Reversing the Delaware Court of Chancery, the Supreme Court of Delaware held in Salzberg v. Sciabacucchi, No. 346, 2019 (Del. March 18, 2020) that corporate forum-selection provisions requiring claims under the Securities Act of 1933 (the 1933 Act) to be brought in federal court are—at least in some instances—enforceable under Delaware law.
The 1933 Act creates a right of action by purchasers of securities against issuers for false or misleading information in company registration statements and prospectuses. The 1933 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 Salzberg, 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 the individual directors who had signed the companies’ registration statements, challenging the enforceability of these provisions.
In a 2018 decision, the Delaware Court of Chancery (Vice Chancellor Travis Laster) acknowledged that Delaware law permits forum-selection provisions concerning a corporation’s internal corporate governance, but held that a claim under the 1933 Act was an “external claim” resembling a third-party tort or contract claim, which “falls outside the scope of the corporate contract.” According to the Court of Chancery, “first principles” of Delaware corporate law therefore dictated that a corporation could not include in its certificate of incorporation a provision setting the forum of a claim under the 1933 Act.
On appeal, the Delaware Supreme Court undertook a detailed analysis of Delaware General Corporate Law (DGCL) Sections 102(b)(1) and 115, emphasizing that “our DGCL was intended to provide directors and stockholders with flexibility and wide discretion for private ordering and adaptation to new situations.” In particular, the Court observed that Section 102(b)(1) broadly permits a company’s certificate of incorporation to include provisions governing the management and affairs of the corporation, along with provisions establishing “the powers of the corporation, the directors, and the stockholders . . . if such provisions are not contrary to the laws of [Delaware].”
Based on this analysis, the Supreme Court rejected the Court of Chancery’s “binary” view of “internal affairs claims” and “external claims,” finding instead that 1933 Act “claims are ‘internal’ in the sense that they arise from internal corporate conduct on the part of the Board.” And because forum-selection provisions applicable to such claims appropriately regulate “intra-corporate affairs,” they are not necessarily invalid.
The Supreme Court noted that it was merely “addressing a facial challenge” and “not considering hypothetical, contextual situations regarding the adoption or application” of federal forum-selection provisions. Without deciding hypotheticals, however, the Court observed that a forum-selection provision invoked against “existing stockholders” alleging material misstatements and omissions in a prospectus would likely be enforceable. The Court also cautioned—without elaboration—that forum-selection provisions will be struck down if found “inequitable,” “unreasonable and unjust,” to “overreach,” or if otherwise found to contravene public policy.
Federal forum-selection provisions are an important tool for corporations seeking to litigate 1933 Act claims in federal court and to avoid state-court litigation of these claims. Salzberg provides welcome validation of such provisions, but for now that validation is uncertain in scope.