A recent Delaware Court of Chancery decision must be read by anyone interested in the latest iteration of Delaware law concerning when a non-signatory may be bound by a forum selection clause in an agreement. In Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), the court provides the most thorough analysis of the titular topic that this reader is aware of, with scholarly insights and copious citations that explain the theoretical underpinnings that support a decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

The court granted an anti-suit injunction to prevent litigation from proceeding in Texas that was contrary to the forum selection clause to which the court found both a parent corporation and its wholly-owned subsidiary to be bound, based on the extensive reasoning provided in this opinion.

Issue Presented:

The issue presented in this decision was whether a non-signatory can be bound to a forum selection clause based on equitable estoppel or promissory estoppel. The court needed to determine whether the Flotek Sub was bound by the agreement signed by the Flotek Parent company before deciding if a particular issue was covered by the forum selection clause. The court conducted a claim-by-claim analysis to determine if the claims filed in another forum were covered by the forum selection clause at issue.

Key Facts:

The Flotek Parent in this case was a party to a Purchase Agreement with a Delaware forum selection clause. But the Flotek Subsidiary involved in this case was not a party to that agreement. Rather, the Flotek Sub was only a party to a separate Supply Agreement–that was referred to in the Purchase Agreement as an exhibit. The Purchase Agreement’s Delaware forum selection provision covered disputes related to other agreements such as the Supply Agreement. The supply agreement did not contain a forum selection provision.

Key Takeaways:

• It’s always useful to be reminded of the well-worn prerequisites for a preliminary injunction which the court provides at page 12.

• A reminder of basic Delaware contract interpretation principles is provided at pages 14-15.

• The court observes a truism of Delaware contract law that when more than one agreement is part of a unitary transaction, and when one contract is referred to in another, they are all interpreted as one contract. See Slip op. at 17-18. However, the court explained that this principle alone would not apply to require the claims of the Flotek Sub to be prosecuted in Delaware. See Slip op. at 32.

• The court restated a three-part test for determining when a non-signatory would be bound by a forum selection clause. See Slip op. at 33-48. The court modified the three-part test announced in the Chancery decision in Capital Group, 2004 WL 2521295, at *5. The first two parts of the test are as follows:

(i) the agreement contains a valid forum selection provision;

(ii) the non-signatory has a sufficiently close relationship to the agreement, either as an intended third-party beneficiary under the agreement or under principles of estoppel (such as equitable estoppel or promissory estoppel).

• The third element of the test described in the Capital Group case was the subject of extensive analysis and modification in this opinion.

• The court discussed the principles of estoppel that would bind a non-signatory to a forum selection clause: (i) a non-signatory accepted a direct benefit from the agreement; or (ii) a non-signatory had a close relationship to the agreement; a signatory to the agreement controlled the non-signatory; and the circumstances established that the signatory agreed to the forum selection provision on behalf of its controlled affiliate. Slip op. at 34. See also footnote 5. The court described the direct-benefit test as resting on principles of equitable estoppel, and the foreseeability test as introducing a measure of promissory estoppel. The court discussed at great length both the direct-benefit test and the foreseeability test. See Slip op. at 35-39.

• The third element in the Capital Group test, which the court modified, included the “same-agreement rule” that limited when a non-signatory would be bound, but that the Court of Chancery in this case decided not to follow.

• Among the extensive reasons given for not following that “same-agreement rule” in the third element of the Capital Group test are the following:

“That outcome [if the same-agreement rule applied] runs contrary to the underlying principles of estoppel that lead to the forum selection provision binding the non-signatory. When a non-signatory accepts a direct benefit under an agreement, principles of equitable estoppel demand that the non-signatory accept the burdens associated with that agreement, including a forum selection provision.”

Slip op. at 44.

• As applied to the facts of this case, the principles of estoppel called for enforcing the Delaware forum provision against the Flotek Sub. The Flotek Parent promised to litigate all claims arising out of or relating to the Supply Agreement in Delaware through the Delaware forum provision in the Purchase Agreement which encompassed related agreements among those claims that were within the forum selection provision. If the same-agreement rule were applied, it would permit the Flotek Parent to escape that promise.

• This decision interpreted the third element of the Capital Group test as asking whether the claims at issue fall within the plain language of a forum selection provision.

• This decision conducted a claim-by-claim analysis of the causes of action in a suit filed in Texas to determine whether they fell within the Delaware forum provision for purposes of an anti-suit injunction against the Flotek Parent. The court’s extensive reasoning explained why the Delaware forum selection provision also binds the Flotek Sub to the same degree as the Flotek Parent.

• The court’s holding also is based on the reasoning that it would allow parties to “enter into overarching forum selection provisions in a primary agreement without requiring that every controlled affiliate become a party to that agreement.”  The court further reasoned that the approach announced in this decision also promotes freedom of contract by enabling a controller to enter into an overarching forum selection provision and avoids the need for separate provisions in each agreement or the potentially cumbersome solution of having every controlled affiliate become a party to a primary agreement.

A recent decision by a Delaware Court of Chancery provides a useful reference for the prerequisites to obtain an injunction in Delaware to enjoin a party from pursuing claims in violation of an exclusive forum selection clause [in another jurisdiction]. In SPay, Inc. v. Stack Media Inc., C.A. No. 2020-0540-JRS (Del. Ch. March 23, 2021), the Delaware Court of Chancery described what one must establish before obtaining an anti-suit injunction based on a forum selection clause. See pages 5 and 6, and footnotes 11-15.

The court also described the elements for a claim of fraud in the inducement. See pages 9 and 10.

Also of note in this ruling is a basic principle of Delaware contract interpretation which requires a court to view a contract claim in the context of the whole relationship between the parties in order to “give sensible life” to the contract. See footnote 28 and related text.

A recent Delaware Court of Chancery opinion interpreted related agreements that included forum selection clauses that were conflicting.  In Mack v. Rev Worldwide, Inc., C.A. No. 2019-0123-MTZ (Del. Ch. Dec. 30, 2020), the court addressed forum selection provisions in two related agreements which the court treated as one because they were incorporated by reference.

The court was asked to decide whether Delaware was the proper forum when one of the forum selection clauses required courts in Texas to address certain issues–and the other forum selection provision provided for a California court to hear disputes.

Key Takeaways:
● The court recited the well-established Delaware law about the enforceability of forum selection clauses generally.  Slip op. at 15 to 17.
● The court also addressed Rule 12(b)(3) motions challenging venue and whether arguments required to be made in an initial Rule 12 motion are waived if all the grounds for such motions are not explained, as well as the impact of a second motion under Rule 12 in connection with an amended complaint.  The court explained why those arguments would generally not be waived, even if all the grounds for such a motion were not recited in the original motion.
● The court also observed that in some instances non-signatories to a forum selection clause may also be bound by it.
● The court reasoned that unlike the typical situation where conflicting forum selection clauses choose Delaware and another forum, in this instance competing forum selection clauses both required litigation in states outside of Delaware. Therefore, the court determined that because neither of the parties chose Delaware, a court in one of the other two forums selected would need to decide which of them would address the merits of the case.

A recent Court of Chancery decision is almost as noteworthy for what it decided as for what was not decided. In JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Delaware’s court of equity enforced an exclusive forum selection clause in a company charter, based at least in part on the internal affairs doctrine, to prevent a stockholder in a Delaware corporation from filing suit in California in reliance on a California statute to demand the inspection of corporate records, notwithstanding a California statute that appears to allow a stockholder to sue in California for corporate records if the Delaware company has its principal place of business in California.

What the court did not decide is whether a stockholder may contractually waive her rights under DGCL section 220. Count this writer as a skeptic on that point. The court reviewed several overlapping agreements, such as a stock option exercise agreement, that the stockholder signed and that purported, at least in the company’s view, to waive inspection rights under DGCL section 220. Some of the agreements were governed by Delaware law and some by California law.

This decision could be the topic of a law review article due to the many core principles of corporate law and doctrinal underpinnings the court carefully analyzes. Alas, for now, I’ll only provide a few bullet points with an exhortation that the whole opinion be reviewed closely.

    • The court provides an in-depth discussion of the foundational concepts that undergird the internal affairs doctrine as it applies to the request for corporate records, as well as related constitutional issues that arise.
    • But footnote 7 acknowledges contrary authority that suggests that a local jurisdiction may apply its law to a demand by a local resident for corporate records of a foreign corporation.
    • The court compares DGCL section 220 with its counterpart in the California statutory regime.
    • The exclusive forum selection clause in the charter was addressed, and the court explained that but for this provision, the California court would be able to apply DGCL section 220.
    • Importantly, the court emphasized that is was not deciding whether a waiver of DGCL section 220 rights would be enforceable. Although at footnote 14 the court provides citations to many Delaware cases that sowed doubt about the viability of that position–but then the court also cited cases at footnote 15 that more generally recognized the ability to waive even constitutional rights.
    • Footnote 16 cites to many scholarly articles, and muses about the public policy aspects of the unilateral adoption of provisions in constitutive documents, such as forum selection clauses in Bylaws. Early in the opinion, at footnote 7, by comparison the court waxes philosophical about the concept of the corporation as a nexus of contracts–as compared to it being viewed as a creature of the state. The latter view has implications about the exercise of one state’s power in relation to other states, especially when private ordering may be seen as private parties exercising state power by proxy.
    • By coincidence or otherwise, this decision was published the same week that a California court in another case refused to enforce a Delaware forum selection clause because the California court ruled that forcing a California resident to litigate in the Delaware Court of Chancery would deprive that resident of a constitutional right to a jury trial.
    • The foregoing hyperlink leads to an article in Delaware Business Court Insider of Aug. 7, 2020, that describes an apparent settlement to allow the case to proceed in Delaware Superior Court, a trial court of general jurisdiction with juries available. The counterpart suit in Delaware has its own procedural history. See William West v. Access Control Related Enterprises, LLC, et al., C.A. No. N17C-11-137-MMJ-CCLD, opinion (Del. Super. June 5, 2019).

Delaware law allows for non-signatories to be bound by a forum selection clause if a three-part test is met, and a recent Delaware Court of Chancery opinion provides an analysis of those factors while granting a motion to dismiss in Highway to Health, Inc. v. Bohn, No. 2018-0707-AGB (Del. Ch. April 15, 2020).

The most noteworthy aspects of this pithy decision are: (i) a reminder that Delaware enforces forum selection clauses; and (ii) that a non-signatory can be bound by a forum selection clause if a three-part test is satisfied. See footnotes 46-47 and accompanying text. The directors of a Delaware company sought a declaratory judgment against non-residents of Delaware regarding a dispute about stock-appreciation-rights (SAR) that, by contract, required the board to fulfill fiduciary duties towards the SAR holders.

Three-Part Test for Binding Non-signatories

The three-part test requires one to demonstrate that: (i) the forum selection clause is valid; (ii) the non-signatories are third-party beneficiaries; and (iii) the claims arise from their standing relating to the agreement. Slip op. at 15. The third element of the test was not satisfied based on the facts of this case because the agreement containing the forum selection clause was not the same agreement that gave rise to the substantive claims brought by or against the non-signatories.

Long-Arm Statute and Specific Personal Jurisdiction

This decision also features an analysis of the Delaware long-arm statute, and explains why the “specific jurisdiction” requirements under Section 3104(c)(1) of Title 10 of the Delaware Code were not satisfied because there was no relevant act that actually occurred in Delaware. The Court factually distinguished a case that found specific jurisdiction based on an amalgamation of factors that included: Delaware lawyers drafting the agreement at issue; a Delaware choice-of-law provision; and issues related to the sale of capital stock in a Delaware company. See NRG Barriers, Inc. v. Jelin, 1996 WL 377014 (Del. Ch. July 1, 1996).

Although the plaintiffs in this case did not avail themselves of the opportunity, the Court observed that limited discovery may be allowed in connection with the plaintiff satisfying its burden of proof to establish personal jurisdiction over defendants.

A recent Delaware Court of Chancery decision entertained a request for expedited relief in Delaware despite a New York forum selection clause, in part due to the unavailability of the New York Courts that were not fully operational due to the coronavirus shutdown. Francis Pileggi and Chauna Abner co-authored an article with an overview of the ruling in Conduent Business Services v. Skyview Capital, C.A. No. 2020-0232-JTL, Transcript Ruling at **33-34 (Del. Ch. Mar. 30, 2020), for the Delaware Business Court Insider in its recent edition. The full article appears below.

“While New York Court System is ‘Unavailable’ Delaware Court of Chancery Permits Parties to Seek Relief in Delaware Despite a New York Forum Selection Clause”

by: Francis G.X. Pileggi and Chauna A. Abner

Amidst the COVID-19 pandemic, the Delaware Court of Chancery recently held that despite a forum selection clause designating New York as the appropriate venue to litigate disputes arising under an agreement, the parties could seek relief in the Court of Chancery because New York courts were unavailable.  Conduent Bus. Servs., LLC v. Skyview Capital, LLC, C.A. No. 2020-0232-JTL, Transcript Ruling, at **33-34 (Del. Ch. Mar. 30, 2020).

In Conduent Business Services, the complaint asserted an anticipatory breach of an asset purchase agreement and sought a declaratory judgment interpreting the terms of the agreement. Id. at 10. That agreement had a forum selection clause designating New York as the forum to litigate disputes arising from the contract. Id. at *19. Before the Court was plaintiff’s motion for expedited proceedings.

The defendant argued that plaintiff’s claim for relief was not colorable because venue was not appropriate. Id. at *20. The defendant contended that the applicable law under the contract is New York law, and the Court should not impose “an exception to what remains New York law for which the parties bargained.” Id. at *18. The defendant argued that “part of the corpus of New York law right now is how the New York courts are handling commercial cases. And that includes, as both sides have briefed, that right now they are not handling this.” Id. at **17-18. Finally, the defendant noted that the New York courts provided for emergency applications and the plaintiff did not make that application. Id. at **18-19.

In response, the plaintiff urged that it was not “trying to stomp on the venue clause” and that it was “just trying to make sure that [it] can protect [it]sel[f] from irreparable harm while the New York courts are closed.” Id. at *32.

In ruling on whether venue was appropriate, Vice Chancellor Laster stated: “frankly, I think the fact that the New York Court is unavailable is pretty dispositive.” Id. *10. He explained that there is no dispute that “under normal circumstances, the forum selection clause in New York would be binding.” Id. at *33. Thus, he phrased the issue as “whether the circumstances, where New York — for understandable reasons given, the current crisis that the city is facing — has decided not to accept expedited commercial matters constitutes a situation that allows the parties to resort to other tribunals that are potentially capable of granting emergent or expedited relief.” Id.

In holding that venue was proper in the Court of Chancery to resolve the motion to expedite, the Court reasoned that “case law holds that where a forum selection clause specifies a forum that is unavailable, parties can resort to a different forum, where appropriate jurisdiction exists” and that case law applies here. Id. The Court explained that this ruling was not intended to disrespect the courts of New York, but it acknowledges that “[t]he reality is that [New York courts] face an extraordinary situation right now, and so it’s understandable that they’d be in a position where they can’t handle disputes.” Id. at **33-34.

Given the uncertain times that the COVID-19 pandemic has resulted in, including the unknown long-term effects, if any, that it will have on courts throughout the country, the Court’s ruling that “people can go to other courts, if the jurisdictional bases are met, and seek relief in those courts” is of paramount importance. Id. at *34. Although this is a transcript ruling, in Delaware, parties may cite transcript rulings in briefs as authority.

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.

The Delaware Supreme Court recently ruled that the Court of Chancery wrongly decided to move a Swiss holding company’s dispute over Allomet Corp.’s stock from Delaware to Austria, even though the struggling metal powder coating company did not carry its burden of proof under a financing pact’s forum selection clause, in Germaninvestments AG, et al. v. Allomet Corp., et al., Del. Supr., No. 2019 (Jan. 27, 2020).

Justice Karen L. Valihura’s Jan. 27 opinion on behalf of a three-justice panel reversed Chancery’s Rule 12(b)(3) dismissal of Germaninvestments AG’s suit to force Allomet to transfer stock, intellectual property and land in return for loans and investments that kept it afloat.

The Vice Chancellor held that under European Union regulations, companies in member nations like Austria can use a mandatory forum selection clause to designate a single jurisdiction to resolve their disputes and that’s what the 2017 Allomet Restructuring and Loan Agreement did. See Germaninvestments AG, et al. v. Allomet Corp., et al., No. 2018-0666-JRS, 2019 WL 2236844 (Del. Ch. May 23, 2019).

But in its partial reversal, the high court found that the vice chancellor wrongly put the forum burden of proof on Germaninvestments AG and should have required expert testimony throughout the briefing on the complex and novel question of the application of foreign law.

Who’s burden of proof?

The appellate panel said Allomet had the burden of proof in establishing foreign law but failed to carry it, so Delaware law should be applied to the forum selection issue, and the result is that the loan agreement’s forum clause is permissive, enabling the Chancery Court case to continue.

Recognizing that there are “very few decisions from this Court that can serve as a reference  in this area,”  it said, “we hold that the party seeking application of foreign law has the burden not only of raising the issue of the application of foreign law, but also, of establishing the substance of the foreign law to be applied.”

The dispute arose over loans and investments that Germaninvestments AG — a Swiss holding company formed to manage the Herrling family’s assets — made in Allomet and the tentative joint venture that the investors and Allomet’s owners formed in 2017 to raise capital.

In May of that year, the parties drafted a Restructuring and Loan agreement to pave the way for the July 3 formation of AHMR GmbH, an Austrian holding company in which the Herrlings and Allomet pioneer Dr. Hannjorg Hereth would eventually hold all of Allomet’s stock.

No final draft

An immediate transfusion of capital in the form of a series of loans totaling $850,000 began and the temporary pact was extended; however, according to the court record, trouble began over how the loans would translate into equity for the investors and negotiations for a permanent agreement that would address that issue broke down in May 2018.

The Hereth faction took the position that the Herrlings could not claim any stock in Allomet and deserved the return of only “a fraction” of their loans and investments, sparking the Chancery Court complaint asking for a “reissue” of stock owed to them.

The Herrlings’ suit also claimed breach of the agreements and unjust enrichment as a result of the alleged failure to transfer all of Allomet’s outstanding stock, property and intellectual property to them.

The defendants won the motion to dismiss in favor of the Vienna court even though they “provided scant information to the Court of Chancery on Austrian law, citing to Article 25 of the Brussels Regulation …but no cases in support of their Rule 12(b)(3) motion on the substance of Austrian law” Justice Valihura wrote.

The plaintiffs argued that:

·     The forum clause is neither mandatory nor enforceable with respect to their stock replacement claim under Section 168 of the Delaware General Corporation Law.

·     The defendants failed to carry their burden of proof because they made only conclusory statements on Austrian law, so the forum clause is permissive under either Delaware or Austrian law.

·     Even an Austrian court would not find that the forum clause would confer mandatory jurisdiction on Vienna courts because it should be interpreted in accordance with Delaware law.

·     Article 8 of the Brussels Regulation provides that the defendants can be sued where their corporation is domiciled — in Delaware.

The high court found that the plaintiffs had supported their arguments with citations to translated Austrian cases and that in a reply in support of their motion for re-argument on the Chancery Court decision, they had provided a law school professor’s expert opinion on Austrian law.

Justice Valihura noted the Vice Chancellor’s frustration with the sparse, eleventh-hour amount of citation and expert opinion on novel foreign law issues, but said without soliciting further information from the parties, he dismissed the complaint.

“The failure to identify, early on and properly join the issues, coupled with the lack of any expert input on the numerous nuances of Austrian and European law that were ultimately raised, lead us to conclude that the Court of Chancery erred in determining that appellees had satisfied their burden of proof,” the Justice said.

However, she affirmed the vice chancellor’s finding that Section 168 — which deals with lost, stolen or destroyed stock certificates — “does not fit” for competing stock ownership claims where the certificates are “in a vault in Austria” pending resolution of this suit.

A recent Court of Chancery decision is noteworthy for its analysis of the interfacing between a forum selection clause requiring Delaware jurisdiction and the law of a foreign country ostensibly granting exclusive jurisdiction to the courts of that foreign country. In AlixPartners, LLP v. Mori, No. 2019-0392-KSJM (Del. Ch. Nov. 26, 2019), the court explained, relying on Delaware Supreme Court decisions, that in only very limited circumstances will the law of a foreign country that provides for exclusive jurisdiction in that foreign country, divest Delaware courts of subject matter jurisdiction–especially when a forum selection clause between the parties before it provided for exclusive Delaware jurisdiction. (A graphic of the Roman forum seemed appropriate for this case.)

Brief Overview:

The facts of this case involve an intricate web of connected and overlapping agreements and related Delaware and foreign entities. For purposes of this short overview, the key facts are that an employee of an Italian subsidiary of a Delaware entity, who had an employment contract governed by Italian law, also signed a partnership agreement with the Delaware entity that had a non-solicitation clause and a Delaware forum selection clause. The employee was accused of downloading confidential information and related activity in violation of the Delaware agreement. However, Italian law required the claims under the employment agreement governed by Italian law to be pursued exclusively in the courts of the country of Italy, even without a forum clause in that agreement.

This case features an unusual twist on the many cases highlighted on these pages over the last 15 years involving the enforceability of forum selection clauses.

Key Takeaways:

  • The court rejected defenses based on the applicable law of Italy and the law of the European Union–which required that certain claims be pursued in Italy–and explained that such foreign laws did not divest the Delaware court of subject matter jurisdiction, especially in light of an applicable forum selection clause providing for Delaware courts to address the majority of the disputes at issue.
  • The court relied on two Delaware Supreme Court cases that addressed the very limited circumstances where a foreign country’s exclusive jurisdictions statute will divest the Delaware courts of jurisdiction. See Slip op. at 14 and footnotes 44 and 45.
  • The court also explained, relying on prior Delaware court decisions, that even a non-signatory can be bound to a forum selection clause–which is also considered to constitute consent to personal jurisdiction that satisfies a due process analysis. See pages 25 to 29.
  • The court explained that a forum selection clause supersedes any defense based on forum non conveniens as well as an argument based on international comity.
  • Nonetheless, the court found that the employment agreement involved in this case, that had an Italian choice of law clause (but no forum selection clause), supported the entry of a stay of the claims related to that employment agreement based on forum non conveniens, and that result is also supported by the fact that Italy had the most substantial relationship to all the facts, the issues and the witnesses, who likely would not be subject to compulsory process in Delaware.
  • But see footnote 138, in which the court requires the parties to meet and confer to determine if there is a way to stay the proceedings “in Delaware or Italy to avoid having both courts determine overlapping issues.” The court reserved its right to reconsider its ruling on the stay depending on the outcome of the parties’ efforts to determine whether duplication of efforts can be avoided by the courts of Delaware and Italy.

For readers who follow the law regarding forum selection clauses, a recent article by Professor Joseph Grundfest should be of interest. The good professor addresses the December 2018 Court of Chancery decision in Sciabacucchi v. Salzberg (highlighted on these pages), and the intersection of Delaware law and Federal law in the context of forum selection clauses and the internal affairs doctrine. The abstract follows to his article titled: The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

Abstract

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

In Sciabacucchi, Chancery applies “first principles” to invalidate FFPs primarily on grounds that charter provisions may only regulate internal affairs, and that Securities Act claims are always external. In so concluding, Sciabacucchi adopts a novel definition of internal affairs that is narrower than precedent, and asserts that plaintiffs have a federal right to bring state court Securities Act claims. It describes all Securities Act plaintiffs as purchasers who are not owed fiduciary duties at the time of purchase. The opinion constrains all actions of the Delaware legislature relating to the DGCL to comply with its novel definition of “internal affairs.”

Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect. It asserts that FFPs are “contrary to the federal regime” because they preclude state court litigation of Securities Act claims. But the U.S. Supreme Court in Rodriguez holds that there is no immutable right to litigate Securities Act claims in state court, and enforces an agreement that precludes state court Securities Act litigation. Sciabacucchi assumes that Securities Act plaintiffs are never existing stockholders to whom fiduciary duties are owed. But SEC filings and the pervasiveness of order splitting conclusively establish that purchasers are commonly existing holders protected by fiduciary duties. The opinion fears hypothetical extraterritorial application of the DGCL. To prevent this result, it invents a novel definition of “internal affairs” that it applies to constrain all of the Legislature’s past and future activity. But the opinion nowhere addresses the large corpus of U.S. and Delaware Supreme Court precedent that already precludes extraterritorial applications of the DGCL. It thus invents novel doctrine that conflicts with established precedent in an effort to solve a problem that is already solved. The opinion’s novel, divergent definition of “internal affairs” also conflicts with U.S. and Delaware Supreme Court precedent that the opinion nowhere considers.

Sciabacucchi is additionally problematic from a policy perspective. By using Delaware law to preclude a federal practice in federal court under a federal statute that is permissible under federal law, Sciabacucchi veers Delaware law sharply into the federal lane and creates unprecedented tension with the federal regime. Its narrow “internal affairs” definition invites sister states to regulate matters traditionally viewed as internal by Delaware, and advances a position inimical to Delaware’s interests. By propounding its divergent internal affairs constraint as a categorical restriction on the General Assembly’s actions, past and future, the opinion causes the judiciary to intrude into the legislature’s lane. And, data indicate that the opinion in Sciabacucchi caused a statistically and economically significant decline in the stock price of recent IPO issuers with FFPs in their organic documents.

In contrast, a straightforward textualist approach would apply the doctrine of consistent usage and use simple dictionary definitions to preclude any extension of the DGCL beyond its traditional bounds. Textualism avoids all of the concerns that inspire the invention of a divergent “internal affairs” definition. Textualism does not require counter-factual assumptions, conflict with U.S. or Delaware Supreme Court precedent, cause Delaware to constrain federal practice in a manner inconsistent with federal law, or advocate policy positions inimical to Delaware’s interest. Textualism also interprets the DGCL in a manner that profoundly constrains the ability of all Delaware corporations to adopt mandatory arbitration of Securities Act claims. Textualism validates FFPs in a manner that precludes the adverse, hypothetical, collateral consequences that animate Sciabacucchi’s fragile analysis, without generating Sciabacucchi’s challenging sequelae.

Keywords: Securities Act, forum selection, Delaware, jurisdiction, litigation, Section 11, charters, by-laws, internal affairs, federal forum provisions

JEL Classification: K22, K41

Suggested Citation

Grundfest, Joseph A., The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi (September 12, 2019). Rock Center for Corporate Governance at Stanford University Working Paper No. 241. Available at SSRN: https://ssrn.com/abstract=3448651 or http://dx.doi.org/10.2139/ssrn.3448651

 

There are many decisions highlighted on these pages ordering the enforcement of forum selection clauses. A recent transcript ruling is notable for granting expedited proceedings, without ruling on the merits, for a plaintiff who sought to enforce a forum selection clause even though the plaintiff was not a signatory to the agreement with the forum selection clause.

The plaintiff in this case is a law firm seeking to enforce a forum selection clause in a release and settlement agreement that released the attorneys of the signatory. See Dentons US LLP, v. Platt, C.A. No. 2019-0177-MTZ, transcript (Del. Ch. March 20, 2019). Regular readers are aware that transcript rulings may be cited in Delaware briefs.