Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School and Mohsen Manesh is Professor at University of Oregon School of Law. This post is based on their recent paper.
J.I. Case Company v. Borak is perhaps unique in contemporary Supreme Court jurisprudence. Although the Court has “abandoned” the 1964 precedent, Borak has never been formally reversed, and it continues to generate circuit splits, most recently concerning the enforceability of a forum selection provision.
Borak held that shareholders enjoy a private right of action under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 14(a), as implemented by Rule 14a-9, broadly prohibits any material misrepresentation or omission in connection with the solicitation of proxy votes from public company shareholders. However, neither the statutory provision nor its implementing rule expressly empowers shareholders to enforce the ban on false or misleading proxy solicitations. Nonetheless, Borak held a private right of action is implied.
Suffice it to say that Borak has not gracefully aged. In the six decades since, the Court has repeatedly distanced itself from Borak, even making it clear that the case would be decided differently today. Still, while chipping away at its doctrinal foundations, the Court has never had the occasion to expressly overrule the beleaguered precedent.
Surprisingly then, despite its “derelict” status, the Seventh Circuit Court of Appeals recently relied on Borak in ruling that a corporation may not cutback against wasteful, frequently meritless shareholder litigation through a forum selection provision in its governing documents, specifically one that requires all derivative lawsuits to be brought in the state courts where the corporation is chartered. In Seafarers Pension Plan v. Bradway, a divided Seventh Circuit panel reasoned that because federal courts enjoy exclusive jurisdiction over all Exchange Act claims, limiting derivative lawsuits to state court would effectively bar shareholders from bringing a Borak claim in a derivative action. Consequently, the divided panel held, over the dissent of Judge Easterbrook, that the enforcement of a corporate forum provision to preclude derivative Borak claims would violate shareholders’ rights under the Exchange Act and the underlying state corporate law authorizing forum provisions.
