April 01, 2020

MONTH-IN-BRIEF: Corporations, LLCs & Partnerships

Tarik Haskins, Mark D. Hobson

Corporate Law

Salzburg v. Sciabaccuchi: Delaware Supreme Court Upholds Certificate of Incorporation Provisions Making Federal Courts the Exclusive Fora for Federal Securities Act Claims 

By K. Tyler O’Connell, Morris James LLP

In Salzburg v. Sciabaccuchi, 2020 WL 1280785, __ A. 3d __ (Del. Mar. 18, 2020), the Delaware Supreme Court upheld the facial validity under Delaware corporate law of certificate of incorporation provisions making the federal courts the exclusive fora for claims arising under the federal Securities Act of 1933, which requires corporations selling securities to make “full and fair disclosure of relevant information” in a publicly filed registration statement.  Although ’33 Act claims may be brought in state or federal court, many corporations and their advisors prefer federal court due to procedural advantages, including a better ability to coordinate parallel suits filed in multiple jurisdictions.  The corporations named in the suit accordingly had adopted the federal forum provisions in advance of their IPOs.  

Writing for the Supreme Court en banc, Justice Karen L. Valihura emphasized that Section 102(b)(1) of the Delaware General Corporation Law (“DGCL”) authorizes charters to include “any provision for the management of the business and for the conduct of the affairs of the corporation,” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, ... if such provisions are not contrary to the laws of this State.”  The high Court reasoned that the provisions at issue were not “contrary to the laws” of Delaware.  Rather, it explained that the DGCL is broadly enabling, and Delaware law regards the certificate of incorporation as an enforceable contract among the corporation and its stockholders.  DGCL amendments in 2015 that added Sections 102(f) and 115, addressing the permissibility of forum and fee-shifting provisions for “internal corporate claims,” tacitly implied that charters and bylaws may address other types of claims – else the limitation to “internal corporate claims” was unnecessary.   

In that regard, the Supreme Court clarified that the scope of permissible regulation for Delaware corporate charters and bylaws extends to intra-corporate” claims – i.e., claims between or among the corporation and its directors, officers or stockholders that relate to the “affairs” of the corporation or the “powers” of its constituents but that are not necessarily governed by Delaware law.  This is a broader category than “internal affairs” claims (e.g., claims for breaches of fiduciary duty) governed by Delaware law.  The Court explained that its decision did not violate principles of federal law and policy, under which contractual provisions restricting the fora for securities claims are enforceable.  For similar reasons, the Court reasoned that its decision did not disrespect the sovereignty of sister states, given that their residents may agree to be bound by contractual forum selection provisions, the application of which (like the provisions at-issue here) may be challenged if applied in an unjust or unreasonable manner in a particular case.  

Tarik Haskins

Partner; Morris, Nichols, Arsht & Tunnell LLP

Tarik is a partner in the Commercial Law Counseling Group. His practice covers a range of commercial transactions including mergers and acquisitions, secured financings, joint ventures, and business counseling.

Mark D. Hobson is an experienced Securities, Transactional, and Corporate attorney licensed in Colorado and Florida, with offices in Coral Gables, Florida. Mark’s clients include private equity funds, sophisticated entrepreneurs and investors, sole proprietors and start-ups, small businesses and medium-sized business, broker-dealers, investment advisers, investment companies, and EB-5 Regional Centers, among others. Mark’s practice spans an array of industries and is limited to transactional matters, M&A deals, private equity and venture capital funds, the offer and sale of Securities or Commodities under Federal law, State blue-sky laws, serving as outside general counsel and expert witness, corporate governance, UCC Article 9 secured-lending matters, joint ventures, distributorship and other sales arrangements.  Although Mark is currently a sole practitioner, he frequently works with third-party specialists to assist clients, as needed.  After starting his legal career in São Paulo, Brazil, Mark relocated to Miami where he practiced for 12 years in the corporate department of Shutts & Bowen, LLP, the oldest law firm in Miami, before working almost 4 years with a boutique law firm on Brickell Avenue, the heart of Miami’s financial district. In July 2014, Mark opened up HOBSON FIRM.