Delaware Chancery Court Strikes Down Federal Forum Provisions for Securities Act Cases
In Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), the Delaware Court of Chancery held “ineffective and invalid” provisions adopted in three Delaware corporations’ certificates of incorporation that required claims brought under the Securities Act of 1933 (the “Securities Act”) to be litigated in federal court. In ruling on cross-motions for summary judgment, Vice Chancellor J. Travis Laster found that such federal forum provisions contained in the certificates of incorporation of Blue Apron Holdings, Inc., Stitch Fix, Inc., and Roku, Inc. were unenforceable, insofar as such “corporate contract[s]” cannot be used to “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.”
Vice Chancellor Laster’s reasoning was based upon former Chancellor Strine’s opinion in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), which held that a Delaware corporation can adopt a forum-selection bylaw only for “internal‑affairs” claims. Vice Chancellor Laster further held that the reasoning in Boilermakers applies with equal force to charter-based provisions. Consequently, the Court held that because claims brought under the Securities Act “do not concern corporate internal affairs” of Delaware corporations, those corporations’ charters or bylaws cannot specify where a claim under the Securities Act – which is “a clear example of an external claim” – must be litigated.
As acknowledged by Vice Chancellor Laster, the catalyst for these corporations’ adoption of such federal forum provisions was “an epidemic of stockholder litigation, in which competing plaintiffs filed a bevy of lawsuits, often in different multiple jurisdictions, before settling for non-monetary relief and an award of attorneys’ fees.” That so-called epidemic has only been exacerbated by the United States Supreme Court decision in Cyan, Inc. et al. v. Beaver County Employees Retirement Fund, et al., 583 U.S. ____ (2018) handed down earlier this year, recognizing concurrent jurisdiction of state courts to adjudicate class actions under the Securities Act. [1] Given the uncertainty prior to and following Cyan, some corporations had adopted federal forum provisions like these as a means of avoiding the cost, burden, and expense of multi-forum litigation to which Vice Chancellor Laster refers.
Nevertheless, the Sciabacucchi opinion ensures that any Delaware corporation that has adopted federal forum provisions in its certificate of incorporation or bylaws will not be able to enforce those provisions, as they are now ineffective and invalid. As a result, barring appellate court review, the ability to curb the current “epidemic of stockholder litigation” may now be left in the hands of legislators.
[1] For additional details, see these authors’ prior discussion of the Cyan opinion.