CLIENT ALERT: Delaware Supreme Court Approves Forum Selection Provisions In Corporate Charters For Securities Act Claims
In this unanimous en banc decision, the Supreme Court of Delaware held that the Court of Chancery erroneously invalidated forum selection provisions in the corporate charters of Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc., that required a stockholder plaintiff to file any claims under the Securities Act of 1933 (the “‘33 Act”) in federal district court. The decision thus presumptively allows corporations to limit the “difficulties presented by multi-forum litigation of Securities Act claims” through federal forum provisions.
As the Supreme Court explained, such federal forum provisions have been implemented in response to the increasing practice of plaintiffs filing ‘33 Act claims in state courts to avoid defendant-friendly provisions in the PSLRA that only apply in federal court. Plaintiffs have done so at an increasing rate since the United States Supreme Court’s decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018), which allowed state courts to retain concurrent jurisdiction for ’33 Act claims.
The starting point of the Supreme Court’s analysis was Section 102(b)(1) of the Delaware General Corporation Law. Section 102(b)(1) allows charters to include any provisions “for the management of the business and for the conduct of the affairs of the corporation” or “creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of stockholders, … if such provisions are not contrary to” Delaware law.
The plaintiff asserted a facial challenge, which required a showing that the charter provisions “cannot operate lawfully or equitably under any circumstances.” The Supreme Court concluded the plaintiff could not make such a showing because “Section 11 claims [under the ‘33 Act] are ‘internal’ in the sense that they arise from internal corporate conduct on the part of the Board and, therefore, fall within Section 102(b)(1).” In reaching that conclusion, the Supreme Court stated that ‘33 Act claims were in the “Outer Band” of “intra-corporate affairs” that could be covered by Section 102(b)(1). It was possible that the federal forum provisions “could apply to [such] an intra-corporate claim,” and, by ruling to the contrary, the Court of Chancery had “narrowed the broad enabling scope of Section 102(b)(1) in a way that is inconsistent with decisions by this Court and with the overall statutory scheme” of the DGCL. As important context, the Supreme Court reiterated that “the DGCL allows immense freedom for business to adopt the most appropriate terms for the organization, finance, and governance of their enterprise” and “was intended to provide directors and stockholders with flexibility and wide discretion for private ordering and adaptation to new situations.”
The Delaware Supreme Court included the caveat, however, that “‘as applied’ challenges are an important safety valve in the enforcement context.” This language, and the associated discussion, mean that, in theory, there are contexts in which federal forum provisions could be contrary to Delaware law.
Finally, in a footnote, the Court noted that much of the concern over the federal forum provisions related to the ‘next move” of corporations requiring “arbitration of internal corporate claims.” In an apparent attempt to cut that avenue off, the Court stated, in dicta, that such provisions “would violate Section 115” of the DGCL.