Delaware judge smacks shareholder lawyers in forum selection flap

(Reuters) – A jurisdictional puzzle that has recently divided federal appellate courts left lawyers for an IT services company in quite an awkward spot this week: Within an hour of filing a securities fraud suit in Delaware Chancery Court, they moved to dismiss the very same complaint.

The dismissal motion wasn’t a mistake. It was, as I’ll explain, a deliberate strategy to get past jurisdictional obstacles in a forum selection agreement that granted “exclusive general jurisdiction” to Delaware Chancery Court.

Fintech Consulting LLC’s lawyers were entirely aware that Chancery Court does not have authority to hear its claims that tech staffing company TSR Inc and TSR insiders violated the federal Securities and Exchange Act. But Fintech counsel Robert Basil and Sean Collier of The Basil Law Group told me they believed that they had no choice but to file their client’s suit in Chancery Court – even though they immediately thereafter admitted that Chancery could not hear the case.

“We felt quite constrained to proceed as we did,” Collier told me.

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Vice Chancellor Morgan Zurn was not amused by the notion that her court is an obstacle course Fintech was required to complete en route to federal court. On Wednesday, Zurn issued a tart letter refusing to expedite Fintech’s motion to dismiss its own lawsuit.

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

Even worse, the vice chancellor hinted that sanctions could be in store for Fintech’s lawyers because they’d filed a complaint asserting claims that were, by their own admission, unwarranted. On Thursday, Fintech counsel 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 maintained in emails that they were trying to comply with the forum selection clause Fintech had signed. Their client, they said, will now bring its suit against TSR in federal court in Delaware. I asked Basil if, in retrospect, he wished he’d skipped the Chancery Court detour and gone straight to federal court. With good humor, he replied, “No comment!!!!!”

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

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

The en banc 9th Circuit granted review of the panel decision. That hotly disputed case was argued 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 of TSR. In early 2021, it agreed to sell its stake back to TSR and a couple of TSR insiders for $7.25 per share, in the midrange of TSR’s NASDAQ trading price. But days later, TSR disclosed a restricted stock award program that drove its share price up as high as $12.

Fintech was convinced that the timing was not a coincidence. TSR and its insiders, Fintech believed, had violated the Exchange Act by keeping the price-boosting stock award 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 granting exclusive general jurisdiction to Delaware Chancery Court. The agreement contains a parenthetical provision that permits claims to be litigated in Delaware federal court – but only if Chancery “declines to accept jurisdiction.”

Fintech’s lawyers filed a 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 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 invalid.

TSR’s lawyers from Connell Foley, who did not respond to my email query, said the clause expressly contemplated the possibility that Chancery might 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 tossed Fintech’s suit last month.

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

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

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

But it was surely not a fun road to that end.

Read more:

The Gap gets big boost from ex-Delaware judges in forum selection appeal

The Gap’s forum selection clause gets 9th Circ.’s full review in shareholder suit

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

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.

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