Forum-selection provisions are common tools for corporations seeking to counteract potentially abusive shareholder litigation. Last month, the Supreme Court of Delaware held that Federal forum provisions, which require actions arising under the Federal Securities Act of 1933, as amended, to be filed in a Federal court, could survive a facial challenge.
In Sciabacucchi v. Salzberg, Plaintiff Matthew Sciabacucchi purchased shares of common stock from Roku Inc., Stitch Fix, Inc. and Blue Apron Holdings, Inc., either in the initial public offerings for those entities or shortly thereafter. Prior to the initial public offerings, each of the companies adopted a Federal forum provision in its Certificate of Incorporation, requiring any claim under the Securities Act to be filed in Federal court. Sciabacucchi commenced a putative class action, seeking declaratory judgment that the Federal forum provisions are invalid.
The Delaware Chancery Court found the Federal forum provisions were ineffective. It held that a Securities Act claim is an external claim distinct from internal affairs claims brought by stockholders qua stockholders, and that it could not be regulated by the corporations’ forum selection clauses in a Certificate of Incorporation. To support that a Securities Act claim is external, the Chancery Court pointed out that (i) the definition of “security” encompasses a wide range of financial products and are not limited to stocks; (ii) the identity of the possible defendants for a Securities Act claim include those who do not have a director or officer status; (iii) a Securities Act claim arises out of purchase of a share, rather than ownership of the share; and (iv) a purchaser does not have to continue to own the security to be able to assert a Securities Act claim.
Following this decision, Sciabacucchi was awarded attorneys’ fees and expenses in the amount of $3 million.
The Supreme Court of Delaware reversed. The Court started its analysis by noting that this is a facial challenge, where Sciabacucchi must show that charter provisions cannot operate lawfully or equitably under any circumstances, that the provisions do not address proper subject matters as defined by statute or the provisions can never operate consistently with law.
The Court then stated that the Federal forum provisions fell within the broad text of Section 102(b)(1) of the Delaware General Corporate Law (“DGCL”), which provides that a Certificate of Incorporation may include:
- 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.
According to the Court, the Federal forum provisions can provide a corporation with efficiencies in managing the procedural aspects of securities litigation, noting that post Cyan, Inc. v. Beaver County Employees Retirement Fund, parallel state and Federal Securities Act litigation increased substantially and no procedural mechanism is available to consolidate or coordinate parallel suits. The Court emphasized that Section 102(b) of DGCL is broad. The statute allows freedom for businesses to adopt the most appropriate terms for the organization, finance and governance of their operation, unless the provision would achieve a result forbidden by settled rules of public policy.
As to whether a Securities Act claim is an external claim, the Court once again noted that this is a facial challenge because it is possible to have a scenario where Federal forum provisions could apply to an intra-corporate claim, that is enough to survive a facial challenge. The Court further disagreed with the Chancery Court’s analysis, indicating that there is a category of matters that is situated on a continuum between the “internal affairs” and purely “external” claims. Section 102(b)(1)’s plain language encompasses “intra-corporate” matters that are not limited to “internal affairs.” The Court concludes that because the Federal forum provisions are within the Section 102(b)(1), they are facially valid under Delaware law.
Sciabacucchi v. Salzberg addresses the Federal forum provisions in Delaware corporations’ Certificates of Incorporation and holds that these provisions could survive a facial challenge. “As applied” challenges are still available to contest the enforcement of such provisions. Sciabacucchi has until June 2020 to file a petition for certiorari to the United States Supreme Court.