The Gap case creates appellate split on shareholder derivative suits in federal court


Publish Date:
June 2, 2023
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But two law professors who backed The Gap in an amicus brief to the 9th Circuit told me they’re eager for the justices to wade in. University of Oregon School of Law professor Mohsen Manesh and Joseph Grundfest of Stanford Law School, who co-authored an upcoming ABA Business Review paper calling for the Supreme Court to revisit its ruling in Borak, said the 9th Circuit majority correctly discerned that the 1964 case does not actually justify Exchange Act derivative suits. (The 9th Circuit majority in the Gap case twice cited a previous version of the Grundfest and Manesh paper.)

Grundfest reiterated a key point from the 9th Circuit’s ruling in an email to me. Borak established that shareholders can bring direct claims for proxy disclosure violations — but addressed derivative suits only as an afterthought, Grundfest said. If shareholders have a right under Borak to bring federal-court suits alleging that they were harmed by misleading proxy filings, Grundfest said, those claims must be brought directly by shareholders acting on their own behalf, not derivatively on behalf of the company.

“There is no such thing as a federal derivative claim” for Exchange Act violation, Grundfest said. “Read correctly, Borak does not hold that any such right exists.”

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