Allows Plaintiffs to Bring Claims Under the Securities Act of 1933 in Either State or Federal Court
In Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), the Delaware Court of Chancery invalidated provisions in the certificates of incorporation of three Delaware corporations — Blue Apron Holdings Inc., Roku Inc., and Stitch Fix Inc. — that would have required stockholders to bring claims under the Securities Act of 1933, as amended, (Securities Act) in federal court as opposed to state court. The decision therefore permits plaintiffs pursuing claims under the Securities Act to sue in either state or federal court — despite the company's preference for a federal forum — and contains an extensive discussion as to the proper contours of the internal affairs doctrine.
Sciabacucchi is the latest chapter in a long-running series of cases grappling with the jurisdiction of state and federal courts to hear cases under the Securities Act. Following the enactment of the Private Securities Litigation Reform Act in 1995 and the Securities Litigation Uniform Standards Act in 1998, courts had split over whether Securities Act claims fell within the exclusive jurisdiction of the federal courts. Defendant companies typically viewed the federal courts as a more reliable and expeditious forum to hear such claims. The Supreme Court finally resolved the issue last March in Cyan Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), concluding unanimously that plaintiffs may bring cases under the Securities Act in either state or federal court. See https://www.kramerlevin.com/en/perspectives-search/supreme-court-in-cyan-upholds-state-court-securities-act-class-actions.html.
But the forum wars did not end there. In the wake of the prior conflict and then subsequent to the Cyan decision, many Delaware corporations sought to resolve the issue by enacting forum selection clauses in their governing documents designating the federal courts as the exclusive forum for hearing claims under the Securities Act. In the Sciabacucchi case, a stockholder of three such corporations brought a declaratory judgment action challenging the forum selection provisions in these certificates of incorporation, affording the Delaware courts their first opportunity to weigh in on the enforceability of such forum selection provisions.
In declaring them "ineffective and invalid," Vice Chancellor Laster relied heavily on Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), which had addressed the enforceability of corporate bylaws requiring that all internal corporate claims – such as derivative actions, fiduciary duty suits, and claims brought pursuant to the Delaware General Corporation Law or the corporation's organizing documents – be filed in the Delaware courts. The Boilermakers court upheld the bylaws as a valid exercise of the internal affairs doctrine, which provides that internal corporate affairs are subject to the law of the state of incorporation. In dicta, however, the Boilermakers court suggested that corporations could not use corporate bylaws or certificates of incorporation to set the forum for claims that were external to the corporation.
The Sciabacucchi court closely followed that reasoning, and invalidated the forum selection provisions requiring plaintiffs to bring their Securities Act claims in federal court: The court found that Securities Act claims are external to the corporation — since these claims arise under federal law rather than state law, and relate to the purchase of a corporation's shares, at which time the purchaser purportedly lacks any special relationship with the corporation that might be considered "internal" — and therefore these forum selection provisions run afoul of the internal affairs doctrine. In the words of the court, "Delaware's authority as the creator of the corporation does not extend to its creation's external relationships, particularly when the laws of other sovereigns govern those relationships."
The Sciabacucchi decision is significant not only for its own holding, but also because it may be cited in discussions relating to proposed mandatory arbitration of securities law claims. The Chancery Court decision will likely be appealed, giving the Delaware Supreme Court the ability to provide guidance on these issues.
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