On Wednesday, the Delaware Supreme Court held in Salzberg, et al. v. Sciabacucchi (C.A. No. 2017-0931) that exclusive federal-forum provisions, which require shareholder claims under the federal Securities Act of 1933 (1933 Act or Securities Act) only be filed in federal court, are valid under Delaware law. As a result of the United States Supreme Court’s 2018 ruling in Cyan, Inc. v. Beaver County Emp. Retirement Fund that federal and state courts have concurrent jurisdiction, many companies have faced multi-forum litigation of Securities Act claims that often resulted in higher litigation costs and inconsistent rulings. Among other reasons articulated in the opinion, the Delaware Supreme Court in Sciabacucchi found that federal-forum provisions advance certainty, predictability, and judicial economy.
Highlights of the Delaware Supreme Court’s Analysis
In Sciabacucchi, all the Delaware companies, Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc., launched their initial public offerings in 2017 and, prior to going public, adopted in their respective certificates of incorporation an exclusive federal-forum provision like (or similar to) the one below:
Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of [the Company] shall be deemed to have notice of and consented to [this provision].
Noting that “a court must give statutory words their commonly understood meanings,” the Delaware Supreme Court rejected the shareholder-appellee’s argument that federal-forum provisions are facially invalid under Section 102 of the Delaware General Corporation Law (DGCL). First, the court reasoned that Section 102(b)(1), which governs certificates of incorporation, has broad enabling powers that apply to federal-forum provisions. Section 102(b)(1) authorizes two broad types of provisions—(i) any provision relating to the “management of the business” and the “conduct of the affairs of the corporation,” and (ii) “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders. . . .” Second, the court observed that charters are given “great respect” under Delaware law because in essence they (including their stockholder-approved amendments) constitute contracts among a corporation’s stockholders. Third, from a policy perspective, “[a]t its core, the [DGCL] is a broad enabling act which leaves latitude for substantive private ordering, provided the statutory parameters and judicially imposed principles of fiduciary duty are honored.” Simply put, the court held that the federal-forum provisions are facially valid under both the enabling text of Section 102(b)(1) and as a matter of Delaware public policy.
The Delaware Supreme Court rejected the argument that Section 115, which relates to internal corporate claims, limits Section 102(b)(1)’s broad scope. Section 115 generally provides that the certificate of incorporation or bylaws may require, but cannot prohibit, all internal corporate claims be brought in Delaware. The Section reads that “‘[i]nternal corporate claims’ means claims, including claims in the right of the corporation . . . that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity. . . .” The Delaware Supreme Court explained that neither Section 115 nor the “internal affairs” doctrine articulated in Boilermakers v. Local 154 Retirement Fund v. Chevron Corp. reach or address all the claims covered by the federal-forum selection provisions.
The Delaware Supreme Court reversed Vice Chancellor Travis Laster’s Chancery Court decision below in Sciabacucchi that federal forum provisions are invalid because charter documents “of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” A 1933 Act liability action, Vice Chancellor Laster had reasoned, “is external to the corporation,” as “Federal law creates the claim, defines the elements of the claim, and specifies who can be a plaintiff or a defendant.”
The Delaware Supreme Court explained that when the Chancery Court defined claims as “internal” and “external,” the Chancery Court overlooked “intra-corporate claims” that lie on the continuum between “internal” and “external” claims. As an example, the Delaware Supreme Court recounted ATP Tour, Inc. v. Deutscher Tennis Bund, which concerned intra-corporate claims involving fee-shifting provision in the bylaws. Turning back to the case before it, the Delaware Supreme Court noted that, besides “internal” claims, foreign-forum provisions include “intra-corporate” claims “arising out of the Board’s disclosures to current and prospective stockholders in connection with an IPO or secondary offering.” Because “[t]he drafting, reviewing, and filing of registration statements by a corporation and its directors is an important aspect of a corporation’s management of its business and affairs and of its relationship with its stockholders . . . ” the Delaware Supreme Court found that federal-forum provisions that cover such matters are also within Section 102(b)(1).
Finally, the Delaware Supreme Court found that federal-forum provisions do not violate federal law or policy and whether sister states would respect and enforce federal-forum provisions was a question “down the road.”
There can be several advantages to companies in having their shareholders’ federal securities claims heard in federal court than in state court, such as greater consistency in court rulings, higher dismissal rates, lower litigation costs, reduced duplication and lower settlement values for weaker claims. Companies incorporated in Delaware may want to consider having an exclusive federal-forum provision in light of the Delaware Supreme Court’s decision.