On March 18, 2020, in a landmark ruling in Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020), the Delaware Supreme Court upheld the validity of provisions of corporate articles of incorporation that require shareholders of a Delaware corporation to sue in federal court, rather than state court, over alleged violations of the Securities Act of 1933 (the "Securities Act"). The Court's 53-page decision provides Delaware corporations with much-needed flexibility and discretion to manage more efficiently Securities Act litigation. WilmerHale is pleased to have represented one of the corporations that prevailed in the litigation.
Previously, in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), the United States Supreme Court opened the floodgates to state court Securities Act litigation by holding that state courts have concurrent jurisdiction over Securities Act claims, with no right of removal to federal court. Following Cyan, there was a marked increase in state court litigation of Securities Act claims, particularly claims brought in the wake of initial public offerings. This development proved problematic and expensive for many companies. Litigation in multiple courts arising out of the same offerings against the same defendants quickly ensued. An increase in insurance premiums and heightened concern over the risk of increased litigation exposure followed.
Some corporations responded to this development by including in their articles of incorporation so called "federal forum provisions," which require shareholders to bring Securities Act claims only in federal court. In Salzburg, a shareholder brought a facial challenge to such provisions as enacted by three companies. In a closely followed and highly publicized decision, the Delaware Court of Chancery held that federal forum provisions were invalid under Delaware law.
On March 18, 2020, the Delaware Supreme Court reversed. The Court found that federal forum provisions are facially permissible under the plain text of 8 Del. C. § 102(b)(1), which specifies which matters corporations may include in their articles of incorporation. The Court found that, because "[federal forum provision]s involve a type of securities claim related to the management of litigation arising out of the Board's disclosures to current and prospective stockholders in connection with an IPO or secondary offering," the provisions "easily" fall within the broad category of matters that articles of incorporation may address. The Court also held that the federal forum provisions were not contrary to the policies or laws of Delaware. Addressing one of the main concerns raised in the briefing—offending sister states—the Court emphasized that the enforceability of forum selection clauses could still be challenged on a case-by-case basis, and, for this reason, did not violate the sovereignty of other states. Finally, the Court observed that federal forum provisions provide "certainty and predictability, uniformity, and prompt judicial resolution to corporate disputes," and "avoid duplicative efforts among courts in resolving disputes."
This landmark opinion provides Delaware corporations with a potentially powerful tool to exercise control over the venue for Securities Act litigation, avoiding duplicative litigation filings and steering cases to federal courts that are accustomed to hearing federal securities claims. Delaware corporations would be well-advised to consider whether to add federal forum provisions to their articles of incorporation.
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