Delaware Judge Strikes Shareholder Lawyers In Forum Committee

(Reuters) – A jurisdictional puzzle that has recently split federal appeals courts left lawyers for an IT services company in a pretty tight spot this week: Within an hour of filing a securities fraud lawsuit in Delaware Chancery Court, they chose to dismiss it. complain.

The motion to dismiss was not an error. It was, as I will explain, a deliberate strategy to get around jurisdictional hurdles in a forum selection agreement that gave “exclusive general jurisdiction” to the Delaware Chancery Court.

Fintech Consulting LLC’s attorneys were fully aware that the Chancery Court does not have jurisdiction to hear their claims that tech staffing company TSR Inc and TSR insiders violated the federal Securities and Exchange Act. But fintech lawyers Robert Basil and Sean Collier of The Basil Law Group told me they believed they had no choice but to take their client’s case to the Court of Chancery – although they immediately admitted afterwards that Chancery could not hear the case.

“We felt quite compelled to continue as we did,” Collier told me.

Vice Chancellor Morgan Zurn was not amused by the notion that her court is an obstacle course that Fintech had to complete on its way to the Federal Court. On Wednesday, Zurn issued a scathing letter refusing to expedite Fintech’s motion to dismiss its own lawsuit.

“I will not advise the plaintiff on the proper way to find a forum,” Zurn said. “This wasn’t it.”

Even worse, the vice-chancellor hinted that sanctions could be in store for Fintech’s lawyers because they had filed a complaint alleging allegations that, by their own admission, were unwarranted. On Thursday, fintech lawyers from The Basil Law Group took Zurn’s unmistakable hint and told the vice-chancellor in a letter that they would drop the Chancery Court case.

As I mentioned, Basil and Collier claimed in emails that they were trying to comply with the forum selection clause Fintech had signed. Their client, they said, will now file suit against TSR in federal court in Delaware. I asked Basil if, in retrospect, he wished he had skipped the Chancery Court detour and gone straight to federal court. In a good mood, he replied: “No comment!!!!!”

As you know, Fintech is not the first shareholder to encounter a jurisdictional issue by asserting an Exchange Act claim against a defendant that mandates Delaware Chancery Court jurisdiction. Last year, both the 7th and 9th US Circuit Courts of Appeals considered cases in which shareholders brought Exchange Act derivative claims against companies requiring derivative suits to be heard in Chancery Court.

The 7th Circuit refused to enforce Boeing Co’s forum selection clause, ruling that enforcement would negate shareholders’ substantive right to bring derivative Exchange Act claims. A three-judge 9th Circuit dissented, concluding that The Gap Inc’s forum selection clause was enforceable.

The en banc 9th Circuit granted review of the panel decision. The hotly contested case was claimed in December.

Fintech’s case is different because it involves a direct claim by a lone shareholder. The IT staffing company, which does business as ApTask, owned nearly 400,000 shares in TSR. In early 2021, it agreed to sell its stake back to TSR and a pair of TSR insiders for $7.25 per share, in the mid-range of TSR’s NASDAQ trading price. But days later, TSR revealed a restricted stock award program that drove the stock price as high as $12.

Fintech was convinced that the timing was no coincidence. TSR and its insiders, Fintech believed, had broken the Stock Exchange Act by keeping the price-increasing share allocation program a secret until ApTask sold its shares.

The problem: Exchange Act claims must be filed in federal court, but Fintech’s stock purchase agreement with TSR and its insiders had a forum selection clause that gave exclusive general jurisdiction to the Delaware Chancery Court. The agreement includes a parenthetical provision that allows claims to be brought in Delaware federal court — but only if the Chancery “declines to accept jurisdiction.”

Fintech’s lawyers filed suit in federal court in New Jersey, arguing, among other things, that the forum selection clause was unenforceable because it left Fintech without a forum for its Exchange Act claims. The forum selection clause, Basil argued, allowed Fintech to sue in Delaware federal court only after the Chancery Court declined to accept jurisdiction. But Chancery, in Fintech’s view, did not even have the authority to decline to hear the Exchange Act claims, so the forum selection clause was void.

TSR’s lawyers from Connell Foley, who did not respond to my email request, said the clause expressly considered the possibility that Chancery could decline to hear a case. In that scenario, the defendants argued, the clause required suits to be brought in federal court in Delaware, not New Jersey. (The defendants also denied Exchange Act violations, arguing that Fintech simply had seller’s remorse.)

U.S. District Judge Katharine Hayden of Newark, New Jersey, agreed with TSR and threw out Fintech’s case last month.

The fintech’s lawyer, Collier, said the Basil firm interpreted Hayden’s opinion to require their client to send the suit to Chancery Court rather than going directly to Delaware’s federal court. Basil told me he would have gone straight to federal court if the defendants had consented, but TSR’s lawyers “were slow to consent.” Concerned about the statute of limitations, Fintech’s attorneys chose to sue in Chancery to obtain the right to sue in federal court.

The defendants have now agreed, according to Fintech’s January 19 letter to Zurn, not to contest the jurisdiction of Delaware federal court.

So in a way, you could say Fintech’s strategy worked: It has solved the jurisdictional puzzle of where to bring its Exchange Act claims against TSR defendants.

But there was certainly no fun road to that goal.

Read more:

The Gap gets a big boost from former Delaware judges in forum selection appeal

The Gap’s forum selection clause gets 9th Circ. its full report in shareholder colour

Boeing’s forum committee bid to send 737 MAX derivative livery to Delaware nixed by 7th Circ.

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