Why it is important
In Salzberg v. Sciabacucchi, the Delaware Supreme Court held that provisions mandating that cases under the Securities Act of 1933 be brought in a federal forum – so called “federal-forum provisions” or FFPs – are not facially invalid when included in Delaware corporate charters. The Delaware Supreme Court found FFPs were permitted under the “broad enabling text” of section 102(b)(1) of the Delaware General Corporation Law, reversing the Court of Chancery’s decision limiting the scope of section 102(b)(1) to prohibit such provisions. Because it was ruling on a facial challenge to FFPs, the Delaware Supreme Court cautioned that there may be instances in which “as applied” challenges would render an FFP unenforceable.
Following this decision, many Delaware corporations are likely to consider adoption of a FFP, while others that already have adopted a FFP but declined to enforce it pending the Delaware Supreme Court’s decision can be expected to exercise their rights.
Please see our prior coverage of the Court of Chancery’s decision in Sciabacucchi here.
Summary
This appeal arose from a putative class action brought by Matthew Sciabacucchi seeking a declaratory judgment that federal-forum provisions (FFPs) included in corporate charters were invalid under Delaware law. The Court of Chancery granted summary judgment in favor of Sciabacucchi, holding that the FFPs were facially invalid. The Court of Chancery found that FFPs were “ineffective and invalid” because 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.”
The Delaware Supreme Court reversed the Court of Chancery’s decision, beginning its analysis with the text of section 102(b)(1) of the DGCL, which governs the contents of certificates of incorporation. Section 102(b)(1) authorizes two broad types of provisions: “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 Delaware Supreme Court, FFPs address securities claims arising from a company’s disclosures to stockholders in connection with an initial or secondary offering, and the creation of those disclosure documents “is an important aspect of a corporation’s management of its business and affairs and of its relationship with its stockholders.” Thus, the Delaware Supreme Court concluded that FFPs could fall in either category under section 102(b)(1).
The Delaware Supreme Court made several other points supporting its approval of FFPs. First, the Court noted the practical benefits of FFPs. The Court found state court cases alleging claims under the Securities Act of 1933, following the U.S. Supreme Court’s reaffirmation of the concurrent state and federal jurisdiction over ’33 Act claims had increased parallel litigation for many corporations. The Court found the use of FFPs to avoid parallel litigation would increase litigation efficiency and benefit corporations.
Second, the Delaware Supreme Court held that FFPs did not violate state or federal law. The Delaware Supreme Court reasoned that “stockholder-approved charter amendments” are consistent with state policies recognizing freedom of contract in the corporate context, and cited to Supreme Court precedent to show that “federal law has no objection to provisions that preclude state litigation of Securities Act claims.”
Third, the Delaware Supreme Court rejected Sciabacucchi’s argument that the addition of section 115 to the DGCL in 2015 “implicitly amended” section 102(b)(1). Section 115 provides that a corporation can require “internal corporate claims” to be brought exclusively in Delaware, but cannot “prohibit bringing such claims in” Delaware. The Delaware Supreme Court rejected the argument on several grounds, finding, among other things, that “Section 115 simply clarifies that for certain claims, Delaware courts may be the only forum, but they cannot be excluded as a forum.”
Fourth, the Delaware Supreme Court disagreed with the Court of Chancery’s holding that section 102(b)(1) only applies to “internal affairs” of a corporation, finding that “the universe of matters encompassed by Section 102(b)(1) is greater than the universe of internal affairs matters.”
Fifth, the Delaware Supreme Court acknowledged that “the most difficult aspect of this dispute” was whether FFPs would “be respected and enforced by our sister states.” Because FFPs do not specify the forum for a strictly intra-corporate claim, to which Delaware law would apply pursuant to the internal affairs doctrine, the Delaware Supreme Court recognized the possibility that other states, applying their own choice-of-law principles, may apply a different law and fail to enforce the FFP. The Delaware Supreme Court believed the FFPs would and should be enforced because, among other things, the corporate charter is a contract between the corporation and its shareholders and all states regularly enforce forum selection provisions in contracts. But it remains to be seen whether the Delaware Supreme Court’s prediction is correct. |
