Delaware Supreme Court Upholds Federal Forum Selection for Securities Act Claims
On Wednesday, March 18, 2020, the Delaware Supreme Court overturned a Chancery Court decision that had prohibited Delaware corporations from adopting federal forum selection provisions for actions arising under the federal Securities Act of 1933 (Securities Act). In its opinion in Salzberg v. Sciabacucchi, the Court held that allowing federal forum selection provisions in a corporation’s governing documents advanced the goals of achieving judicial efficiency in resolving claims and offering flexibility to engage in private ordering.
The case had been closely-watched given its potential to upend recent trends of forum selection in Securities Act litigation. Unlike some securities laws, the Securities Act confers private rights of action to purchasers of securities, enabling plaintiffs to enforce the law’s registration and disclosure requirements by bringing claims in either state or federal court. The statute also bars removal of a case from state to federal court so that the plaintiff has control over forum selection. When it was enacted in 1995, the Private Securities Litigation Reform Act (PSLRA) was meant to counter perceived abuses of class action litigation involving nationally traded securities by, among other things, limiting recoverable damages, placing restrictions on selection of lead counsel, and imposing mandatory sanctions for frivolous litigation. The unintended consequence of PSLRA, however, was that it drove a number of class action lawsuits into state courts under state law as plaintiffs maneuvered around the PSLRA’s hurdles. Federal forum selection clauses rose in prominence among corporations that incorporated such terms into their governing documents to shift Securities Act litigation back into federal court and avoid the inefficiencies of multi-forum litigation claims.
Sciabacucchi involved challenges to three Delaware corporations — Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc. — that each launched an initial public offering in 2017. Prior to filing registration statements with the SEC, each company adopted a federal forum provision in its certificate of incorporation providing that any cause of action asserting claims under the Securities Act would be resolved exclusively in the federal courts (collectively, the Federal Forum Provisions). The appellee bought shares of common stock of each company in or shortly after each company’s IPO. He subsequently filed a putative class action complaint in the Court of Chancery against the individual directors of the three corporations and the corporations as nominal defendants seeking a declaratory judgment that the Federal Forum Provisions are invalid under Delaware Law.
The Chancery Court granted the motion for summary judgment, reciting as “first principles” of Delaware corporate law the proposition that the “constitutive documents of a Delaware corporation cannot 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.” Because the Federal Forum Provisions in question violated that principle, the Chancery Court deemed them to be ineffective and invalid.
In contrast, the Supreme Court anchored its analysis in the broad, permissive language of Section 102 of the Delaware General Corporation Law (DGCL). Section 102(b) governs the contents of a corporation’s certificate of incorporation and authorizes (i) “any provision for the management of the business and conduct of the affairs of the corporation and (ii) any provision creating, defining, limiting, and regulating the powers of the corporation, the directors, and the stockholders . . . if such provisions are not contrary to the laws” of Delaware. In the Supreme Court’s view, the Federal Forum Provisions are facially valid under either of the broad categories set forth in Section 102(b).
In the first instance, the Court observed that preparing and reviewing registration statements in connection with an IPO or secondary offering are important functions of a corporation’s management. The use of Federal Forum Provisions to manage the risks of litigation relating to disclosures contained in the registration statements is then a prudent part of such management, particularly, the Court noted, in light of Cyan, Inc. v. Beaver County Employees Retirement Fund. In Cyan, the United States Supreme Court held that federal and state courts have concurrent jurisdiction over class actions based on claims brought under the Securities Act. That decision prompted an immediate, historically-unprecedented surge in state-only and parallel state-and-federal filings. The absence of a procedural mechanism to consolidate suits in state and federal courts left defendant corporations facing the potential of managing simultaneous state and federal cases (which could potentially lead to inconsistent rulings). In the Delaware Supreme Court’s view, avoiding the costs and inefficiencies of parallel litigation through the use of Federal Forum Provisions is responsible “management of the business” in a post-Cyan world.
As to the second Section 102(b) category, the Court explained that the DGCL allows immense freedom for businesses to adopt the most appropriate terms for the organization and governance. A corporation’s charter document is fundamentally a contract between the corporation and its stockholders, and as such, should be respected as a matter of policy.
In the Court’s view, therefore, the Federal Forum Provisions are facially valid both under Section 102(b) and as a matter of Delaware public policy.
The Court also addressed the appellee’s argument that 2015 Amendments to the DGCL altered Section 102’s scope. The 2015 Amendments added Section 115, which provides that a corporation’s organizational documents may require that “internal corporate claims shall be brought solely and exclusively in . . . the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.”
The appellee had argued, and the Chancery Court agreed, that the addition of Section 115 implicitly amended the scope of Section 102(b). Disputing that conclusion, the Court first noted that “statutes should not be superseded or altered by implication unless there is an irreconcilable conflict.” In this instance, however, the Court found no such irreconcilable conflict as there was a clear way to read both provisions in a way that could “harmonize” their meaning. The 2015 Amendments added a new Section 102(f) (relating to fee shifting), but did not alter the expansive authorizations in Section 102(b). Had the General Assembly meant to amend Section 102(b), it would have done so.
Rather, the Court explained that Section 115 clarifies that for certain internal corporate claims Delaware courts cannot be excluded as a forum, while Section 102(b)(1)’s general provisions continue to apply to matters that exist on a continuum between such purely internal affairs (subject to Section 115) and those that are purely external (and, therefore, outside the appropriate scope of a certificate of incorporation or bylaw provision). Overturning the Chancery Court decisions, the Supreme Court concluded that the Federal Forum Provisions were within an “Outer Band” of matters that are not purely internal corporate affairs but still within the statutory scope of Section 102(b)(1), explaining in a footnote “internal corporate claims and Section 115 were likely intended to cover matters to be decided under Delaware corporate law as opposed to federal law.”
The Court’s conclusion that federal forum selection provisions are facially valid and have important implications for Delaware corporations. As a general matter, Sciabacucchi reaffirms that Delaware law favors flexibility and wide discretion for private ordering to appropriately balance the interests of directors and stockholders. More specifically, the decision means that federal forum selection provisions remain available as a tool to avoid the potentially crushing expenses of parallel state and federal litigation permitted by Cyan. This is welcome relief for the defendant corporations and the D&O insurers that have been coping with Cyan in the absence of legislative action. In light of this decision, Delaware corporations should re-visit when the adoption of a federal forum selection provision in their charters would be appropriate and advisable.
 Salzberg v. Sciabacucchi, 2020 Del. LEXIS 100.
 Although all three clauses were substantively similar, Blue Apron’s federal forum provision differed in that it stated that federal courts would be the exclusive forum “to the fullest extent permitted by law.”
 Sciabacucchi v. Salzberg, 2018 Del. Ch. LEXIS 578, at *8.
 8 Del. C. §102(b)(1).
 Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061.
 8 Del. C. §115.
 Sciabacucchi at *19.