December 20, 2018

Court of Chancery Declares Federal Forum Provisions Invalid

The Delaware Court of Chancery issued a decision on Wednesday in Sciabacucchi v. Salzberg, et al., C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018) declaring that federal forum selection provisions purporting to require claims under the Securities Act of 1933 be brought in federal court (the “Federal Forum Provisions”) are “ineffective and invalid.” These Federal Forum Provisions had been adopted in reaction to the United States Supreme Court decision ruling in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), finding that the Securities Litigation Uniform Standards Act of 1998 did not eliminate concurrent state court jurisdiction over class action lawsuits asserting claims under the Securities Act of 1933. Given concerns about stockholder litigation proceeding in state courts, companies such as Blue Apron, Stitch Fix, and Roku included Federal Forum Provisions in their certificates of incorporation in advance of their recent public offerings.

In Sciabacucchi, the plaintiff stockholder argued that the provisions adopted by Blue Apron, Stitch Fix and Roku are not permissible under Delaware law. Specifically, plaintiff argued that the purpose of the Federal Forum Provisions are to regulate choice of venue in actions that do not assert internal corporate claims governed by Delaware law. Plaintiff argued, alternatively, that to the extent claims under the Securities Act of 1933 are classified as internal corporate claims, then these Federal Forum Provisions are inconsistent with the Delaware General Corporation Law (the “DGCL”) as it provides that, with respect to internal corporate claims, “no provision of the certificate of incorporation . . . may prohibit bringing such claims in the courts of this State.”

In its ruling on Wednesday, the Delaware Court of Chancery relied heavily on Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. June 25, 2013) in which the court found that Delaware corporations can adopt forum selection clauses for internal affairs claims but not for disputes external to the corporation. Relying on Boilermakers, the court determined that “a 1933 act claim is external to the corporation” as “[f]ederal law creates the claim, defines the elements of the claim and specifies who can be a plaintiff or a defendant.” The court rejected defendants’ argument that “issuing securities and defending against securities lawsuits involve the business and affairs of the corporation.” The court noted that, while that assertion was true, “it does not follow that these matters involve the internal affairs of the corporation.” The court concluded that Delaware corporations do not have the power to adopt in their charter or bylaws forum-selection provisions governing external claims such as the Federal Forum Provisions challenged by the stockholder in this case.

Given the significance of this decision, it is reasonable to expect that defendants will file an appeal to the Delaware Supreme Court. We do not expect that this will be the final word on the validity (or invalidity) of Federal Forum Provisions.