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3 key lessons from recent Circuit Court split on 14(a) claims

On Behalf of | Jul 5, 2022 | Corporate Litigation

The Securities and Exchange Commission (SEC) has strict rules about what corporations can and cannot say regarding performance. The SEC has put these rules in place to help protect potential investors. The rules are complex and a failure to follow proper procedure can result in a lawsuit.

A recent dispute related to these rules making its way through the courts involve Section 14(a) claims. Section 14(a) of the Securities Exchange Act essentially prohibits misrepresentations and omissions in proxy statements filed with the SEC that may lead stockholders to make decisions that result in a negative impact on the corporation. In some situations, company leaders may move to dismiss these cases by providing additional disclosures through supplemental proxies, but this strategy does not always work. If the stockholder can build a successful case, they can have the directors and officers pay damages to the corporation to make up for the alleged damage.

In a recent case involving The Gap, Inc., a stockholder of the clothing company filed suit against the company’s directors claiming the board permitted a violation of Section 14(a) when it allowed false statements about diversity within recent proxy statements. But could the company force the issue to go through adjudication in Delaware state court? The plaintiff argued not, pointing to federal court’s exclusive jurisdiction over Section 14(a) cases. According to the 9th Circuit, the Delaware Court of Chancery bylaws likely preclude stockholders from bringing derivative Section 14(a) claims.

Under the 9th Circuit’s holding, enforcing forum selection bylaws could potentially benefit stockholders. This is because it would concentrate this type of action into a single forum, the Delaware Court of Chancery, and eliminate waste of duplicative multi-forum litigation. However, the 9th Circuit’s holding is of note as it is in contrast with an early ruling on the same issue by the 7th Circuit.

What does this mean for future cases?

Since the circuit courts are split, those who bring forward these claims will likely continue to dispute whether the Delaware Court of Chancery bylaws apply.

What can other litigants learn from this case?

The dispute provides some important lessons, most notably:

  • Complex. These cases are complex and often hinge on the small details. A failure to approach and build the case wisely can have a catastrophic impact on your options for relief.
  • Multi-faceted. These cases are often just one approach, often brought in collaboration with other lawsuits.
  • Evolving. As the two contradicting holdings indicate above, this area of law continues to grow and change.

Navigating this area of law is complex and disputes about how to approach this split will likely continue in the near future.