On December 19, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted summary judgment to a shareholder challenging the validity of forum-selection charter provisions requiring shareholders to litigate claims under the Securities Act of 1933 (the “Securities Act”) in federal courts. Sciabacucchi v. Salzberg
, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 18, 2018). The case involved three corporations that adopted federal forum-selection provisions for Securities Act claims in their respective certificates of incorporation prior to their initial public offerings. Plaintiff had purchased shares of common stock in the initial public offerings (or shortly thereafter), and therefore, according to the Court, “could sue under Section 11 of the [Securities] Act to address any material misstatements or omissions in the registration statements.” Without actually asserting claims for violations of the Securities Act, however, plaintiff challenged the forum-selection provisions in a declaratory judgment suit. Reasoning that “[t]he 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,” the Court held that the federal forum-selection provisions are “ineffective and invalid.”
After reviewing Delaware case law and statutory authority generally permitting forum-selection provisions for claims related to the internal affairs of the corporation, the Court determined that a Delaware corporation “does not have the power to adopt in its charter or bylaws a forum-selection provision that governs external claims.” For example, the Court relied on Section 115 of the Delaware General Corporation Law, which expressly permits the implementation of a forum-selection provision in favor of Delaware courts for “internal
corporate claims” (emphasis added). The Court also relied on “first principles,” recognizing that a corporation is a legal entity “created through the sovereign power of the state,” but concluding that the state of incorporation cannot use corporate law to regulate the corporation’s external relationships. Moreover, the Court found that claims under the Securities Act do not implicate the internal affairs of the corporation. As the Court explained, “the speaker may have made fraudulent statements about the shares, or which relate to the shares, but the claim for fraud is not an attribute of the shares and does not arise out of the corporate contract.” Therefore, the Court declared the federal forum-selection provisions invalid.
As we discussed in a recent post
, companies have been considering various responses to the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund
, 138 S. Ct. 1061 (2018), which held that state courts have jurisdiction to adjudicate class actions brought under the Securities Act and that such actions cannot be removed from state to federal court. Indeed, as we noted, one California state court recently stayed a Securities Act suit on forum non conveniens
grounds based on a forum-selection clause contained in a deposit agreement that set the terms for the deposit of non-U.S. securities so that they could be traded in the U.S. as American Depositary Shares. Given the interest, it seems likely that this decision from the Delaware Court of Chancery will be addressed in substance at some point by the Delaware Supreme Court either on a direct appeal or an appeal in a similar case.