April 02, 2020 Practice Points

Delaware Supreme Court Declares Federal Forum Provisions in Corporate Charters are “Facially Valid”

Companies and litigators should continue to watch the Delaware courts for developments as parties bring as-applied challenges.

By Gabriel K. Gillett, Michael F. Linden, and Howard S. Suskin

In a March 18, 2020 opinion in Salzberg v. Sciabacucchi, the Supreme Court of Delaware held that forum-selection clauses in corporate charters are facially valid, reversing a decision by the Court of Chancery.  As a result, corporate defendants may be able to require that shareholder lawsuits are brought in federal rather than state court, closing a door the U.S. Supreme Court left open in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018).

The Delaware Supreme Court’s ruling has great significance for publicly held companies incorporated in Delaware that face liability under the federal securities laws. Under the Securities Act of 1933, plaintiffs may choose to bring an action in either state or federal court. But after the U.S. Supreme Court held in Cyan that if the case is filed in state court, the defendant company is not permitted to remove it to federal court, securities plaintiffs increasingly flocked to state courts. To avoid the risk of having to defend securities claims in state court, the defendant corporations in Salzberg each added federal forum provisions to their registration statements prior to their public offerings, which required shareholders to bring securities lawsuits in federal court only. Slip op. 7. Plaintiffs sought a declaratory judgment that the provisions were invalid under Delaware law. The Court of Chancery granted summary judgment to plaintiffs, reasoning 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.” Slip op. 8.

In reversing the Court of Chancery, the Delaware Supreme Court held that because federal forum provisions regulate the “management of the business” and the “conduct of the affairs of the corporation,” they are facially valid under Section 102(b) of Delaware’s General Corporation Law. Slip op. 11. As the court put it, Delaware corporation law “allows immense freedom for businesses to adopt the most appropriate terms for the organizations, finance and governance of their enterprise.” Slip op. 15. And while Delaware law protects shareholders’ ability to bring internal corporate claims in Delaware courts, such as those alleging breaches of fiduciary duties by the board, it “does not address the propriety of forum-selection provisions applicable to other types of claims.” Slip op. 20. Finally, the court concluded that federal forum provisions do not violate federal law or policy. Slip op. 43.

Federal forum provisions likely will continue to be a point of contention in 1933 Act litigation, however. The Delaware Supreme Court declared the provisions “facially valid” but noted that they may not be valid in every circumstance: “Charter and bylaw provisions that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.” Slip op. 49. Companies and litigators should therefore continue to watch the Delaware courts for developments as parties bring as-applied challenges, and transactional lawyers drafting corporate charters for new Delaware corporations should be mindful of the opportunity to include federal forum provisions as a protective measure to avoid having to litigate federal securities claims in state court.

Gabriel K. Gillett and Michael F. Linden are associates and Howard S. Suskin is a partner with Jenner & Block in Chicago, Illinois.


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