Federal Forum Selection Provision Invalidated by State Court

January 31, 2019
Travis Dunkelberger
Practice Points

The court's decision relied heavily on the seminal decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp.

In this memorandum opinion, the Delaware Court of Chancery invalidated forum selection provisions contained in the certificates of incorporation of three Delaware corporations that required any claim brought under the Securities Act of 1933 to be brought in federal court.

Prior to filing an initial public offering, the nominal defendants in this case — Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc. — each adopted a charter-based forum selection provision (hereafter referred to as the "Federal Forums Provisions") that purported to require any claim brought under the act to be filed in federal court. Plaintiff Matthew Sciabacucchi, an owner of common stock at each entity, subsequently challenged the validity of these provisions.

Ruling on cross-motions for summary judgment, Vice-Chancellor Laster held that the Federal Forum Provisions are ineffective to the extent they require any claim brought under the 1933 act to be filed in federal court. The court explained that 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.” Here, because the Federal Forum Provisions sought to accomplish that exact purpose—i.e., mandate a forum for claims that do not arise out of or implicate the internal affairs of the corporation—the provisions were determined to be ineffective and invalid.

The court’s decision relied heavily on then-Chancellor Strine’s seminal decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp. regarding the validity of forum-selection provisions and, more particularly, its distinction between internal and external claims. The Boilermakers decision upheld the validity of forum-selection provisions that covered four types of actions: (i) derivative actions or proceedings; (ii) claims asserting breach of fiduciary duty; (iii) claims arising pursuant to the DGCL; and (iv) claims governed by the internal affairs doctrine.

According to then-Chancellor Strine, the forum-selection provisions in Chevron easily fell within the scope of Section 109(b) because they addressed “internal affairs claims” and governed the rights of “stockholders qua stockholders.” The distinction between internal and external claims was further clarified by contrasting the forum-selection provisions at issue there with tort or contract claims, which fall outside the scope of the statutory language because they do “not deal with the rights or powers of the plaintiff-stockholder as a stockholder.” Chevron thus validated the ability of a corporation to adopt a forum-selection provision but drew a distinction with claims involving internal affairs of a corporation.

Consistent with the Chevron decision, the court in Sciabacucchi held that the nominal defendants could not use the Federal Forum Provisions to specify a forum for 1933 act claims. The court reached this conclusion by first determining that the result in Chevron, which was subsequently codified by the Delaware General Assembly, applies equally to charter-based provisions based on the parallelism between Delaware General Corporation Law (DGCL) Sections 109(b) and 102(b)(1) and the fact that “the[se] provisions are generally viewed as covering the same broad subject matter.” Further, because “[a] claim under the 1933 Act does not turn on the rights, powers, or preferences of the shares, language in the corporation’s charter or bylaws, a provision in the DGCL, or the equitable relationships that flow from the internal structure of the corporation,” it necessarily follows that 1933 Act claims are external in nature and distinct from an internal affairs claim “brought by stockholders qua stockholders.”

Though the court recognized that “[m]any aspects of the corporation’s business affairs involve external relationships,” it nonetheless rejected the nominal defendants’ argument that “issuing securities and defending against securities lawsuits involve the business and affairs of the corporation.” Instead, the court noted that “the predicate act” for a claim under the 1933 act is the purchase of the share and, at the time the predicate act occurs, the “purchaser is not yet a stockholder and lacks any relationship with the corporation that is grounded in corporate law.” Thus, the court held that the Forum Selection Provisions cannot govern claims arising under the 1933 act and entered judgment in favor of the plaintiff.

Travis Dunkelberger is an associate at Potter Anderson & Corroon LLP in Wilmington, Delaware.

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