On March 18, 2020, the Delaware Supreme Court reversed a Chancery Court decision that had ruled forum selection provisions in Delaware corporate charters that required securities fraud claims under the Securities Act of 1933 (“Securities Act”) to be filed only in federal courts are invalid and unenforceable. In reversing the lower court’s decision, the Delaware Supreme Court found that federal-forum selection provisions relate to “intra-corporate affairs” that fall outside a company’s internal affairs, but within the outer edges of Delaware General Corporation Law (“DGCL”) Section 102(b)(1). Therefore, federal-forum provisions are authorized by Section 102(b)(1) and are facially valid. Salzberg v. Sciabacucchi, 2020 WL 1280785 (Mar. 18, 2020).
In Sciabacucchi v. Salzberg, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018), the Chancery Court was asked for a declaratory judgment that federal-forum selection provisions are invalid under Delaware law. The court examined Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) and ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), and found federal-forum selection provisions to be invalid as 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.” Sciabacucchi, 2018 WL 6719718, at *3.
The Delaware Supreme Court, in reversing the Chancery Court’s decision, determined that federal-forum selection provisions fall within the broad enabling language of DGCL Section 102(b)(1). The Delaware Supreme Court analyzed the plain text of Section 102(b)(1) and ruled the Chancery Court’s finding that Section 102(b) only covered “internal affairs” was incorrect. The Court found that Section 102(b) extends out to include a company’s “intra-corporate affairs.” Furthermore, the Supreme Court found that the Chancery Court improperly narrowed the definition of the internal affairs doctrine.
In addition to finding that federal-forum selection provision facially valid, the Supreme Court found that federal-forum provisions also survive challenges as a policy matter.
The U.S. Supreme Court had previously ruled in Cyan v. Beaver County Employees Retirement Fund, et al., 138 S.Ct. 1061 (2018), that investors could bring claims under Section 11 of the Securities Act, alleging the issuance of false and misleading registration statements for initial public offerings (“IPO”) and secondary offerings, in state or federal court. Now, Delaware companies contemplating an IPO or offering can amend their charters or bylaws to mandate that investor suits be brought in federal court subject to the requirements of the Private Securities Litigation Reform Act of 1995.
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About Maxwell Michael
Maxwell Michael's practice is focused on shareholder merger and securities litigation. Maxwell is an associate in Faruqi & Faruqi, LLP's New York office.