Abandoned and Split But Never Reversed: Borak and Federal Court Derivative Litigation

Abstract

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 clause. The split boils down to a basic legal question: may a corporation cutback against wasteful, duplicative 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? Because it would preclude derivative shareholder lawsuits asserting the federal private right of action implied by Borak, the Seventh Circuit ruled that such a provision is unenforceable, as a matter of both federal securities law and the state corporate law of Delaware. Only five months later, the Ninth Circuit, evaluating an identical forum provision, disagreed.

The resulting circuit split offers an opportunity to reexamine Borak in light of six subsequent decades of Supreme Court precedent. A sober assessment of the Court’s post-Borak decisions suggests that at minimum, a corporate forum provision waiving derivative Borak claims is valid and enforceable. More forcefully, it suggests that the derivative standing recognized in Borak does not survive the Court’s subsequent decisions. Ultimately, it suggests that should the Supreme Court ever resolve the circuit split, it might well take the opportunity to revisit Borak and squarely overrule it.

In all cases, it also suggests that the Seventh Circuit’s reliance on Borak was clearly mistaken. Where shareholders are able to bring (i) the same Borak claim as a direct or class action to recover any damage they suffered personally and (ii) a derivative action under state corporate law to recover any damage suffered by the corporation, then a third lawsuit, making a derivative Borak claim, does nothing to benefit the corporation, its shareholders, or society more broadly.

Keywords: Corporate Law, Securities Law, Contract Law, Delaware, Securities Regulation, Securities Exchange Act, Securities Litigation

JEL Classification: K12, K22