The Gap’s corporate bylaws contain a forum-selection clause specifying that any derivative action must be brought in the Delaware Court of Chancery. Yet under federal law, derivative claims under Section 14(a) of the Securities Exchange Act of 1934 can only be brought in federal court. Enforcing the forum-selection clause, therefore, would make it impossible to pursue Section 14(a) derivative claims. The district court nonetheless held that the clause should be enforced and dismissed the case.
On appeal, a panel of the Ninth Circuit affirmed the district court, but the full court granted rehearing en banc and vacated that decision. At the limited en banc en banc stage, Public Citizen, joined by Consumer Federation of America and Better Markets, filed an amicus brief urging reversal. The brief explained that enforcing the forum-selection clause would bar Appellant from pursuing her Section 14(a) derivative claims in any court because the state court lacks power to adjudicate those claims and therefore, would violate the Exchange Act’s anti-waiver clause. Importantly, unlike in direct shareholder suits, the remedies available through derivative actions, such as corporate governance reforms and any payment, flow to the corporation. Because corporations are increasingly adopting clauses similar to The Gap’s, the outcome of this case may have broad effect. And because exclusive federal jurisdiction is not limited to the Exchange Act, the outcome will affect the ability to enforce a range of federal statutes—including the antitrust laws, ERISA, and others.
In June 2023, in a 6-5 opinion, the court held that the provision was enforceable, preventing the plaintiff from pursuing his case. The plaintiff them petitioned the court for rehearing by the full court, and we filed an amicus brief in support of the petition. On August 1, 2023, the court denied the petition.