In the highly anticipated decision of Salzberg v. Sciabacucchi, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020), the Delaware Supreme Court held that a provision in several Delaware corporations’ charters, requiring that actions arising under the Securities Act of 1933 (the “Securities Act”) be brought in federal court, was valid and enforceable.
Background/Court of Chancery Decision
Appellee, Matthew Sciabacucchi, purchased shares in three Delaware corporations in their initial public offerings or shortly thereafter. Each of these companies adopted a federal-forum provision in their certificates of incorporation that designated the federal courts as the exclusive forum for the resolution of any claims brought under the Securities Act. Sciabacucchi subsequently sought a declaratory judgment in the Court of Chancery that such forum-selection provisions are invalid under Delaware law. Vice Chancellor J. Travis Laster granted summary judgment, holding that the federal-forum provisions were invalid, because, as the Vice Chancellor held, “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.” Sciabacucchi v. Salzberg, 2018 WL 6719718, at *3 (Del. Ch. Dec. 19, 2018).
The Court of Chancery’s decision looked to Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), to decide that federal forum provisions could only be valid if they related to the internal affairs of the corporation. Vice Chancellor Laster further reasoned “a securities claim is not an ‘internal corporate claim’ within the meaning of the amendments” to the Delaware General Corporation Law (“DGCL”) enacted in 2015, whereby Section 115 was added and Sections 102 and 109 were amended. 2018 WL 6719718, at *14. Again relying on Boilermakers, the Vice Chancellor held that a claim under the Securities Act is “an external claim that falls outside the scope of the corporate contract.” Id. at *18. As such, the Court of Chancery concluded that “[a] charter-based forum-selection provision cannot govern claims [under the Securities Act] because the provision would not be addressing ‘the rights and powers of the plaintiff-stockholder as a stockholder.” Id. at *16 (emphasis in original).
Delaware Supreme Court Analysis
On appeal, in a 53-page unanimous opinion by Justice Karen Valihura, the Delaware Supreme Court reversed the Court of Chancery’s decision, holding that such forum-selection provisions are indeed valid and survive a facial challenge.
Under the Supreme Court’s analysis, the Court held that the federal-forum provisions were valid because they fall within the plain language of 8 Del. C. § 102, which governs matters contained in a certificate of incorporation. Under Section 102(b)(1) of the DGCL, Delaware corporations may adopt: (i) provisions that provide for the management of business and conduct of the affairs of the corporation; or (ii) provisions that create, define, limit, and regulate the powers of the corporation, directors, and stockholders so long as those provisions are not contrary to state law. Accordingly, the Court concluded that the federal-forum provisions “could easily fall” within either category, and were therefore facially valid. Salzberg, 2020 WL 1280785 at *4.
Within the High Court’s analysis under Section 102, the Court further addressed case law, including the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138, S. Ct. 1061 (2018), and concluded that federal-forum provisions “classically fit the definition of a provision ‘for the management of the business and for the conduct of the affairs of the corporation.” The Court also concluded that federal-forum provisions are not contrary to the policies or laws of Delaware, noting that such provisions are “given great respect” under Delaware law. Salzberg, 2020 WL 1280785 at *5. Under this analysis, the Court dissected Section 115 of the DGCL, determining that Section 115 did not alter the scope of Section 102(b)(1).
The Court’s opinion next went into a detailed analysis of the internal affairs doctrine, finding that the Court of Chancery erred by defining “internal affairs” too narrowly, and thus, erroneously narrowed the scope of Section 102(b)(1).
Lastly, the Supreme Court concluded that federal forum-provisions survive a facial challenge as a policy matter, and do not offend federal law and policy.
Key Takeaway: This groundbreaking decision permits Delaware corporations to adopt federal-forum provisions to ensure that any securities fraud claims brought under federal law are filed in federal court, so that the action would be subject to the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995. This will likely result in a decrease in the number of claims under the Federal Securities Act being brought in state courts. Delaware corporations that have not yet adopted federal forum provisions in their charters may consider doing so in light of this decision.