Lee ex rel. Gap, Inc. v. Fisher
| Docket Number | 21-15923 |
| Decision Date | 01 June 2023 |
| Parties | Noelle LEE, derivatively on behalf of The Gap, Inc, Plaintiff-Appellant, v. Robert J. FISHER; Sonia Syngal; Arthur Peck; Amy Bohutinsky; Amy Miles; Isabella D. Goren; Bob L. Martin; Chris O'Neill; Elizabeth A. Smith; John J. Fisher; Jorge P. Montoya; Mayo A. Shattuck III; Tracy Gardner; William S. Fisher; Doris F. Fisher; The Gap, Inc., Nominal Defendant, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Appeal from the United States District Court for the Northern District of California, Sallie Kim, Magistrate Judge, Presiding, D.C. No. 3:20-cv-06163-SK
Yury A. Kolesnikov (argued), Francis A. Bottini Jr., and Albert Y. Chang, Bottini & Bottini Inc., La Jolla, California, for Plaintiff-Appellant.
Roman Martinez (argued), Susan E. Engel, Michael Clemente, and Jordan R. Goldberg, Latham & Watkins LLP, Washington, D.C.; Elizabeth L. Deeley and Morgan E. Whitworth, Latham & Watkins, San Francisco, California; William J. Trach, Latham & Watkins LLP, Boston, Massachusetts; for Defendants-Appellees.
Allison M. Zieve and Scott L. Nelson, Public Citizen Litigation Group, Washington, D.C., for Amici Curiae Public Citizen, Consumer Federation of America, and Better Markets.
Jeremy A. Lieberman and Emma Gilmore, Pomerantz LLP, New York, New York; Jennifer Pafiti, Pomerantz LLP, Los Angeles, California; Ernest A. Young, Apex, North Carolina; for Amici Curiae Law Professors.
Jeffrey R. White, American Association for Justice, Washington, D.C., for Amicus Curiae American Association for Justice.
Boris Feldman, Doru Gavril, Elise Lopez, and Sigourney Jellins, Freshfields Bruckhaus Deringer US LLP, Redwood City, California, for Amici Curiae Professors Joseph A. Grundfest and Mohsen Manesh.
Anitha Reddy, Wachtell Lipton Rosen & Katz, New York, New York; Tyler S. Badgley and Janet Galeria, United States Chamber Litigation Center, Washington, D.C.; Stephanie Martz, National Retail Federation, Washington, D.C.; for Amici Curiae The Chamber of Commerce of the United States of America and the National Retail Federation.
Before: Mary H. Murguia, Chief Judge, and Sidney R. Thomas, Sandra S. Ikuta, Jacqueline H. Nguyen, Michelle T. Friedland, Ryan D. Nelson, Bridget S. Bade, Daniel A. Bress, Danielle J. Forrest, Patrick J. Bumatay and Salvador Mendoza, Jr., Circuit Judges.
Opinion by Judge Ikuta;
OPINION
Noelle Lee brought an action against The Gap, Inc. and its directors, "derivatively on behalf of Gap."1 Lee's action alleged that Gap violated § 14(a) of the Securities Exchange Act of 1934 (the Exchange Act) and Securities and Exchange Commission (SEC) Rule 14a-9 by making false or misleading statements to shareholders about its commitment to diversity. Gap's bylaws contain a forum-selection clause stating that the Delaware Court of Chancery "shall be the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation." Lee nevertheless brought her putative derivative action in a California district court. The district court granted Gap's motion to dismiss Lee's complaint on forum non conveniens grounds. Lee's appeal raises three questions: (1) whether Gap's forum-selection clause is void because it violates the Exchange Act's antiwaiver provision, § 29(a), 15 U.S.C. § 78cc(a); (2) whether the forum-selection clause is unenforceable under M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), because enforcement would violate a strong public policy of the federal forum; and (3) whether Gap's bylaw is invalid because it is contrary to Delaware law. We answer "no" to each question and affirm the district court.
The Exchange Act, 15 U.S.C. §§ 78a-78qq, regulates the trading of securities on national stock exchanges, and includes a range of prohibitions aimed at "promot[ing] honest practices in the securities markets." Cyan, Inc. v. Beaver Cnty. Emps. Ret. Fund, — U.S. —, 138 S. Ct. 1061, 1066, 200 L.Ed.2d 332 (2018). The Exchange Act "and its companion legislative enactments embrace a 'fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.' " Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) (citing SEC v. Cap. Gains Rsch. Bureau, 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (footnote omitted).
The Exchange Act provision that forms the basis for Lee's federal claim is § 14(a), which states: "It shall be unlawful for any person, . . . in contravention of such rules and regulations as the [SEC] may prescribe[,] . . . to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security." 15 U.S.C. § 78n(a)(1). Rule 14a-9, one of the regulations promulgated by the SEC to implement § 14(a), provides that "[n]o solicitation subject to this regulation shall be made by means of any proxy statement, . . . containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact." 17 C.F.R. § 240.14a-9(a).
The Exchange Act prohibits a range of other deceptive actions, including price manipulation, §§ 9, 15 U.S.C. §§ 78i, "short-swing trading" by corporate insiders, 16, 78p, and making false or misleading statements in reports or documents filed with the SEC, 18, 78r. Each of these provisions includes an express private right of action allowing a shareholder to bring an action against a person who violates these prohibitions. See §§ 9(c), 15 U.S.C. §§ 78i(f), 16(b), 78p(b), and 18(a), 78r(a). Unlike these prohibitions, the Exchange Act "makes no provision for private recovery for a violation of § 14(a)," Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 391, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), although the Supreme Court has permitted shareholders to bring such actions, see J.I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964).
The Exchange Act also includes various provisions that govern its implementation, including antiwaiver and jurisdictional provisions. Section 29(a) of the Exchange Act provides that "[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void." 15 U.S.C. § 78cc(a). In addition, § 27(a) of the Exchange Act gives federal courts "exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by" the Act. Id. § 78aa(a).
We now turn to the facts of this case. Gap, a clothing retailer headquartered in San Francisco, is incorporated in Delaware, and therefore governed by Delaware law. See CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89-90, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987). Pursuant to Section 109(b) of the Delaware General Corporation Law (DGCL),2 Gap adopted bylaws setting forth the rules by which it conducts its corporate business. Gap's bylaws include a forum-selection clause, which states in part: "Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation . . . ."
Gap's inclusion of a forum-selection clause in its bylaws is consistent with a modern corporate trend. See Verity Winship, Shareholder Litigation by Contract, 96 B.U. L. Rev. 485, 500-04 (2016). In the first decade of the 2000s, there was an increase in litigation, id., "brought by dispersed stockholders in different forums, directly or derivatively, to challenge a single corporate action," Boilermakers Loc. 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 944 (Del. Ch. 2013). Because multiforum litigation could impose high costs and hurt investors, id., many corporations adopted forum-selection clauses in response, see KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 759 (Del. 2019); see also Mohsen Manesh & Joseph A. Grundfest, Abandoned and Split But Never Reversed: Borak and Federal Derivative Litigation (forthcoming 2023) (manuscript, at 11-12), online at https://ssrn.com/abstract=4274616.
Notwithstanding Gap's forum-selection clause, Lee, a Gap shareholder, filed a complaint in a California district court asserting claims "derivatively on behalf of Gap" against 15 current and former Gap directors. The complaint alleged a violation of § 14(a) of the Exchange Act and SEC Rule 14a-9, as well as state-law claims for breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, abuse of control, and unjust enrichment. The gravamen of Lee's complaint is that Gap filed proxy statements with the SEC in 2019 and 2020 that contained misstatements about Gap's corporate governance, including its failure to consider diversity in nominating directors and hiring executives. According to the complaint, "[d]espite [Gap's] supposed 'imperative' to be inclusive, Gap has failed to create any meaningful diversity at the very top of the Company," and has in fact "deceived stockholders . . . by repeatedly making false assertions about [its] commitment to diversity." The complaint alleged that Gap's false statements denied Gap's shareholders the right to a fully informed vote. According to the complaint, had Gap's proxy statements been truthful about its discriminatory hiring and compensation practices and its lack of high-level diversity, then "shareholders would not have voted to reelect Board members, approve executive compensation packages, and reject an independent Board chairman." As...
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