"Lee v Fisher" - Much More of This Could Go Down in ESG Times

 “Lee v Fisher, et al.,” a shareholder derivative lawsuit, began in September 2020. To some it might have seemed like it was about ESG (Environmental Social Governance) issues at Gap Inc. In this case, those cited by the plaintiff were about diversity (social) and directors/officers’ duties (governance).

But, as the analysis by Paul Weiss in this Client Memorandum tracks, along the way it evolved into the kind of litigation which could be reviewed by the US Supreme Court. Given the growth of the ESG movement, where “Lee v Fisher” could be going will be closely followed.

WHERE THINGS ARE

Paul Weiss lawyers explain that on May 13^th, 2022, the Ninth Circuit affirmed the earlier dismissals (district and appellate courts). Plaintiff had alleged failure of the Gap directors/officers to uphold commitments to diversity/inclusion, including alleged false statements about those in the corporate proxy materials.

The main reason for the Court’s decision was that the corporate bylaws require derivative lawsuits to be filed exclusively in the Delaware Court of Chancery. Plaintiff had asserted both state fiduciary duty claims and a federal securities claim. In the latter she contended there had been a violation of Section 14(a) of the Exchange Act, prohibiting misleading material in proxy statements. “Lee v Fisher” has been filed in the Northern District of California.

Yes, this is good news for directors/officers at corporations with exclusive forum provisions in their bylaws and charters. Especially good news is for those Delaware ones with provisions requiring derivative lawsuits be handled in the Delaware Court of Chancery. As Paul Weiss emphasizes, investors have been chasing a perceived advantage by filing lawsuits in federal courts versus Delaware Courts. That is because Delaware courts are more up on these kinds of issues. The dismissal could slow that down.

WHERE THINGS COULD GO

What defendants and their lawyers might be picking up from this decision is this: They might be more successful in getting dismissals for derivative lawsuits filed in federal court based on exclusive forum provisions. That is even though the plaintiffs are stranded without a forum in which to assert federal securities laws derivatively.

Paul Weiss posits that the Ninth Circuit ruling is unlikely to be the last stop for this litigation. There are two reasons for that:

• The Court did not address the plaintiff’s statutory argument under the Delaware General Corporation Law. That was because the plaintiff had first raised it in her reply. Moreover, the Court further held that the anti-waiver provision argument had been foreclosed by binding Ninth Circuit precedent.

• There exists a split between the Ninth and Seven Circuits. That is about the application of the Exchange Act’s anti-waiver provision in these circumstances. In a 2022 decision in “Seafarers Pension Plan ex rel. Boeing Co. v. Broadway,” the Seventh Circuit had held that an identical forum-selection clause had not been enforceable. The divided Court decided that section 115 of the Delaware General Corporation Law – that permits exclusive forum provisions for derivative lawsuits that are “consistent with applicable jurisdictional requirements” – would prohibit the use of a forum bylaw that would entirely foreclose a derivative action under Section 14(a) of the Exchange Act. In addition, such a bylaw would violate the Exchange Act’s anti-waiver provisions.

Because of the split between the two Courts, there could be a petition for a US Supreme Court review.

MORE CLARIFICATION OR GUIDANCE

The Client Memorandum lists the legal experts and their contact information at Paul Weiss who are available for additional insight or guidance.

Connect with Editor-in-Chief Jane Genova at janegenova374@gmail.com. Now and then she does freelance assignments for law firms such as Paul Weiss. She works with both defense and plaintiff firms as well as their vendors.