Practical Considerations for Private and Public Company Clients in Light of the Delaware Supreme Court's Decision Upholding Federal Forum Provisions

Wilson Sonsini Goodrich & Rosati

Last week, the Delaware Supreme Court issued an important decision upholding the validity of "Federal Forum Provisions" in corporate charters requiring that claims under the Securities Act of 1933 (the "'33 Act") be brought in federal court. Wilson Sonsini previously issued an alert (available here) describing the opinion, which represents a significant development in Delaware law and which should have important implications for pre-IPO companies that are considering adopting a Federal Forum Provision in their post-IPO charters as well as for public companies. Below are some of the key questions and considerations that follow from the decision:

Q.

Why were Federal Forum Provisions introduced?

A.

Shareholder claims involving a public offering (of equity or debt) can be brought pursuant to the '33 Act. A U.S. Supreme Court decision in 2018 confirmed that Section 11 claims may be brought in federal or state court. Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018). State court is generally a favorable forum for plaintiffs.

In response to Cyan, many companies began to include a Federal Forum Provision in their charter or bylaws. The Provision specified that a shareholder could only bring a Section 11 claim in federal court. No such provision is required for after-market shareholder class actions, brought under Section 10(b) of the Securities Exchange Act of 1934. Those claims can only be brought in federal court by statute.

The plaintiffs sued in the Delaware Court of Chancery to invalidate the provisions. The plaintiffs prevailed in the trial court, but lost on appeal.

Q.

Are Federal Forum Provisions subject to further judicial challenge or has their validity been settled?

A.

The Supreme Court's decision as to the proper interpretation of Delaware law is final and not subject to further appeal. Accordingly, Federal Forum Provisions are valid as a matter of Delaware law, though they remain subject to "as applied" challenges if and when corporations seek to dismiss '33 Act claims in state court on the basis of such a provision. An "as applied" challenge looks to, among other considerations, whether application of the particular forum selection provision at issue would be unreasonable under the circumstances or would contravene a strong public policy of the state where the lawsuit is brought.

Q.

My company is contemplating an IPO, should we adopt a Federal Forum Provision?

A.

While you should speak to your legal counsel, our recommendation is that any company looking to undertake a registered securities offering should adopt a Federal Forum Provision.

Q.

My company previously adopted a Federal Forum Provision but filed a Form 8-K to announce that the company would not enforce it until its validity was finally adjudicated. Should we file a Form 8-K to disclose that the company now intends to enforce it?

A.

Following the December 2018 decision by the Delaware Court of Chancery that initially invalidated Federal Forum Provisions, many companies that had previously adopted Federal Forum Provisions disclosed that they would not seek to enforce those provisions unless and until the Delaware Supreme Court issued a definitive ruling on their enforceability. We believe it is prudent for those companies to file 8-Ks to clarify that they intend to enforce their Federal Forum Provisions.

Q.

What are the implications for companies that have already adopted Federal Forum Provisions and are currently defendants in pending Section 11 cases in state courts?

A.

Now that the Supreme Court has ruled that Federal Forum Provisions are valid under Delaware law, we expect that most companies in this situation will seek to dismiss any pending state court lawsuits. It remains to be seen whether other state courts will enforce the Federal Forum Provisions to dismiss existing lawsuits, which will depend on considerations such as the stage of the litigation and any public policy considerations in that state that might come into play. Notably, although the Supreme Court's decision was limited to the facial validity of Federal Forum Provisions, the Supreme Court made a strong case for why other state courts should enforce them, observing that "[g]iven that many Section 11 claims closely parallel state law breach of fiduciary duty claims, many of the same reasons requiring application of the internal affairs doctrine would support the enforcement of [Federal Forum Provisions]." Opinion at 49-50.

Q.

Can post-IPO companies still adopt Federal Forum Provisions?

A.

Yes, and many should consider doing so because they may still face '33 Act claims in registered offerings, including follow-on equity offerings, secondary offerings, and offerings in connection with M&A transactions. Moreover, although the Supreme Court's decision dealt specifically with the validity of Federal Forum Provisions contained in corporate charters, the Court's reasoning should apply equally to federal forum selection provisions in board-adopted bylaws. It remains to be seen, however, whether a newly adopted Federal Forum Provision can be applied to subsequent lawsuits challenging IPO-related disclosures. Delaware law is clear that a forum selection bylaw can bind stockholders suing on conduct that predates adoption of the bylaw. But we certainly expect plaintiffs to make contrary arguments that Section 11 claims arising from purchases made prior to adoption of such a bylaw should be treated differently.

Q.

What other variations on the Federal Forum Provisions could we see adopted?

A.

We expect companies to tailor Federal Forum Provisions to suit their particular needs, consistent with the Supreme Court's clear message that Delaware corporate law allows "immense freedom" for companies to innovate and adapt to new situations. Nothing in the Supreme Court's analysis on the facial validity of Federal Forum Provisions suggests a provision limiting '33 Act claims to a specific federal court or courts would be inherently problematic, but such a provision would likely be more difficult to defend on an "as applied" challenge.

Wilson Sonsini represented appellants Stitch Fix, Inc. and Roku, Inc., and their respective directors, and Wilson Sonsini partner William B. Chandler III argued the appeal before the Supreme Court.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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