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.