Delaware Supreme Court Confirms That Federal Forum Provision Is Facially Valid, Reversing Court of Chancery
In Sciabacucchi v. Salzberg, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020), the Delaware Supreme Court reversed a Delaware Court of Chancery (Laster, V.C.) decision declaring invalid a federal forum selection provision in a Delaware corporation’s charter or bylaws. The federal forum selection provision was intended to require claims by investors under the Securities Act of 1933 (“1933 Act”) to be brought solely in federal court, thereby avoiding the likelihood of defending duplicate, concurrent state and federal court 1933 Act claims. The Delaware Supreme Court’s decision provides clear guidance to companies preparing for securities offerings for implementing a tool to limit the cost of defending duplicative 1933 Act litigation.
The Chancery Court’s decision (see blog article here) declared that three companies’ federal-forum provisions were facially invalid. Each of the federal-forum provisions provided, “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.” The Chancery Court held that 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.” Because “the Federal Forum Provisions attempt to accomplish that feat,” the court held that the federal-forum provisions are “ineffective and invalid.”
The Supreme Court reversed. Taking a textualist approach and giving the statutory words of Section 102 of the Delaware General Corporation Law (“DGCL”), 8 Del. C. § 102, their commonly understood meanings, the Court determined that Federal Forum Provisions “easily fall within” the broad categories authorized under Section 102(b)(1), and thus, are “facially valid.”
Turning to the public policy arguments, the Supreme Court held that Federal Forum Provisions are neither contrary to policies or laws of Delaware, nor violate federal law or policy. The Court reasoned that the holding in Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989), “provides forceful support for the notion that FFPS do not violate federal policy by narrowing the forum alternatives available under the Securities Act.”
Lastly, the Court noted the Court of Chancery’s novel definition of “internal affairs” and reaffirmed that there is only one definition of internal affairs as accepted by the U.S. and Delaware Supreme Courts which encompasses, “matters which are peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”
The Court’s decision clears the way for Delaware corporations to implement in their bylaws or charters federal forum provisions that require 1933 Act claims to be brought solely in federal court, thus avoiding the cost of duplicative state court 1933 Act litigation permitted under Cyan, Inc. v. Beaver Cty. Empls. Ret. Fund, 138 S. Ct. 1061 (2018). The main open question, however, is whether state courts outside of Delaware will follow the Delaware Supreme Court’s ruling. Although state courts generally defer to the law of the state of incorporation regarding such matters, some courts may consider superimposing their own state’s law or public policy to overrule or disregard the law of the state of incorporation. The United States Supreme Court may end up having the last word on this issue.