The Delaware Supreme Court today ruled that corporations may require stockholders to litigate claims under the Securities Act of 1933 (Securities Act) in federal court, holding that such forum provisions in corporate charter documents and bylaws are facially valid. The court’s decision in Salzberg v. Blue Apron Holdings reversed an earlier ruling of the Delaware Court of Chancery and opened the door for Delaware corporations to mitigate the costs, inefficiencies and burdens imposed by plaintiffs' lawyers who have opted to litigate Securities Act claims in various state courts throughout the country.
Over the past several years, the plaintiffs' bar has increasingly filed Securities Act claims (typically challenging disclosures in registration statements under Sections 11 and 12(a)(2) of the Securities Act) in state court, rather than federal court. Plaintiffs' lawyers view state court as a more favorable forum for such cases, primarily because many of the key provisions of the Private Securities Litigation Reform Act—including more stringent pleading standards, an automatic stay of discovery while motions to dismiss are pending and a statutory process for vetting and appointing proposed lead plaintiffs—have been largely disregarded by state courts. To address that trend and minimize the prospect of multiple Securities Act cases proceeding simultaneously in different courts, many corporations included provisions in their charter documents or bylaws requiring Securities Act claims to be brought exclusively in federal court. The enforceability of those clauses assumed greater importance after the United States Supreme Court’s March 2018 decision in Cyan, Inc. v. Beaver County Employees’ Retirement Fund, which confirmed that plaintiffs may file Securities Act claims in either state or federal court.
Delaware law expressly permits corporations to use their charter documents and bylaws to require internal corporate claims—e.g., derivative suits and claims involving alleged breaches of fiduciary duty, the rights of stockholders or application of the Delaware General Corporation Law—to be brought exclusively in the Court of Chancery. But in December 2018, Vice Chancellor J. Travis Laster of the Court of Chancery found that federal forum provisions (FFPs)—those requiring Securities Act claims to be brought in federal court—are unenforceable as a matter of Delaware law.
In Sciabacucchi v. Salzberg, Vice Chancellor Laster held that while certificates of incorporation and bylaws create contractual relationships between Delaware corporations and their stockholders, such “corporate contract[s]” cannot “dictate mechanisms for bringing claims that do not concern corporate internal affairs, such as claims alleging fraud in connection with a securities sale.” In other words, while charter documents and bylaws may properly specify that claims involving the “internal affairs” of Delaware corporations be litigated in Delaware, Vice Chancellor Laster ruled that they may not regulate matters involving federal law or other “external issues.”
Today’s ruling by the Delaware Supreme Court reverses Vice Chancellor Laster’s decision. The Supreme Court held that FFPs: (1) are, on their face, within the permissible scope of bylaws and charter provisions because (in the words of the relevant statute) they address “the management of the business” and the “conduct of the affairs of the corporation”; (2) provide corporations “with certain efficiencies in managing the procedural aspects of securities litigation” post-Cyan, and in particular the inefficiencies and burdens imposed by “multiple suits in state and federal court”; and (3) do not violate any Delaware laws or policies. The Delaware Supreme Court further rejected the lower court’s finding that, as a matter of Delaware statutory law, mandatory forum provisions are applicable only to matters involving a corporation’s “internal affairs”; instead, the scope of the relevant statute is broad enough to extend to other matters. It further held that the Court of Chancery had not only “unduly constricted the scope of ‘internal affairs’” in a manner inconsistent with Delaware law, but also erroneously consigned Securities Act claims to a category of “external claims” beyond the scope of mandatory forum provisions. In today’s decision, the court stressed that provisions designed to regulate where stockholders may bring claims based on their purchase of shares in a company fall within an area of “intra-corporate” matters, and thus stand in contrast to matters that are purely “external” (such as tort or commercial contract claims). Finally, the Delaware Supreme Court concluded that FFPs do not violate federal policy or principles of “horizontal sovereignty” vis-à-vis other states, although it recognized that the facts of a particular case may prompt a court to consider whether the provision is enforceable “as applied” to that specific case.
The impact of today’s decision will be the subject of considerable thought and discussion in the weeks ahead, but a few immediate takeaways are clear:
For Delaware corporations that do not have FFPs: It makes sense to adopt a provision promptly. The easiest way to do so is by means of a bylaw amendment, which may be accomplished via board action and does not require a stockholder vote. Both the Delaware General Corporation Law and today’s decision make clear that forum provisions are properly included in either bylaws or the certificate of incorporation.
For Delaware corporations that have FFPs: A number of companies had adopted FFPs before the Court of Chancery’s decision in Sciabacucchi but determined not to enforce them pending appellate review in that case. Some had included risk factors or other disclosures to that effect in their SEC filings. Today’s decision should be viewed as a “green light” to seek enforcement of FFPs going forward; accordingly, companies should consider when and how to revise any disclosures or risk factors on that subject. Similarly, companies that filed a Form 8-K indicating that they would not enforce their FFPs pending appellate review in Sciabacucchi should consider filing a new Form 8-K citing the Delaware Supreme Court’s decision and indicating that the FFP will be enforced.
For non-Delaware corporations: Although today’s decision is based on—and limited to—Delaware law, it will provide some persuasive authority for companies incorporated in other states that may want to adopt FFPs. That is especially true in states (such as Washington) which have statutes similar to those in Delaware expressly authorizing forum provisions in bylaws and charter documents.
For corporations currently defending Securities Act claims in state court: Companies that had pre-existing FFPs but had deferred enforcing them following the Court of Chancery’s decision in Sciabacucci may want to consider whether to seek enforcement now. The success of that strategy will depend on various factors, including the law of the state in which such an action is pending, how advanced the litigation is and whether there are parallel actions pending in federal court. The ability of a corporation to enact a provision now that would apply retroactively to a pending suit is not yet clear, but will presumably be a matter that courts will be asked to consider in the months ahead.