This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
In a milestone opinion, the Delaware Supreme Court has ruled that the state’s corporation law permits Delaware chartered companies to designate the federal courts for all shareholder securities suits alleging disclosure violations in their initial and secondary public offerings in Salzberg et al. v. Sciabacucchi et al. No. 346-2019, opinion (Del. March 18, 2019).
The en banc court’s unanimous March 18 opinion reversed a Chancery Court decision that invalidated the exclusive forum selection clauses in Blue Apron Holdings Inc., Roku Inc. and Stitch Fix Inc.’s charters.
Vice Chancellor Travis Laster’s ruling found that such bylaws wrongly barred stockholders from suing in state court over issues that were outside Delaware’s internal governance purview. Sciabacucchi v. Salzberg, 2018 WL 6719718, (Del. Ch. Dec. 19, 2018).
Herded into federal court
The widely-anticipated high court ruling effectively lets companies steer shareholder plaintiffs into federal court where charges under the federal Securities Act of 1933 must survive a procedural test of their substance. The justices also said their decision would not interfere with federal law or the jurisdiction of other states because its effect was basically procedural.
The stakes in the defendant companies’ appeal of plaintiff Matthew Sciabacucchi’s victory in the Chancery Court were raised by the U.S. Supreme Court’s 2018 decision in Cyan v. Beaver County Employees’ Retirement Fund, in which the high court said 1933 Act securities claims could be filed in federal or state courts. Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1066 (2018).
That precipitated a surge of Section 11 disclosure actions in state courts, mandatory forum selection clauses in corporate charters and Sciabacucchi’s suit for a declaratory judgment invalidating the charter provisions of the three defendant companies in which he had invested.
Based on Boilermakers?
Vice Chancellor Travis Laster’s decision in the plaintiff’s favor was based on Boilermakers v. Chevron Corp. a ruling by former Chief Justice Leo E. Strine when he was on the Chancery Court bench. Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013)
Vice Chancellor Laster interpreted that ruling as holding that Delaware corporations could adopt a forum selection bylaw to regulate “internal affairs claims brought by stockholders qua stockholders,” but not “to regulate external relationships” such as securities law matters.
He held that Delaware General Corporation Law Section 102(b)(1) empowers companies to adopt bylaws only relating to the area of internal affairs, such as alleged violations of the duties of officers and directors, but not securities law claims.
On appeal, the defendant companies led by William B. Chandler, of Wilson Sonsini Goodrich & Rosati — the former Delaware Chancellor — argued that Section 102(b)(1) has always been interpreted broadly to mean “for the management of the business”, even when that involves “intra-corporate” matters such as stock sales.
The defendant companies maintained that claims under Section 11 of the ’33 Act are indeed external an inappropriate for charter bylaws because they involve stockholders only in the role of purchaser or seller.
Definition too restrictive
However, the unanimous high court found the vice chancellor’s definition of internal governance to be too restrictive, noting that the U.S. Supreme Court had decided, in Matsushita Electric v. Epstein, that Delaware courts can settle claims subject to exclusive federal jurisdiction without violating federal law or policy. Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367, 377, 382 (1996).
Justice Valihura acknowledged that “intra-corporate” matters such as Section 11 disclosure claims are not at the heart of traditional corporate governance territory and might be close to the outer band of external matters in some respects.
She also noted the concern that Delaware’s endorsement of forum selection bylaws might be viewed by sister states as “an out-of-our-lane power grab,” but she said there is a strong argument that as a facial matter at least, it does not violate principles of “horizontal sovereignty” among states.
The high court reversed the declaratory judgment ruling and the $3 million fee award the plaintiff’s lawyers received for successfully invalidating the bylaws.