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Sciabacucchi v. Salzberg: Court of Chancery Declares Federal Forum Provisions Ineffective

December 19, 2018

The Delaware Court of Chancery, in Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), has declared “ineffective and invalid” provisions in three corporations’ certificates of incorporation that purported “to require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal Forum Provisions”). 

 

Ruling on cross-motions for summary judgment, the Court, by Vice Chancellor Laster, ruled that “[t]he 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.  In this case, the Federal Forum Provisions attempt to accomplish that feat.  They are therefore ineffective and invalid.”

 

The Court recognized that the impetus for these provisions “came from an epidemic of stockholder litigation, in which competing plaintiffs filed a bevy of lawsuits, often in different multiple jurisdictions, before settling for non-monetary relief and an award of attorneys’ fees.”  The Court recognized the detrimental effects of this process on corporations and the courts, but explained that forum selection provisions in a corporation’s constitutive documents can govern only intra-entity disputes.

 

The Court’s analysis relied heavily on its interpretation of then-Chancellor Strine’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. June 25, 2013), in which the Court upheld the validity of corporate bylaws requiring (i) derivative actions, (ii) fiduciary duty actions, (iii) actions arising under the Delaware General Corporation Law and (iv) actions asserting claims governed by the internal affairs doctrine, to be brought exclusively in the Court of Chancery.  The Court in Boilermakers contrasted the provisions at issue in that case against a hypothetical provision addressing suits over external matters, such as “a tort claim against the company based on a personal injury [plaintiff] suffered that occurred on the company’s premises or a contract claim based on a commercial contract with the corporation,” suggesting that forum selection bylaws governing external claims might not be valid.

 

The Court in Sciabacucchi held, consistent with the dicta in Boilermakers, that the certificate of incorporation and bylaws could not regulate the forum of suits over external matters, including claims arising under the ’33 Act.   The Court reached this conclusion based in part on the language in Boilermakers and in part on the Delaware General Assembly’s adoption, in 2015, of Section 115 of the General Corporation Law, which codified the result of Boilermakers, and of revisions to Sections 102 and 109, which prohibited fee-shifting provisions in the certificate of incorporation or bylaws.  The Court determined that the 2015 revisions to the General Corporation Law manifested an implicit understanding by the legislature that a corporation’s internal governance documents could reach only the internal affairs of the corporation.

 

The Court concluded that the rationale advanced in Boilermakers (which dealt with the validity of bylaws) applied equally to provisions in the certificate of incorporation, such as the Federal Forum Provisions.  Because the Federal Forum Provisions did not address “the rights and powers of the plaintiff-stockholder as a stockholder,” but rather addressed what the Court determined to be external claims, those provisions exceeded the permissible scope of provisions of the certificate of incorporation under Section 102.

 

The Court rejected defendants’ argument that “issuing securities and defending against securities lawsuits involve the business and affairs of the corporation.”  The Court noted that, while that assertion was true, “it does not follow that these matters involve the internal affairs of the corporation. Many aspects of the corporation’s business and affairs involve external relationships.  The certificate of incorporation and Delaware law cannot regulate those external relationships.”

 

Thus, the Court concluded:

Under existing Delaware authority, a Delaware corporation does not have the power to adopt in its charter or bylaws a forum-selection provision that governs external claims. The Federal Forum Provisions purport to regulate the forum in which parties external to the corporation (purchasers of securities) can sue under a body of law external to the corporate contract (the 1933 Act). They cannot accomplish that feat, rendering the provisions ineffective.