Delaware Authorizes Federal Forum-Selection Provisions for Securities Act Claims
The Situation: In response to plaintiffs filing lawsuits in state courts asserting federal claims under the Securities Act of 1933, several companies adopted forum-selection provisions requiring those claims to be brought in federal court. The Delaware Supreme Court recently upheld these provisions, finding them valid under Delaware law and consistent with public policy.
The Result: Companies now have a way to address the waste and risk resulting from defending 1933 Act class actions in state courts.
Looking Ahead: Just as companies have adopted provisions requiring that certain state-law claims be filed in a specified forum, we anticipate companies will—and should—consider adopting bylaw provisions to designate federal court as the exclusive forum for 1933 Act claims.
The Delaware Supreme Court recently held that forum-selection provisions requiring that claims under the Securities Act of 1933 be brought in federal court are valid under Delaware law and are consistent with federal and Delaware public policy. Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020).
In 2018, the U.S. Supreme Court held that state courts have concurrent jurisdiction over class actions asserting violations of the 1933 Act and that such suits cannot be removed to federal court.
In response, plaintiffs increasingly brought 1933 Act claims in state courts. In many instances, companies were forced to simultaneously defend overlapping securities class actions in both state and federal courts, because there is no procedural mechanism to consolidate or coordinate those cases. This results in obvious inefficiencies and waste of resources, and it presents the risk of inconsistent judgments and rulings.
To avoid that situation, several companies, before going public, included provisions in their certificates of incorporation to designate federal courts as the exclusive forum for any lawsuit asserting a claim under the 1933 Act ("Federal Forum Provision"). Stockholders challenged the Federal Forum Provisions, and the Court of Chancery ruled in late 2018 that those provisions were invalid.
On appeal, the Delaware Supreme Court reversed. The Court concluded that Federal Forum Provisions concern the "management of the business" and the "conduct of the affairs of the corporation" and define "the powers of the corporation, the directors and the stockholders" and, therefore, are presumptively valid under Section 102(b)(1) of the Delaware General Corporation Law, which sets forth the matters that may be addressed in a certificate of incorporation. In upholding the Federal Forum Provisions, the Court distinguished between matters that are not "internal affairs," but still are "internal" or "intra-corporate" claims. For example, directors may be liable under Section 11 of the 1933 Act for misstatements in registration statements for a secondary offering. Those claims, the Court reasoned, are "internal" because they arise from internal corporate actions by a board. Because Federal Forum Provisions seek to regulate such "internal" claims (even if not matters of "internal affairs"), those provisions are permitted under Delaware law.
Companies anticipating an initial public offering should consider including Federal Forum Provisions in their certificates of incorporation. Companies that are already public likewise should consider the potential benefits of Federal Forum Provisions. Though the Supreme Court considered the validity of Federal Forum Provisions under only Section 102(b)(1), and did not in address whether Federal Forum Provisions also could be adopted through a bylaw under Section 109(b), the Court's reasoning likely would apply with equal force to Federal Forum Provisions in bylaws adopted pursuant to Section 109(b).
First, the broad scope of Section 109(b) is virtually identical to that of Section 102(b)(1). Second, a Federal Forum Provision under Section 109(b) would provide companies with the same efficiencies as one under Section 102(b)(1). Third, Section 115, which codified exclusive-forum provisions for internal corporate claims, expressly states that such forum provisions may be in the certificate of incorporation or the bylaws. We therefore anticipate that Federal Forum Provisions also could be adopted through bylaws, allowing companies to reduce the burdens and costs of multiforum litigation involving 1933 Act claims.
Two Key Takeaways
- Just as we previously urged companies to consider forum-selection bylaw provisions to select the Delaware Court of Chancery as the exclusive forum for certain state-law actions, we now recommend that companies carefully consider Federal Forum Provisions for 1933 Act actions.
- Companies that have not already adopted any forum-selection bylaw provision should consider adopting one now that includes both a Federal Forum Provision (for 1933 Act claims) and a Delaware forum provision (for internal corporate claims under state law).