Earlier this week, the Delaware Court of Chancery held in Sciabacucchi v. Salzberg, No. 2017-0931-JTL (Del. Ch. 2018), that corporate forum-selection provisions are ineffective as to claims under the federal Securities Act of 1933 because such claims are unrelated to the internal affairs of a corporation.
The 1933 Act creates a right of action by purchasers of securities against security issuers for false or misleading information in company registration statements. The Act provides that state and federal courts have concurrent jurisdiction over these claims and that defendants may not remove actions filed in state court to federal court.
In Sciabacucchi, the shareholder plaintiff purchased shares of three technology companies in initial public offerings or soon thereafter. All three companies had adopted nearly identical forum-selection provisions in their corporate charters providing that “the federal district courts of the Unites States of America shall be the exclusive forum for the resolution of any complaint” under the 1933 Act. The plaintiff filed a declaratory judgment action against individuals who had signed the companies’ registration statements, challenging the enforceability of these provisions.
Analyzing the parties’ cross-motions for summary judgment on this claim, Vice Chancellor Laster observed that forum-selection provisions were rarely used until 2010, when he wrote in an opinion that “if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.” Three years later, in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), the Court of Chancery expressly approved the use of forum-selection provisions in company bylaws for disputes “relating to internal corporate governance.” In 2015, Delaware codified the right of Delaware corporations to adopt forum-selection provisions for internal corporate governance claims in DGCL Section 115.
In Sciabacucchi, however, the Vice Chancellor rejected defendants’ argument that a 1933 Act claim arises from corporate internal affairs, reasoning that “[f]ederal law creates the claim, defines the elements of the claim, and specifies who can be a plaintiff or defendant.” Further, the individuals sued under the Act may extend well beyond corporate officers and directors, and the definition of a “security” is far broader than a share of stock. And the “predicate act” under the 1933 Act is the purchase of a security, not the ownership of the security. Therefore, “a 1933 Act claim resembles a tort or contract claim brought by a third-party plaintiff” and “is an external claim that falls outside the scope of the corporate contract.”
The Vice Chancellor acknowledged that 1933 Act claims may involve “the business and affairs” of a corporation but emphasized that these claims do not involve “the internal affairs of the corporation.” The Chancery Court also rejected the plaintiff’s contention that the enforceability of a federal forum-selection provision was an issue of first impression. In the Court’s view, “first principles” establish that Delaware law does not authorize companies to dictate the forum for claims arising from “external relationships,” even if the plaintiff happens to be a stockholder.
While this decision builds on established Delaware precedent, it serves as an important reminder to all Delaware corporations: forum-selection clauses in bylaws and charter documents are not all created equal, and their enforcement hinges on the underlying nature of the dispute.
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