The Delaware Supreme Court today handed securities defendants a major victory, concluding that forum selection provisions in Delaware companies’ registration statements that required that certain securities litigation be brought solely in federal district court were facially valid. Salzberg, et al. v. Sciabacucchi, Case No. 314 2019 (Del. Mar. 18, 2020). In doing so, it overturned the Delaware Chancery Court’s previous conclusion that such provisions were unenforceable to the extent that they required any claim under the Securities Act of 1933 (the 1933 Act) to be filed exclusively in federal court.
In 2017, three separate Delaware corporations included in their initial public offering registration statements federal forum provisions (FFPs) providing that, absent company consent, any action against them asserting claims under the 1933 Act must be brought in federal court. The provisions further provided that purchase of the company’s securities conveyed consent to the FFPs. An individual who purchased shares of all three companies brought suit in Delaware Chancery Court, asserting that the FFPs were invalid under Delaware law under all circumstances. In January 2019, the Delaware Chancery Court agreed, concluding that “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.” See Sciabacucchi v. Salzberg, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018). The appeal followed.
In overturning the lower court’s ruling, the Delaware Supreme Court first noted that the plaintiff had brought a facial challenge to the provisions, meaning he needed to establish that they could not be enforceable under any circumstances. It then noted that Delaware General Corporation Law provided that corporate constitutive documents authorized (1) “any provision for the management of the business and for the conduct of the affairs of the corporation”; and (2) “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.” The court concluded that the FFPs could fall under either of these categories, as the underlying securities claims would necessarily “relate . . . to the management of litigation arising out of the Board’s disclosures to current and prospective stockholders in connection with” a securities offering. Accordingly, the court concluded that the FFPs at issue were facially valid.
In explaining its reasoning, the Delaware Supreme Court noted the marked increase in state court 1933 Act filings in the wake of Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), as well as the associated “costs and inefficiencies” of companies having to litigate concurrently in state and federal fora. The court opined that the FFPs addressed these difficulties consistent with Delaware law. It also noted that they were not otherwise contrary to state law or public policy, as the plaintiff had contended. Further, with respect to federal considerations, the court observed that the U.S. Supreme Court had previously concluded that federal law furnished no basis to object to provisions that preclude state litigation of Securities Act claims and that nothing in Cyan prohibited “a forum-selection provision from designating federal court as the venue for litigating Securities Act claims.”
The Delaware Supreme Court closed its analysis by posing the “down the road” question of whether other states would deem such forum selection provisions enforceable. While noting that this question was likely beyond the scope of the facial challenge at hand, the court nonetheless observed that “there are persuasive arguments that could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty—just as it does not offend federal policy.” According to the court, the special role of the internal affairs doctrine in jurisprudence, along with its emphasis on a corporation’s state of incorporation, should support enforcement of FFPs, at least for Delaware corporations. Additionally, it emphasized that future “as applied” challenges could take into account specific circumstances that might support a decision not to enforce depending on the equities involved, characterizing such challenges as “an important safety valve” in future consideration of the issue. But the court closed its discussion by stressing that its views, focused on internal affairs, constitutional concerns, and practical consideration of corporate governance, led it to believe that such “horizontal sovereignty” should not pose a significant barrier to acceptance of its ruling by other states.
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Impact for D&O Insurers: This ruling will obviously be welcomed by carriers, as it should provide some respite from the uptick in state court 1933 Act claims. Establishing a preferred federal forum for 1933 Act claims post-Cyan should be hailed as a victory by all defendants. A vigorous challenge on the plaintiffs’ side undoubtedly will ensue, as securities plaintiffs likely will assert that this result somehow runs afoul of Cyan or perhaps the 1933 Act itself, though the opinion reflects that the Delaware Justices do not view any such challenges as particularly well-founded. The decision, however, does reflect a great deal of sensitivity to other states’ willingness to embrace its reasoning, and the courts of other states doubtlessly will provide the site of future battles in the forum-selection wars.