Forum Selection Clause Upheld in Shareholder Dispute

According to a report from Reuters, a federal judge in Texas has upheld a forum selection clause in a shareholder derivative agreement. In doing so, the court effectively ended a shareholder derivative lawsuit filed against the company SolarWinds. Here, our Miami shareholder rights lawyer discusses the case and highlights the key things to understand about forum selection provisions in shareholder lawsuits.

Background: SolarWinds Faced Shareholder Derivative Lawsuit Over Data Breach 

SolarWinds is a Texas based software company. In 2020, the firm faced a massive cybersecurity breach that affected thousands of its clients. A group of shareholders sued the company—alleging that SolarWinds failed to maintain adequate security protocols, failed to properly communicate the extent of the breach, and failed to properly respond to the breach. Notably, the company’s stock saw a steep drop in price after the breach became public knowledge.

 Federal Judge Dismissed Lawsuit Due to Forum Selection Clause 

A significant turn of events unfolded as a federal judge dismissed the lawsuit against SolarWinds citing the forum selection clause. This legal stipulation, often included in contracts, predetermines the jurisdiction in which any dispute arising from the contract must be resolved. In this case, the clause specified that litigation must take place in the Delaware Chancery Court.

Why This Case is Unique: Delaware Chancery Court Lacks Jurisdiction Over Specific Claim 

Courts will typically uphold forum selection clauses in shareholder agreements. However, this case is unique because the claim in question actually cannot be adjudicated in the Delaware Chancery Court. The shareholders filed a derivative lawsuit under the federal Securities Exchange Act. The Delaware Chancery Court has repeatedly ruled that it lacks subject matter jurisdiction over such a claim. The judge did not rule on whether or not the shareholders could have brought a direct claim against the company instead of a derivative claim.

 The Difference Between Shareholder Direct Claims and Shareholder Derivative Claims 

Shareholder direct claims and shareholder derivative claims represent two types of legal actions by shareholders against a corporation. Here is a brief overview of the material difference:

• Shareholder Direct Lawsuit: A direct claim arises when a shareholder sues a corporation for damages that directly affect the shareholder’s personal interests. These can include violations of shareholder rights, such as withholding dividends or diluting share value.
• Shareholder Derivative Lawsuit: On the other hand, a derivative claim is brought by a shareholder on behalf of the corporation itself. The harm is indirect, caused to the corporation as a whole. It could be through managerial malfeasance or breach of fiduciary duty.

 Set Up a Confidential Appointment With a Miami Shareholder Rights Attorney

At Pike & Lustig, LLP, our Miami shareholder attorney has the professional experience that you can rely on in complex legal disputes. If you have any questions about forum selection clauses, please do not hesitate to contact us today for a confidential initial appointment. Our firm handles shareholder disputes in Miami, West Palm Beach, Fort Lauderdale, and throughout all of Southeast Florida.

Source:

reuters.com/legal/litigation/column-solarwinds-forum-selection-clause-kills-shareholders-derivative-suit-2023-07-10/