Delaware Supreme Court Revives Charter Provision Requiring Securities Act Claims Be Brought in Federal Court
The Delaware Supreme Court, in reversing a Delaware Court of Chancery decision, upheld a corporate charter provision requiring stockholders bring claims arising under the Securities Act of 1933, as amended (the 1933 Act), in a Federal District Court, unless the company consents in writing to a different forum. Sciabacucchi v. Salzberg, et al., No. 346, 2019 (Del. Mar. 18, 2020) overturns a Chancery Court decision holding that the power to impose a forum choice was limited to matters involving a corporation’s “internal affairs,” a ruling the Delaware Supreme Court found to be overly narrow.
Some Delaware corporations adopted federal forum selection provisions after the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1066 (2018) in order to avoid state court jurisdiction over 1933 Act claims. The Chancery Court found such provisions invalid because the “constitutive 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.” Sciabacucchi v. Salzberg, 2018 Del. Ch. LEXIS 578, at *8 (Del. Ch. Dec. 19, 2018).
In reversing, the Delaware Supreme Court found that a corporation’s “internal affairs” did not set the outer bounds for permissible certificate provisions and that certain “intra-corporate claims” are “situated on a continuum between ‘internal affairs’” and “purely ’external’ claims” and that those claims can be subject to a federal forum selection provision in a corporation’s charter.
The Delaware Supreme Court held that federal forum selection provisions were authorized by Delaware General Corporation Law §102(b)(1), which provides that a corporate charter may include “any provision for the management of the business and for the conduct of the affairs of the corporation” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders . . ,” unless otherwise limited by Delaware law.
The Delaware Supreme Court also examined the issue of whether federal law precluded the application of federal forum selection provisions over 1933 Act claims and held “nothing in Cyan prohibits a forum-selection provision from designating federal court as the venue for litigating Securities Act claims.” To buttress its decision, the Court relied on Rodriquez de Quijas v. Shearson American Express, lnc., 490 U.S. 477 (1989), in which the U.S. Supreme Court found broker arbitration clauses to be valid. Rodriquez, though, relied on the Federal Arbitration Act, and other courts may disagree with the Delaware Supreme Court on the issue of federal preemption under the 1933 Act which could result in the preemption issue ultimately being decided by the United States Supreme Court.
Directors and officers of Delaware corporations should review their corporate charter provisions and consider whether to adopt a federal forum provision for 1933 Act claims, other federal securities claims, or other forum selection clauses that have been upheld by the Delaware Courts. Ballard Spahr’s Securities and Corporate Governance Section includes attorneys experienced with all aspects of the issue, including current developments under Delaware law and the drafting and implementation of such provisions.
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