Corporate charter provisions that require shareholders to bring 1933 Act lawsuits in federal court are facially valid, the Delaware Supreme Court has held. See Salzberg v. Sciabacucchi, No. 346, 2019, ___ A.3d ___, 2020 WL 1280785 (Del. Mar. 18, 2020) (“Blue Apron”). The unanimous, en Banc March 18 opinion paves the way for Delaware corporations to adopt those provisions in their charters or by-laws. If widely adopted, those provisions could slow or reverse the trend of 1933 Act lawsuits’ being filed in state court, a trend that has accelerated since the U.S. Supreme Court confirmed in 2018 that investors could file such lawsuits in federal or state court. Given Delaware’s influence in corporate law, Blue Apron’s impact will likely be felt beyond Delaware, including by international companies with subsidiaries incorporated in the U.S. or considering incorporating subsidiaries in the U.S.
The 1933 Act – formally, the Securities Act of 1933 – governs the registration and issuance of securities in the U.S. It provides to investors private rights of action for material misstatements or omissions in registration statements or prospectuses. Liability for a corporation and its directors and officers is essentially strict under Section 11 of the 1933 Act.
Although private rights of action under federal law generally must be pursued in federal court, investors may file 1933 Act lawsuits in federal or state court. A 1998 federal law, the Securities Litigation Uniform Standards Act, appeared to curtail concurrent federal and state court jurisdiction in certain circumstances. But in 2018, the U.S. Supreme Court ruled that concurrent jurisdiction remains. See Cyan, Inc. v. Beaver Cnty. Employees Ret. Fund, 138 S. Ct. 1061 (2018). State court and parallel state and federal court filings have since jumped; and given the absence of effective mechanisms to consolidate and coordinate those filings, corporations and their directors and officers may face duplicative claims and conflicting rulings.1 Even before Cyan, corporations were evaluating strategies to ensure that shareholders file 1933 Act claims in federal court. Adopting a federal-forum provision in a corporate charter, such as the provisions at issue in Blue Apron, was one such strategy.
Sciabacucchi, the plaintiff-appellee in Blue Apron, was a shareholder in three Delaware corporations that had adopted federal-forum provisions before their initial public offerings. Sciabacucchi challenged the validity of those provisions and prevailed in the court of first instance, the Delaware Court of Chancery. The court held that using a federal-forum provision to regulate where shareholders could bring Securities Act claims runs afoul of precedent and “first principles.” Sciabacucchi v. Salzberg, No. 2017-0931, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018).
Pointing to precedent, the lower court distinguished between measures aimed at regulating shareholder lawsuits over a corporation’s internal affairs and its external affairs. Precedent permitted the former, but not the latter, according to the lower court. “The constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” Id. at *3.
Pointing to first principles, the lower court held that shareholder 1933 Act claims do not involve rights or relationships established under Delaware’s corporate law. The 1933 Act is a federal statute that sweeps broadly, the court observed; it is not specific to Delaware corporations, corporate officers and directors, or even to common stock. The court also noted that shareholder 1933 Act claims arise from the purchase of securities, not the purchaser’s status as a shareholder. “[S]tockholder status is incidental to the claim,” and consequently, the “claim falls outside the scope of the corporate contract.” Id. at *18.
The Delaware Supreme Court Opinion
The Delaware Supreme Court, sitting en banc, rejected the Chancery Court’s reasoning and reversed. The Court held that federal-forum provisions for 1933 Act claims were facially valid under Section 102(b)(1) of the Delaware General Corporate Law. That section governs the matters contained in Delaware certificates of incorporation. It authorizes “[a]ny provision for the management of the business and for the conduct of the affairs of the corporation,” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, … if such provisions are not contrary to the laws of this State.”
Federal-forum provisions for 1933 Act claims “could easily fit” within Section 102(b)(1)’s broad language, the Court held. 2020 WL 1280785, at *4. Given the sprawling, inefficient litigation and inconsistent court rulings that could result from concurrent state and federal court jurisdiction, federal-forum provisions that direct 1933 Act litigation into federal court “classically fit the definition of a provision ‘for the management of the business and for the conduct of the affairs of the corporation.’” Further, because they “prescribe where current and former stockholders can bring Section 11 [of the 1933 Act] claims against the corporation  and [its] directors and officers,” federal-forum provisions also “defin[e], limit and regulat[e] the powers of the corporation, the directors and the stockholders.” Id. at *5.
Turning to the lower court’s distinction between internal affairs and external affairs, the Court criticized it for defining “internal affairs” too narrowly. The lower court stated that 1933 Act claims are not strictly “internal” because they are not governed by Delaware substantive law. But neither are they “external” given that they “arise from internal corporate conduct on the part of the Board.” The claims are “intra-corporate,” the Court concluded. As such, the claims and federal-forum provisions that direct shareholders where to file them fit within Section 102(b)(1)’s broad ambit. Id. at *11, 18.
Finally, the Court held that federal-forum provisions for 1933 Act claims do not violate public policy. They do not undermine concurrent state and federal court jurisdiction over 1933 Act lawsuits because, the Court observed, the U.S. Supreme Court already has upheld contractual arbitration provisions that prevent litigating 1933 Act claims in state court. See id. at *18. They also do not represent overreach by Delaware. The provisions do not require non-Delaware shareholders to file 1933 Act lawsuits in Delaware. Those shareholders may bring 1933 Act lawsuits in the federal courts in their home states.
Blue Apron is a significant corporate and securities law decision from one of the most influential business courts in the U.S. It affirms that Delaware corporate law is “intended to provide directors and stockholders with flexibility and wide discretion for private ordering and adaptation to new situations.” Id. at *23. Federal-forum provisions are a specific example of that flexibility. Such provisions, if properly adopted and applied, could slow or reverse the post-Cyan trend of filing 1933 Act lawsuits in state courts.
Companies that are considering federal-forum selection provisions should be mindful that Blue Apron addresses whether those provisions are facially valid. It does not address whether those provisions are valid “as applied.” That question turns on the manner in which a particular provision is adopted and the circumstances under which it is invoked. A particular provision may be challenged on the grounds that it was adopted unlawfully, would lead to unjust results, or otherwise contravenes the forum’s public policy. See id. at 21.
Murphy & McGonigle, P.C.
1 We addressed these implications of Cyan in a May 19, 2019 Law360 article, “The Post-Cyan Spike In State Securities Act Filings.”