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Gap Prevails in Diversity-Related Shareholder Lawsuit—Significant Circuit Split Now Exists on Enforceability of Shareholder Derivative Forum Selection Clauses


According to a report from Reuters, Gap—the large San Francisco, CA based retail brand—has prevailed in a shareholder lawsuit over allegations that it breached its obligations to shareholders by making material misrepresentations about the level of racial diversity among members of its corporate leadership. Notably, the company won on a technical shareholder law matter.

As there is now a major circuit split or shareholder derivative forum selection, there is a possibility that matter could go on to the U.S. Supreme Court. To be clear, the actual merits of the underlying allegations were not at issue in the decision. Here, our West Palm Beach shareholder litigation attorney provides a more expansive overview of the case and the implications.

Federal Court Rules in Favor of Gap in Shareholder Matter 

As reported by Reuters, the national retail brand Gap Inc. triumphed in a shareholder lawsuit that alleged deceptive statements regarding the firm’s commitment to executive racial diversity. In a split court six to five decision, the Ninth U.S. Circuit Court of Appeals ruled that Gap can uphold a bylaw mandating shareholder derivative lawsuits to be lodged in Delaware Chancery Court. Gap shareholder Noelle Lee’s allegations were dismissed, with the judges finding that the forum selection clause doesn’t allow the company to evade litigation or abandon federal securities law obligations.

Major Circuit Split: Forum Selection Clauses for Shareholder Derivative Lawsuits

The ruling highlights a division among federal appeals courts concerning forum selection provisions in derivative suits alleging Securities and Exchange Act violations. Last year, the Seventh Circuit stated Boeing could enforce a similar provision. However, in this case, the Ninth circuit determined that a forum selection clause could be enforced.

Supreme Court May Need to Resolve Split On Shareholder Derivative Forum Selection Clauses 

The recent ruling by the Ninth U.S. Circuit Court of Appeals has amplified a circuit split regarding the enforceability of forum selection clauses in shareholder derivative lawsuits. The discord among federal appeals courts—with the 9th Circuit now permitting such clauses while the 7th Circuit opposes them—substantially increases the odds of the issue reaching the Supreme Court for resolution.

Given its role as the ultimate judicial authority, the Supreme Court often steps in to resolve such interpretative discrepancies among lower courts, particularly when they concern crucial securities laws. Such a decision would have profound implications for corporate governance and shareholder rights, potentially setting a national precedent for how forum selection clauses apply in shareholder derivative lawsuits.

 Speak to a Shareholder Litigation Attorney in Southeast Florida

At Pike & Lustig, LLP, we are solutions-forward commercial litigation law firms. If you are locked in a shareholder dispute, our attorneys are ready to get started on your side. We are focused on helping our clients find the best legal answer for their situation. Contact us now for a confidential initial appointment. Our firm provides shareholder dispute representation in Palm Beach County, Miami-Dade County, Broward County, and beyond.



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