A Real Game-Changer: Supreme Court of Delaware Validates Federal Forum Provisions for Securities Act Cases
In a noteworthy and highly-anticipated opinion issued yesterday, the Supreme Court of Delaware, in Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020), reversed the Delaware Court of Chancery’s decision and held valid the federal forum provisions (“FFPs”) adopted in Delaware corporations Blue Apron Holdings, Inc., Stitch Fix, Inc., and Roku, Inc.’s certificates of incorporation that required claims brought under the Securities Act of 1933 (the “Securities Act”) to be litigated in federal court. The Supreme Court of Delaware’s opinion reopens the door for companies to use federal forum provisions to ensure efficiencies in managing procedural aspects of securities litigation. This is especially significant following the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S.Ct. 1061 (2018), which held that federal and state courts have concurrent jurisdiction over class actions based on claims brought under the Securities Act. As noted in the Salzberg opinion, Cyan has resulted in a substantial increase in Securities Act cases being filed in state courts, as well as simultaneously in state and federal court.
The Court of Chancery had previously 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. [1]
In reversing the Delaware Chancery Court decision, the Supreme Court of Delaware explained that FFPs are facially valid because they fall within the broad, enabling text of Section 102(b)(1) of the Delaware General Corporation Law (the “DGCL”), which 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.” Salzberg, No. 346, 2019 at 10-11. The Supreme Court of Delaware concluded that an FFP could “easily fall within either of these broad categories” as FFPs involve a type of securities claim related to a corporation’s management of its affairs and of its relationship with its stockholders and, thus, a bylaw that seeks to regulate the forum in which such “intra-corporate” litigation can occur is facially valid under Section 102(b)(1). Id. at 11.
Importantly, the Supreme Court of Delaware noted that the Chancery Court’s analysis overly narrowed the “broad enabling scope” of Section 102(b)(1) by holding that it is limited only to “internal affairs” matters. In so doing, the Court relied on its decision in ATP Tour Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), where it held that a fee-shifting bylaw fell within both broad prongs of Section 102(b)(1). The Supreme Court of Delaware explained that, like a fee-shifting provision, an FFP is an “intra-corporate claim,” which supports the view that Section 102(b)(1) also encompasses matters that fall outside the United States and Delaware Supreme Court’s definition of “internal affairs.” The Court concluded that FFPs, and other intra-corporate claims, are facially valid under Delaware law because they are within the statutory scope of Section 102(b)(1). Importantly, the Supreme Court of Delaware further observed that FFPs do not violate federal law or public policy.
Consequently, Salzberg alleviates the procedural concerns and inefficiencies following Cyan. The Supreme Court of Delaware specifically noted this effect and driving force behind its decision, explaining that “[t]he costs and inefficiencies of multiple cases being litigated in both state and federal courts are obvious,” and that by directing Securities Act claims to federal courts, “FFPs classically fit the definition of a provision ‘for the management of the business and for the conduct of the affairs of the corporation.’” Id. at 13-14. We anticipate that, ultimately, Delaware public companies will as a matter of course amend their charters to include FFPs for any claims arising under the Securities Act and, thus, substantially reduce the potential litigation exposure, burden, and expense of multi-forum litigation.
[1] For additional details, see our prior discussion of the Delaware Court of Chancery’s opinion. https://www.troutman.com/insights/delaware-chancery-court-strikes-down-federal-forum-provisions-for-securities-act-cases.html.