The Delaware Supreme Court held federal-forum provisions, or FFPs, in charters of Delaware corporations are facially valid in Salzberg et al v. Sciabacucchi. The FFPs at issue generally provided that the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint arising under the Securities Act of 1933. The Court of Chancery held that the FFPs at issue were 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 Court noted this was a facial challenge. Accordingly, the plaintiff must show that the charter provisions “cannot operate lawfully or equitably under any circumstances.” Plaintiff must demonstrate that the charter provisions “do not address proper subject matters” as defined by statute, “and can never operate consistently with law.”
The FFPs are Valid Under Section 102(b)(1) of the DGCL
The Court noted Section 102(b)(1) of the Delaware General Corporation Law, or DGCL, 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.
The Court found an FFP could easily fall within either of these broad categories, and thus, is facially valid. FFPs involve securities claim related to the management of litigation arising out of the Board’s disclosures to current and prospective stockholders in connection with an IPO or secondary offering. Therefore, a bylaw that seeks to regulate the forum in regards to the filing of a registration statements and in the disclosure area, is a provision that addresses the “management of the business” and the “conduct of the affairs of the corporation.”
The Court also noted FFPs can provide a corporation with certain efficiencies in managing the procedural aspects of securities litigation following the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund.
According to the Court:
In Cyan, the United States Supreme Court unanimously held that federal and state courts have concurrent jurisdiction over class actions based on claims brought under the 1933 Act, and that such claims are not removable to federal court. When parallel state and federal actions are filed, no procedural mechanism is available to consolidate or coordinate multiple suits in state and federal court. The costs and inefficiencies of multiple cases being litigated simultaneously in both state and federal courts are obvious. The possibility of inconsistent judgments and rulings on other matters, such as stays of discovery, also exists. By directing 1933 Act claims to federal courts when coordination and consolidation are possible, FFPs classically fit the definition of a provision “for the management of the business and for the conduct of the affairs of the corporation.”
The FFPs Do Not Violate Federal Law or Policy
The Court held FFPs do not violate federal law or policy. Citing precedent, the Court noted the United States Supreme Court held that federal law has no objection to provisions that preclude state litigation of Securities Act claims. Specifically, the Supreme Court has upheld an arbitration provision in a brokerage firm’s standard customer agreement that precluded state court litigation of Securities Act claims. In enforcing the provision, the United States Supreme Court described it as “in effect, a specialized kind of forum selection clause” that “should not be prohibited under the Securities Act.”
FFPs and Inter-State Policy
The Court noted perhaps the most difficult aspect of this dispute is not with the facial validity of FFPs, but rather, with the “down the road” question of whether they will be respected and enforced by Delaware’s sister states. The Court noted the question of enforceability is a separate, subsequent analysis that should not drive the initial facial validity inquiry. However, the Court recognized that it is a powerful concern that infused much of the briefing in the case. The fear expressed was that Delaware’s sister states might react negatively to what could be viewed as an out-of-our-lane power grab.
The Court, however, stated there are persuasive arguments that could also be made 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. For instance, the Court stated that an FFP is analogous to forum selection clause in a contract which is often enforceable. Also, given that many Section 11 claims closely parallel state law breach of fiduciary duty claims, many of the same reasons requiring application of the internal affairs doctrine would support the enforcement of FFPs. For these reasons, the Delaware Supreme Court found that forum selection provisions are facially valid.