February 24, 2020

February 24, 2020

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Delaware Chancery Court Holds Corporations Cannot Enact Federal Forum Provisions To Bypass Cyan and Preclude State Courts from Hearing Securities Act Claims

In 2017, courts across this country were split on whether plaintiffs could assert a class action alleging claims under the Securities Act of 1933 (which provides a private right of action against issuers and others for providing false or misleading statements in offering materials) in state court. While California state courts recognized such jurisdiction, in New York, similar suits were routinely removed to federal court. In the midst of this jurisdictional uncertainty and prior to launching their respective initial public offerings, Blue Apron Holdings, Roku Inc., and Stitch Fix, Inc. adopted charter-based Federal Forum Provisions, in an attempt to make federal district courts the exclusive forum for the resolution of any complaint asserting claims arising under the Securities Act.

On March 20, 2018, a few months after the Federal Forum Provisions were put into place, the U.S. Supreme Court held that plaintiffs could assert class actions alleging solely claims under the Securities Act in state court (and that such suits are not removable to federal court). See Cyan, Inc. v. Beaver County Employees Ret. Fund. Defendants, Roku and Stitch Fix, litigating in Delaware’s Court of Chancery, argued that the Federal Forum Provisions were nonetheless valid because “Cyan says nothing about Delaware law or forum selection charter provisions, and in no way restricts any person’s ability to designate available forums for [Securities] Act claims through private ordering.” Brief in Support of Cross-Motion for Summary Judgment at 11, Sciabacucchi v. Salzberg, No. 2017-0931-JTL, 2018 Del. Ch. LEXIS 578 (Dec. 19, 2018).

On December 19, 2018, Vice Chancellor J. Travis Laster, rejected Defendants’ arguments and issued a decision in Sciabacucchi, holding that such Federal Forum Provisions are invalid. Vice Chancellor Laster’s decision is consistent with a 2013 ruling by then-Chancellor Leo E. Strine in the Boilermakers case.

While holding that specific forum selection bylaws, all of which pertained to “internal corporate governance,” were proper, in dicta, the Boilermakers Court explained that a forum-selection bylaw could not regulate external matters such as tort and contract claims. Following the Boilermakers decision, there was debate as to whether charter and bylaw provisions could regulate other aspects of shareholder litigation. Boilermakers’ codification into Section 115 of the Delaware General Corporate Law in 2015 did not provide further clarity. Vice Chancellor Laster’s Sciabacucchi decision finally ended the debate, reasoning that for purposes of the Boilermakers analysis, a Securities Act claim resembles a tort or contract claim brought by a third-party plaintiff. Sciabacucchi was unequivocal that corporations could not restrict Securities Act class actions to federal court:

Under existing Delaware authority, a Delaware corporation does not have the power to adopt in its charter or bylaws a forum-selection provision that governs external claims. The Federal Forum Provisions purport to regulate the forum in which parties external to the corporation (purchasers of securities) can sue under a body of law external to the corporate contract (the [Securities] Act). They cannot accomplish that feat rendering the provisions ineffective.

To quell Defendants’ concerns about the applicability of Boilermakers, Vice Chancellor Laster confirmed that the same result derives from first principles. 

Sciabacucchi appears to have closed any loophole around the U.S. Supreme Court’s decision in Cyan. As a result, the Plaintiffs’ bar may continue to assert class actions alleging solely violations under the Securities Act in state courts across the country. The Defense Bar may be concerned that state courts are less familiar with federal securities actions and it remains unclear to what extent Defendants may benefit from application of the Private Securities Litigation Reform Act of 1995 and its procedural safeguards. The Plaintiffs’ Bar has increasingly used California state courts to assert Securities Act claims and, on balance, state courts may well be more welcome to plaintiffs’ claims. Notably, the limited data available suggests that a trend toward higher settlements of Securities Act cases in California state court may be emerging.

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About this Author

Ellen Shapiro Litigation Attorney Mintz Law Firm

Ellen focuses her practice on securities litigation, including shareholder class actions and opt-outs thereto, and complex commercial litigation. She has experience taking and defending depositions, drafting briefs and other filings, as well as with internal investigations and patent matters. She represents public and private companies in a variety of industries, including life sciences.

Ellen also has an active pro bono practice. To date, she has successfully represented an individual seeking asylum and a Section 8 tenant facing eviction. She has also defended a victim of domestic...

Peter Saparoff Securities Attorney Mintz Law Firm

Peter is an experienced securities litigator both on the plaintiff and defense side. He has defended over 100 cases and investigations. In addition, he chairs the Institutional Investor Class Action Recovery practice which has recovered nearly $7 billion for thousands of mutual funds and other institutional clients. The practice evaluates virtually every securities investor settlement in the world. The practice not only files claims for clients but also assists them in opting out and filing separate cases, both in the US and in international jurisdictions.

Peter is one of the nation’s leading securities litigators and he has represented clients in well over 100 cases, investigations, and proceedings throughout the country. He has successfully defended SEC investigations, class actions, derivative suits, stock exchange proceedings, and state securities investigations, and has handled numerous FINRA arbitrations, among other matters.

Peter, through the Institutional Investor Class Action Recovery Practice, also represents hundreds of institutional investors with respect to the monitoring and evaluation of securities class action settlements. Peter has recovered over $7 billion for institutional clients. He has represented various clients in opting out of or objecting to proposed class settlements and has represented institutions as plaintiffs in various actions. In this role he participates in virtually every securities action that is filed and thus has a unique perspective when representing clients in said cases.

He has succeeded in preventing the vast majority of the dozens of clients he has represented in SEC investigations from being named as defendants or respondents. In matters where the SEC has taken action, Peter has frequently negotiated bars or suspensions, which have enabled the clients to return to their businesses or professions without undue delay.

Peter has represented many clients in FINRA arbitrations and has tried FINRA cases to successful conclusions. He also serves as an FINRA arbitrator.

He is a frequent lecturer and author on securities matters, having written hundreds of articles and papers, including co-authoring the Securities Litigation chapter in the definitive Massachusetts Continuing Legal Education publication, Business Torts in Massachusetts (2016). He has been an Adjunct Professor of Securities Litigation at the Maine Law School. He speaks at many institutional investor and securities industry forums, and is frequently quoted in the press.

Joel Rothman Securities Attorney Mintz Levin

Joel’s practice encompasses a range of complex commercial, securities, insurance, and employment litigation matters, including advising institutional investors with respect to the monitoring and evaluation of both foreign and domestic securities class actions, representing shareholders in post-closing merger disputes, counseling insurance companies in coverage disputes, representing attorneys and insurance brokers against claims of professional negligence, and advising employers on all facets of the employment relationship. He also focuses his practice on representing and advising...