On March 18, 2020, the Delaware Supreme Court reversed the Delaware Court of Chancery and held that Delaware corporations can adopt federal-forum selection provisions (FFPs) requiring that claims arising under the federal Securities Act of 1933 (1933 Act) be brought in federal court.1 The case is styled Salzberg et. al v. Sciabacucchi, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020). Companies should strongly consider using the Salzberg decision as an opportunity to adopt an FFP. Absent such a provision, 1933 Act class actions – which are frequently filed after initial and secondary public offerings – may be brought in state court and cannot be removed to federal court. Because the prospects for obtaining an early dismissal are typically far greater in federal court than in state court, adopting an FFP can provide a significant litigation advantage.
Section 11 of the 1933 Act allows purchasers in an initial public offering (IPO) or secondary offering to sue for alleged misrepresentations in the registration statement. In 2018, the US Supreme Court held in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund2 that state and federal courts have concurrent jurisdiction over Section 11 claims, and that such claims cannot be removed to federal courts if they are filed in state court. Unsurprisingly, the number of state Section 11 claims has increased dramatically following Cyan3, as the odds of plaintiffs surviving a motion to dismiss are often much higher in state court than in federal court.4 As the Delaware Supreme Court recognized, FFPs can provide “efficiencies” by allowing companies to avoid duplicative state and federal securities class action, which has become an increasingly common feature of post-Cyan securities litigation.5
The appellants in Salzberg were three Delaware corporations that launched IPOs in 2017.6 Each had adopted a FFP in its charter7 before filing its registration statement for the IPO.8 Appellee Matthew Sciabacucchi purchased shares of each company in the IPO or shortly thereafter and then sought a declaratory judgment in the Court of Chancery that the FFPs are invalid under Delaware law.9 The Court of Chancery agreed with Sciabacucchi, concluding that the power to adopt forum selection bylaws only encompassed internal corporate governance claims and not federal securities claims. 10
Delaware Supreme Court’s decision
The Delaware Supreme Court found that the FFPs were valid because they fall within the plain text of Section 102 of the Delaware General Corporation Law (DGCL), which broadly authorizes “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, . . . if such provisions are not contrary to the laws of this State.”11 The Court rejected appellee’s argument that Section 115 of the DGCL12, which bars companies from adopting bylaw provisions that prevent plaintiffs from bringing “internal corporate claims” in Delaware courts, altered the broad scope of Section 102(b)(1). The opinion concluded that Section 11 claims are not “internal corporate claims” as defined in Section 115 and, accordingly, that Section 115 did not bar companies from adopting forum provisions pertaining to Securities Act claims.13 The Court also rejected the Chancery Court’s rationale that Section 102(b)(1)’s broad authority is limited to “internal affairs” claims arising under Delaware corporate law, holding instead that Section 102(b)(1) authorizes companies to adopt bylaw provisions covering a broader scope of claims that includes “internal affairs” and “intra-corporate” matters.14 While Section 11 claims do not arise under Delaware corporate law, the Court concluded that Section 11 litigation is nonetheless a type of “intra-corporate” matter that falls within Section 102(b)(1)’s broad authority.15 The Court also held that FFPs do not violate federal law or policy, observing that arbitration clauses can likewise validly preclude state court 1933 Act claims and that forum-selection clauses are given as much effect as possible.16 The Court considered the question of enforceability of FFPs by sister states as “[p]erhaps the most difficult aspect” of the case, but outlined arguments for enforceability as not violating principles of horizontal sovereignty.17 In light of its decision, the Court also reversed the appellee’s previously awarded fees and expenses.18
The Salzberg decision could provide public companies some relief from the post-Cyan deluge of nonremovable state court Section 11 claims. Delaware corporations that do not currently have FFPs in their charters should strongly consider adopting such provisions.
A special thanks to lawyer Kelly Potter, who works directly under the supervision of Peter Stokes, for her assistance in preparing this text.