Still No Certainty In Forum Selection for Derivative Litigation

Issuers facing threats of securities litigation have been trying to obtain as much certainty as possible concerning their potential exposure in such lawsuits for years. The effort has included attempts to have securities and corporate governance litigation filed in particular forums to eliminate overlapping lawsuits asserting essentially the same claims in different courts. As part of these efforts, issuers incorporated in Delaware have adopted forum selection provisions requiring that certain internal claims, including fiduciary duty claims and derivative claims, to be brought in the Delaware Court of Chancery only, and not in other state or federal courts. The Delaware courts approved these types of forum selection provisions in 2013 and most other state courts have agreed to enforce these forum selection provisions.

Certainty with respect to fiduciary duty and derivative claims has nonetheless been elusive. There is circuit split between the United States Court of Appeals for the Seventh Circuit and the United States Court of Appeals for the Ninth Circuit concerning whether a forum selection provision stating that stockholder derivative claims and other internal claims can only be brought in the state courts where the corporation is incorporated are enforceable. In the Ninth Circuit, such a clause is enforceable. Simplifying somewhat, in courts within the Ninth Circuit, the directors and officers of a corporation can force stockholders bringing internal claims to file lawsuits asserting such claims (even if the lawsuit also includes claims under the federal securities laws) in the state courts where the company is incorporated. The federal claims are dismissed and there is no jurisdiction where such federal derivative claims can be asserted.

In contrast in the Seventh Circuit, such a clause is unenforceable. Thus, the directors and officers of corporation with its headquarters in states within the Seventh Circuit could be sued on internal claims in multiple fora. For example, directors and officers of a Delaware corporation can be sued both in the Delaware Court of Chancery on solely state law claims and then also face one or more lawsuits in the federal district courts in the Seventh Circuit on both state and federal claims.

Last year, the Delaware General Assembly made changes to the Delaware Corporate Code to adopt the result reached by the Seventh Circuit for the most part. See 8 Del. Code 115(c). It did not (and could not) change the law for companies incorporated in states other than Delaware.  Also, not all companies incorporated in Delaware have amended their certificates of incorporation or bylaws to conform to the amendments in the Delaware Corporate Code, and there are cases that were filed before the amendments took effect.

Into this “void” comes a decision from the United States District Court for the Northern District of California last month. While the Northern District of California is located in the Ninth Circuit and bound to follow the law in the Ninth Circuit, the Court held that a stockholder derivative lawsuit asserting claims under both state law and federal securities law could go forward in that court.  See In re Block Inc. Shareholder Derivative Litig., Order Denying Motions to Dismiss (ECF. No. 90), Case No. 25-cv-1262 (N.D. Cal. Jan. 6, 2026).  The court thus refused to dismiss the case on forum non conveniens grounds based on a forum selection provision stating that stockholder derivative claims could only be brought in the state courts where the company was incorporated. The decision resulted in large part on the specific language of the forum selection provision at issue and the court’s interpretation of that provision. It did not address broader questions such as the application of the anti-waiver provisions of the Securities Exchange Act of 1934 or whether the forum selection provision violated Delaware law as it existed when the lawsuit was filed.

The upshot is that when it comes to forum selection provisions in certificates of incorporation, articles of incorporation, and bylaws is that issuers, their boards, and their stockholders, along with outside corporate counsel, need to look closely at the language of these provisions.  They need to consider where they are incorporated, their principal place of business or headquarters, and their risk appetite with respect to duplicative litigation and the costs to avoid such duplicative litigation.