Delaware corporations routinely include “exclusive federal forum” provisions in their charters and bylaws to designate federal courts as the exclusive forum for litigating claims under the Securities Act of 1933 (the “’33 Act”). Corporations generally prefer to litigate these claims in federal court as state court is viewed as inefficient and more inclined to grant plaintiffs a summary judgment ruling. The practice of adopting exclusive forum provisions is intended to avoid state court litigation of ’33 Act claims and state court forum shopping by plaintiffs.
In a registered securities offering, Section 11 of the ’33 Act allows purchasers to sue for false or misleading information included in a registration statement. Federal and state courts were given concurrent jurisdiction for those claims, and parties were barred from removing claims filed in state court to federal court on the basis of federal question jurisdiction. Amendments to the ‘33 Act created uncertainty about whether those jurisdictional and removal provisions applied to class actions.
In its March 2018 ruling in Cyan Inc. v. Beaver County Employees Retirement Fund,[1] the U.S. Supreme Court confirmed that state court is a proper forum for ’33 Act class actions. The Court held that, in class actions alleging only ’33 Act violations by private plaintiffs, state courts have concurrent jurisdiction and defendants cannot remove actions filed in state court to federal court. With the plaintiff favorable ruling in Cyan, corporations faced an escalation of ’33 Act claims in state court and became more vigilant about including exclusive federal forum provisions in their governance documents.
Before Cyan was decided, the enforceability of exclusive federal forum provisions was challenged in a separate Delaware case, Sciabacucchi v. Salzberg.[2] In Sciabacucchi, the plaintiffs sought to invalidate those provisions in the certificates of incorporation of Blue Apron, Roku and Stitch Fix. In December 2018, the Delaware Chancery Court invalidated all three exclusive federal forum provisions. While the Delaware General Corporation Law (“DGCL”) permits forum selection provisions to govern a corporation’s internal-affairs claims (such as derivative actions), the court held that it did not govern external-affairs claims (such as actions under the ‘33 Act).
This week the Delaware Supreme Court reversed the Chancery Court’s decision in Sciabacucchi and upheld the validity of the Blue Apron, Roku and Stitch Fix exclusive federal forum provisions.[3] Relying in part on Section 102(b)(1) of the DGCL,[4] the Supreme Court reaffirmed that Delaware law “allow[s] immense freedom for businesses to adopt the most appropriate terms for the organization, finance and governance of their enterprise” including matters addressed by exclusive federal forum provisions. The Supreme Court also reaffirmed the proper scope of the internal affairs doctrine under Delaware law.
[1] Cyan, Inc. v. Beaver Cty. Empls. Ret. Fund, 138 S. Ct. 1061 (2018).
[2] Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018).
[3] Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020).
[4] Section 102(b)(1) of the DGCL authorizes charter provisions of the following nature: “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.”
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