperly protect directors and officers from personal liability for derivative claims.
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Jill Fisch, a law professor at the University of Pennsylvania’s Carey Law School, said the federal courts could have posed the shareholder standing issue to Delaware’s Supreme Court as a formal question, avoiding speculation about Delaware’s position.
But Fisch also said she was sympathetic to the idea that forum-selection bylaws should not trump federal statutes providing for exclusive federal jurisdiction.
“Most forum-selection bylaws are written in a way that expressly preserves access to the federal courts, although typically it’s the district court in Delaware,” Fisch said. “That’s the norm.”
Fisch also said the current dispute continues one that emerged in the Delaware Supreme Court’s Salzburg v. Sciabacucchi ruling in 2020. That decision reversed the Chancery Court’s rejection of federal-court-only charter mandates for certain Securities Act cases.
Salzburg covered challenges to claims that three Delaware-chartered companies — Blue Apron Inc., Roku Inc. and Stitch Fix Inc. — wrongly adopted charter provisions barring stockholders from filing state court complaints for violations of Section 11 of the federal Securities Act of 1933.
Justice Karen L. Valihura, writing for the state Supreme Court, rejected Vice Chancellor J. Travis Laster’s finding that a corporate charter cannot mandate an exclusive federal forum for some Securities Act suits if the claim doesn’t involve an internal matter of the company. Instead, the justices unanimously concluded some “intra-corporate” matters can be kept away from state courts if companies choose.
The issue was vexing enough at the time that Delaware’s justices took an unusual “let me draw you a picture” posture in its Salzburg ruling and included a Venn diagram in the opinion illustrating the internal, external and “intra” overlaps.
Seafarers “kind of goes back to this question Justice Valihura was struggling with in Salzburg, that these cases aren’t clearly external affairs and aren’t clearly internal,” Fisch said.
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