On December 19, 2018, The Delaware Court of Chancery held in Sciabacucchi v. Salzberg ^[1] that Delaware corporations cannot use charter or bylaw provisions to mandate that claims under the Securities Act of 1933 (‘33 Act) must be pursued in federal court. Such federal forum selection provisions have become a frequent component of corporate constitutive documents. This largely has been in response to increasing pursuit of state court actions asserting ‘33 Act claims and particularly after the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund ^[2] – which clarified that ‘33 Act claims may be pursued in either state or federal court.

Importantly, Sciabacucchi does not prohibit all forum selection provisions from corporate constitutive documents. The decision distinguishes between forum selection provisions for claims based on the corporation’s internal affairs (i.e., claims involving rights or relationships established by or under Delaware’s corporate law) and external claims. Corporations may continue to mandate that internal affair claims must be pursued in Delaware state courts.

The decision reasoned that a ’33 Act claim does not turn on the rights, powers, or preferences of the shares, language in the corporation’s charter or bylaws, a provision of Delaware corporate law or the equitable relationships flowing from the internal structure of the corporation. In other words, ‘33 Act claims do not arise from a stockholder’s status as a stockholder. Accordingly, the external nature of a ‘33 Act claim places it beyond any forum selection allowance under Delaware corporate law.

Based upon the decision’s logic, it stands to reason that a provision mandating arbitration of ‘33 Act claims would also be deemed invalid, thereby removing another opportunity corporations have taken to control the forum for such disputes. A savings provision, such as “to the fullest extent permitted by law,” cannot salvage the federal forum selection provision because of the conclusion that Delaware corporate law does not permit the provision. Nor was the decision deemed premature because the defendants had not yet raised the federal forum selection provision to challenge the venue of a pending ‘33 Act action. The court routinely addresses facial challenges to the legality of provisions in corporate instruments. Lastly, the decision noted – without deciding – that the conflict between the forums allowed by federal law and the restrictions imposed by the federal forum selection provisions would likely result in federal preemption of the provisions.

It is widely anticipated that the decision will be appealed. Corporations need not remove existing provisions from constitutive documents at this time. However, enforceability of the provisions remains uncertain until the Delaware Supreme Court brings finality to this debate.

[1] C.A. No. 2017-0931-JTL.

[2] 138 S. Ct. 1061 (2018).

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