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Delaware Supreme Court Upholds Federal-Forum Provisions

March 19, 2020, Covington Alert

On March 18, 2020, in Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020), the Delaware Supreme Court held that corporate charter provisions that require claims under the Securities Act of 1933 (the “Securities Act”) to be filed in federal court are facially valid. The decision may enable Delaware corporations who adopt such provisions to avoid the growing wave of Securities Act claims filed in state court as well as the risk of duplicative parallel state and federal proceedings.

Background and Context

In 2018, the U.S. Supreme Court held, in Cyan, Inc. v. Beaver Cty. Employees Ret. Fund, 138 S. Ct. 1061 (2018), that state and federal courts have concurrent jurisdiction over class actions alleging only claims under the Securities Act and that such cases are not removable to federal court. The result was an unprecedented increase in state court filings under the Securities Act, as plaintiffs sought to avoid the procedural protections afforded to defendants in federal court. In many cases, defendants have been forced not only to litigate these state court cases under plaintiff-friendly procedures, but to defend parallel litigation filed in federal court, because of the absence of procedures for consolidating or coordinating duplicative state and federal litigation.

In an effort to avoid these problems, a number of Delaware corporations including Blue Apron Holdings, Inc., Stitch Fix, Inc., and Roku, Inc. adopted federal forum provisions in their certificates of incorporation that require stockholders to file Securities Act claims in federal court. In Salzberg, a stockholder of each of these corporations sought a declaratory judgment that the federal forum provisions were invalid. The Court of Chancery granted summary judgment to the plaintiff, holding that Delaware corporations cannot adopt forum selection provisions for stockholder claims that do not involve rights established by Delaware law.

Delaware Supreme Court Decision

The Delaware Supreme Court reversed, holding that federal forum provisions are facially valid. The Court reasoned that such provisions are authorized under the plain language of Section 102(b)(1) of the Delaware General Corporation Law (“DGCL”), which grants Delaware corporations broad authority to adopt charter provisions that govern the conduct of the business and affairs of the corporation and regulate its relationship with stockholders, so long as those provisions are not contrary to Delaware law. In reaching this decision, the Court rejected the argument that federal forum provisions are implicitly prohibited by Section 115 of the DGCL, which authorizes corporations to adopt charter provisions or bylaws requiring that “internal corporate claims” be brought exclusively in Delaware.

The Supreme Court also addressed policy arguments, holding that federal forum provisions do not violate federal law or public policy. The Court noted that “perhaps the most difficult aspect of this dispute” was whether other states would enforce such provisions. While acknowledging that the question of enforcement by other states was a separate and subsequent analysis beyond the scope of its decision as to facial validity, it observed that there were “persuasive arguments that could be made to our sister states” that a federal forum provision “does not offend principles of horizontal sovereignty–just as it does not offend federal policy.”

Practical Implications

Salzberg reaffirms the “immense freedom” that Delaware law provides to corporations to decide how to order their affairs. A corporation that wishes to avoid the prospect of state court litigation under the Securities Act, or of duplicative state and federal actions under the Securities Act, should consider amending its certificate of incorporation to provide that such claims must be brought in federal court.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Commercial Litigation and Mergers and Acquisitions practices:

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