The Delaware Supreme Court recently held that Delaware corporations may validly adopt forum selection provisions requiring that all actions arising under the Securities Act of 1933 be filed exclusively in federal court. Salzberg v. Sciabaucchi, Case No. 346, 2020 WL 1280785 (Del. Mar. 18, 2020). The decision enables Delaware corporations to more effectively manage litigation filed in multiple forums, a problem created following the United States Supreme Court’s 2018 decision in Cyan, Inc. v. Beaver County Employee’s Retirement Fund, 138 S.Ct. 106 (2018), which held that federal and state courts have concurrent jurisdiction over Securities Act claims.
In 2017, three companies, Blue Apron Holdings, Inc., Roku, Inc. and StitchFix, Inc., each adopted its own variation of a federal forum provision (FFP), attempting to force shareholders to file Securities Act claims arising out of each corporation’s anticipated initial public offering in federal court. The FFPs included language in a form similar to the following: Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for 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.
A shareholder of each corporations brought suit seeking a declaratory judgment that the FFPs are invalid under Delaware law. Delaware’s Court of Chancery agreed. It held that the provisions are ineffective because they attempt to bind the plaintiffs to a particular forum when the underlying claim did not involve rights or relationships established under Delaware law.
Delaware Supreme Court’s Analysis
The Delaware Supreme Court (Court) disagreed. It held that the FFPs are valid and consistent with both Delaware law as well as state and federal policy. First, the Court found that the FFPs fell within §102 of the Delaware General Corporation Law, which broadly authorizes the adoption of charter provisions for “the management of the business and for the conduct of the affairs of the corporation” and for “creating, defining, limiting, and regulating the powers of the corporation, the directions, and the stockholders, or any class of the stockholders.” According to the Court, the FFPs are consistent with the scope of the corporate law insofar as they regulate the forum in which an “intra-corporate” litigation, such as a Securities Act claim arising from a disclosure in connection with an IPO or secondary offering, can be brought. Second, the Court held that §115 of the Delaware General Corporation Law, which permits Delaware corporations to include in their organizational documents exclusive Delaware forum selection provisions for the regulation of “internal corporate claims,” does not prevent Delaware corporations from adopting FFPs such as those at issue. Section 115 was intended to address Delaware corporate law, not federal claims. Because the FFPs are limited to federal Securities Act actions, they are not prohibited by Delaware law.
Third, the Court also created a range of permissible and impermissible subjects of corporate regulation of affairs from narrow to broad. The opinion included a Venn diagram demonstrating the extent to which corporate regulation might be permitted. Finally, the Court found that the FFPs did not violate Delaware and federal policies.
In the event of a Securities Act violation (e.g., failing to file the registration statement or misrepresentations in statements and prospectuses), a private right of action exists providing a monetary remedy to shareholders who purchase a security directly in a public offering. Claims may be filed in federal or state courts and will remain there for the duration of the litigation because the statute prohibits removal. In the wake of Cyan, companies faced a tidal wave of Securities Act claims in state courts, often forced to litigate duplicative claims in both state and federal courts with no mechanism to coordinate or consolidate cases in multiple states or across jurisdictions. Plaintiffs often filed Securities Act claims in state court to avoid more stringent federal pleading standards as well as the possibility of a discovery stay under the Private Securities Litigation Reform Act of 1995 (PSLRA). Because both federal and state jurisdictions are available, defendants face added complexity and increased costs if parallel federal and state cases are filed over the same matter.
The Delaware Supreme Court also noted this concurrent jurisdiction problem, which often resulted in Delaware corporations managing litigation in multiple jurisdictions, creating the risk of higher costs, managing efficiencies, and as well as potentially inconsistent judgments. The Salzberg decision provides a significant measure of relief (from Cyan) to Delaware corporations and their ability to manage Securities Act litigation. Now, through the adoption of FFPs, corporations can minimize litigation inefficiencies created by the concurrent jurisdiction of federal and state courts over Securities Act claims.
While the Delaware Supreme Court found the forum selection provisions were not prohibited by Delaware or federal laws and policies, it expressed what it described as “powerful concerns” whether the provisions might be enforced by other states. The Court suggested “there are persuasive arguments that could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in federal court does not offend principles of horizontal sovereignty — just as it does not offend federal policy.” The FFPs may command consideration of the internal affairs doctrine, pointing to application of Delaware law, and full faith and credit may argue in favor of deference. Also, the FFPs are process oriented (pertaining to where stockholders may file suit) rather than substantive (whether suit may be filed or the remedy) thus do not offend traditional constitutional and jurisdictional principles.
Finally, while the Delaware Supreme Court’s opinion dealt squarely with whether Securities Act claims can validly be required to be filed in federal court under a FFP, it is less clear whether other securities claims can likewise be subject to FFPs. The Court also distinguished matters such as “internal corporate claims” and “intra-corporate affairs” from “external affairs.” Contract and tort claims may well be outside the scope of “internal corporate claims” and “intra corporate affairs.” In such instances, because FFPs do not address these claims, courts may resort to a review of contractual venue selection provisions in contract cases. Tort claims likely would be subject to traditional jurisdiction and venue analysis, statutes, and laws.
In light of Salzberg, companies governed by Delaware law should consider adopting FFPs to counteract the concurrent jurisdiction problems exacerbated by Cyan. As FFPs become more ubiquitous and additional cases are inevitably filed challenging them, case law will develop that will (hopefully) follow the lead of Delaware and find FFPs are valid and enforceable wherever the company is incorporated.
© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 195