On December 19, 2018, the Delaware Chancery Court held that a business incorporated in Delaware could not use its corporate charter or bylaws to require that its shareholders bring any securities claims under the Securities Act of 1933 (the “1933 Act”) in federal court. The 1933 Act requires that any person selling or offering securities make certain disclosures through a registration statement approved by the Securities and Exchange Commission and provides a private right of action to securities purchasers to enforce its provisions.
Earlier this year, in Cyan, Inc. v. Beaver Cty. Empls. Ret. Fund, the United States Supreme Court concluded that federal law did not bar state courts from adjudicating class actions alleging only 1933 Act claims. Importantly, it also prohibited the removal of such class actions from state to federal court. As a result of the Supreme Court’s decision in Cyan, if a securities purchaser brings a 1933 Act class action in state court, a defendant corporation will find it difficult to have those federal claims heard in federal court.
Following Cyan, several Delaware companies attempted to avoid litigating 1933 Act class actions in state court by adopting charter-based “Federal Forum Provisions.” Those charter provisions required shareholders to file any claim under the 1933 Act in federal court.
Those efforts to circumvent the consequence of Cyan, however, appear to have failed. In Matthew Sciabacucchi v. Matthew B. Salzberg et al., the Delaware Chancery Court rejected use of Federal Forum Provisions. The Court reasoned that Delaware corporations could only adopt forum-selection provisions for “internal-affairs claims.” According to the Delaware Chancery Court, “a 1933 Act claim is external to the corporation.” Therefore, because 1933 Act claims are external to Delaware corporations, charter provisions requiring a federal forum for 1933 Act class actions brought by corporation shareholders were invalid under Delaware law.
An appeal of the Delaware Chancery Court’s decision to the Delaware Supreme Court is likely. Should the Delaware Chancery Court’s decision stand, there are few options left for Delaware corporations to avoid litigating 1933 Act class actions in state court, which are on the rise since the decision in Cyan. Perhaps the most viable remaining option is federal legislation correcting for Cyan. As the United States Supreme Court observed in Cyan, “[i]f further steps are needed, they are up to Congress.”