The Delaware Supreme Court upholds unanimously in Sciabacucchi v. Salzberg, No. 346, 2019 (Del. Mar. 18, 2020), use of a corporate charter’s forum selection clause (“Federal Forum Provision”), mandating that stockholder 1933 Securities Act claims be brought in federal district court.
Why was this an issue? The 1933 Act creates private rights of action that may be brought in either federal or state courts. The statute also bars the removal of such actions from state court to federal court. “Thus,” in the Court’s words, “if a plaintiff chooses to bring an action under the 1933 Act in state court, a defendant cannot change the forum.” However, if a plaintiff is previously bound by agreement with the corporation to file any action under the Act in federal court, then the issue of removal never arises. The question posed in Sciabacucchi asked whether such a clause was legitimate under Delaware's GCL.
Background - SEC Non-Disapproval
Of immediate interest in the story behind how this case came to the State's top Court is the fact that the three public companies that are Nominal Defendants in the case were all the subject of SEC Corp Fin review prior to initial public offerings and the forum selection clauses at issue in this case were added to each company's corporate organizational documents prior to that review. In other words, inserting forum-limiting provisions into Articles of Incorporation or Corporate By-Laws passed muster at SEC. The Plaintiffs who opposed that permissive approach -- shareholders of the various companies -- sought class action relief by arguing that state law prohibited clauses in these corporate charter documents that exceed the scope of corporate "internal affairs."
The Chancery Court Decision
In a scholarly and lengthy Opinion, Sciabacucchi v. Salzberg, No. 2017-0931-JTL (Del. Chancery Ct. Dec. 19, 2018), Vice Chancellor J. Travis Laster (now retired) dealt with the Federal Forum Provisions (FFPs) in the companies' charters and declared them “ineffective” under Delaware law. In essence, the Provision, the Court wrote, is ultra vires, as attempting to extend a forum selection clause beyond the “internal affairs only” scope to which Delaware law limits corporate clauses binding the corporation and its shareholders.” Would it be a distant stretch, we asked in our coverage of the decision in SAA 2019-01, to extend that ruling to the use of PDAAs in corporate charters to, well, prohibit class action waivers? Arbitration agreements are, after all, forum selection clauses of a specific kind.
Summary of En Banc Decision
An appeal was quickly taken to the Delaware Supreme Court, which we reported in SAA 2019-11, but Chancellor Laster had built his conclusions on the precepts of his Chancery predecessor, now Chief Justice Seitz, whom he cited liberally. The decision to reverse from an en banc Court included the Chief Justice, was delivered by Justice Valihura, with Justices Vaughn and Traynor, and Judge Karsnitz joining. In order to prevail, the Court begins, Plaintiffs 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 facially valid, because, under Delaware law, they easily fall into either of the two types of clauses permitted in charters: those relating to the "management of the business" and those governing the "conduct of the affairs" of the company. Corporations might reasonably opt for a FFP because state court actions involving 1933 Act claims are difficult to coordinate with federal class actions and consolidation can be key to the company's ability to manage multi-forum litigation. Moreover, federal courts are the more experienced in dealing with federal securities law claims. FFPs are not contrary to policies of the State and the statutory scheme does not limit forum selection clauses to "internal affairs," as the Chancery Court held. The Chancery Court's view of "internal affairs" does not coincide with those of this Court or with SCOTUS' explication of the "internal affairs" doctrine. While truly "external" claims, such as tort or commercial contract claims, fall outside the limits permitted by Delaware corporate law, there is an "outer band" between the two of "intra-corporate affairs" where FFPs fall. Finally, the Court finds, FFPs do not violate federal law or policy. SCOTUS's Rodriquez v. Shearson/American Express decision illustrates that, as the Rodriquez Court held that federal law does not object to procedural provisions, such as arbitration agreements, that preclude state litigation of Securities Act claims.
(ed: *While this decision will certainly encourage more Delaware corporations to include FFPs restricting shareholders from filing Securities Act claims in state court, our interest lay more in whether the decision opens the door to the use of class action waivers to restrict shareholders from bringing securities class actions at all. The Court scotches the idea of a charter clause requiring the arbitration of "internal corporate claims," (see fn. 169), but it also holds that Securities Act claims are not "internal corporate claims" (i.e., they do not fall within Section 115 of the Code (see, e.g., fn. 146)). **We looked for guidance on this point and found an excellent analysis of the decision in the National Law Review (3/20); it has, as a "takeaway," that the Court rejected the notion of a Securities Act-type PDAA in the charter or by-laws, to wit: " The Court swiftly rejected this contention in its decision, noting that 'such provisions' explicitly would violate state law, which provides that charters and bylaws cannot 'prohibit bringing such claims in the courts of this state.” (citing 8 Del. C. § 115). ***We differ on that critical point with the NLR authors; our sense is that this Court is aligning itself with SCOTUS on the enforcement of forum-selection clauses, including arbitration. The upshot, though, is we're not sure that the door is wide open; but we'd say it's ajar. If we're right, then, given Sciabacucchi and the SEC's apparent/possible shift, we can expect that a Delaware corporation contemplating a public offering will introduce a charter provision requiring individual arbitration of federal securities claims. ****If Plaintiffs can articulate a federal question, the next stop will be a cert. Petition, but, frankly, we don't see it.)
