November 19, 2020 Top Story

Companies May Select Forum Through Charter Provision

Federal-forum clause for securities claims in articles of incorporation upheld

By Laura W. Givens

Forum selection provisions in companies’ certificates of incorporation that require claims under the Securities Act of 1933 to be litigated in federal court are facially valid, a state supreme court held. Federal forum provisions provide efficiency and consistency to unintended problems created by federal securities laws, the Supreme Court of Delaware reasoned. ABA Section of Litigation leaders expect more widespread use of forum selection provisions for securities claims in corporate charters or bylaws following this decision.

Federal-forum provision clauses are ruled as facially valid

Federal-forum provision clauses are ruled as facially valid

Credit: iStockphoto by Getty Images

Reforms Prompt Companies to Use Forum Selection Clauses

The Securities Act of 1933 provides that private plaintiffs may bring their claims under the act in either federal or state courts. If a plaintiff chooses to bring an action under the act in state court, a defendant cannot change the forum. The act requires persons offering securities for sale to the public to file a registration statement that makes full and fair disclosure of relevant information.

Concerns over perceived abuses of the class action vehicle in litigation involving nationally traded securities prompted Congress in 1995 to adopt the Private Securities Litigation Reform Act (PSLRA). PSLRA limits recoverable damages and attorney fees and provides other restrictions on litigation. PSLRA had the unintended consequence of plaintiffs bringing class actions in state court under state law rather than face the PSLRA obstacles in federal court. That prompted companies, like the defendants in Salzberg v. Sciabacucchi, to include federal forum selection provisions in their certificates of incorporation.

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