Delaware Court Rejects Forum Selection Provisions in Certificates of Incorporation Applied to ’33 Act Claims

by Jennifer Hadley Catero

The Delaware Court of Chancery recently moved the ball forward in the unfolding saga of the jurisdiction of state and federal courts to hear cases under the Securities Act of 1933, as amended (the “’33 Act”). In Sciabacucchi v. Salzberg, C.A. 2017-0931-JTL, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018), the Chancery Court addressed the validity of federal forum selection provisions in the certificates of incorporation of three Delaware corporations (Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc.) purportedly requiring stockholders to bring ’33 Act claims in federal court. The Chancery Court held that such provisions are “ineffective and invalid” to deprive the state courts of jurisdiction over ’33 Act claims. The result is that the proliferation of ’33 Act suits filed in state courts is likely to continue, much to the chagrin of corporate defendants who view state courts as a less desirable or friendly forum.

The genesis of the jurisdiction debate is a split in the courts that followed on the heels of the enactment of the Private Securities Litigation Reform Act and, subsequently, the Securities Litigation Uniform Standards Act – as to whether the federal courts have exclusive jurisdiction over ’33 Act claims. In early 2018, the U.S. Supreme Court resolved this issue unanimously in Cyan Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), holding that state courts continue to have concurrent jurisdiction over ’33 Act claims without the possibility of removal. However, following the Cyan decision, corporations continued to look for ways to confine ’33 Act litigation to federal court, which is generally viewed to be more advantageous to corporate defendants. One such tactic that gained in popularity was the inclusion of forum selection clauses in a corporation’s governing documents providing for exclusive jurisdiction in the federal courts for ’33 Act claims.

It is this tactic that was directly challenged by the stockholder in Sciabacucchi. There, the stockholder brought a declaratory judgment action seeking to invalidate the federal forum selection clauses in the certificates of incorporation of the three corporations referenced above. The validity of such federal forum selection clauses as applied to ’33 Act claims was an issue of first impression for the Delaware Court of Chancery.

The decision in Sciabacucchi invalidating the forum selection provision as applied to ’33 Act claims drew largely from the analysis set forth in the prior Chancery Court decision in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). The Boilermakers decision dealt with a slightly different issue, which was the enforceability of a provision in a corporation’s bylaws purporting to require exclusive jurisdiction in Delaware state court for all “internal corporate claims” such as shareholder derivative actions, actions under the Delaware General Corporation Law (“DGCL”), or claims involving the corporation’s organizational documents. The Boilermakers court resolved that issue by determining that such bylaws were a valid application of the internal affairs doctrine. However, in coming to this conclusion, the Boilermakers court relied upon an analytical framework distinguishing claims that were “internal” to the corporation from claims that were “external.” It was this “internal” vs. “external” claims framework that likewise informed the analysis and outcome of the recent Sciabacucchi decision. The Sciabacucchi court reasoned that section 102(b)(1) of the DGCL limits corporate charter provisions to governing only “internal” claims. The Court further reasoned that ’33 Act claims are “external” to the corporation as they arise under federal and not state law, do not turn on the internal relationships within the corporation, and arise out of the purchase of corporate shares – at which time the purchaser (prior to purchase) lacks any special relationship with the corporation that could be considered “internal.”

The Sciabacucchi decision invalidating forum selection clauses in certificates of incorporation as applied to ’33 Act claims is expected to be of some influence on other state or federal courts that may subsequently address this issue given Delaware’s influence on corporate litigation. The decision is expected to be appealed but, at least for now, such forum selection clauses are invalid in Delaware. Absent a reversal by the Delaware Supreme Court, it is not likely that such provisions will be enforceable as applied to ’33 Act claims.