Delaware Supreme Court Upholds Corporate Charter Provisions Requiring 1933 Act Claims to be Filed in Federal Court

Business Litigation Update

Date: April 08, 2020

Key Notes:

  • Delaware upholds use of federal forum provisions requiring Securities Act claims to be filed in federal court.
  • Companies may want to consider adopting such provisions to avoid parallel state and federal litigation over 1933 Act claims, and to secure the protections of the Private Securities Litigation Reform Act


On March 18, 2020, the Delaware Supreme Court issued an en banc decision in Salzberg v. Sciabacucchi, upholding the use of federal forum provisions in corporate charters to require claims under the Securities Act of 1933 (the "1933 Act") to be brought in federal court.

As the Delaware Supreme Court acknowledged, federal forum provisions "are a relatively recent phenomenon" that were designed to address certain "difficulties" that arose out of the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, which held that federal and state courts have concurrent jurisdiction over 1933 Act class-action claims and that such suits, when filed in state courts, are not removable to federal court.

In the wake of Cyan, many plaintiffs’ lawyers saw an opportunity to sidestep the obstacles imposed by the Private Securities Litigation Reform Act (the "PSLRA") and began bringing state-court claims under the 1933 Act. In many cases, corporations found themselves defending against parallel state and federal-court actions, with no procedural mechanism available to consolidate or coordinate the suits.

To curb this trend, some Delaware corporations adopted charter provisions that required actions arising under the 1933 Act to be filed in federal court. Salzberg involved federal forum provisions adopted by three Delaware companies – Blue Apron Inc., Roku Inc., and Stitch Fix Inc. In a 2018 decision, the Delaware Court of Chancery invalidated these charter provisions, explaining that 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." The Delaware Supreme Court reversed this decision, holding that federal forum provisions are facially valid under Section 102(b)(1) of Delaware’s corporation law and consistent with the policy considerations underlying that statute.

By upholding the validity of federal forum provisions, the Delaware Supreme Court provided Delaware corporations with an important tool for avoiding the increased legal costs and risks of inconsistent rulings inherent in having to defend parallel state and federal 1933 Act claims, and to benefit from the protections of the PSLRA. Public companies, and those that aspire to become public in the future, may want to consider adding a federal forum provision to their corporate charters in light of this ruling.

FOR MORE INFORMATION

For more information, please contact:

Thomas M. Ritzert
216.566.5782
Thomas.Ritzert@ThompsonHine.com

Renee Zaytsev
212.908.3981
Renee.Zaytsev@ThompsonHine.com

Melanie M. Lazor
513.352.6554
Melanie.Lazor@ThompsonHine.com

or any member of our Business Litigation practice group.

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