If the term "hotly anticipated corporate law decision" is not a contradiction, it surely applies to the Delaware Supreme Court's recent ruling in Salzberg v. Sciabacucchi.1
The question posed there was deceptively simple: May a corporation adopt a charter provision requiring that certain federal securities law claims against the corporation and its directors and officers be brought only in federal court?
Three corporations set to go public included language in their charters identifying federal court as the "exclusive" forum for claims brought under the federal Securities Act of 1933. In response, a stockholder brought suit seeking to have those forum selection provisions declared invalid.
In a unanimous decision in March, the Delaware Supreme Court rejected the stockholder's argument and upheld the charter language as a facial matter. For at least some claims under the 1933 Securities Act brought by some plaintiffs, the court ruled, forum selection provisions are permissible; plaintiffs can indeed be forced to litigate those claims in federal court. Sciabacucchi thus answers one important question about the use of forum selection language in constitutive corporate documents.
But in doing so, the decision raises a host of other questions about forum selection provisions — foremost among them, whether a corporation can require arbitration of securities claims.
Mandatory arbitration was the proverbial elephant in the room: Many of those supporting or opposing the right of corporations to choose a federal forum did so because of what it might mean for corporations looking to arbitrate rather than litigate securities claims. Since arbitration is typically conducted on a bilateral (one-on-one) basis, widespread adoption and acceptance of arbitration provisions could spell the end of securities class actions.
That's the theory, at least. The Delaware Supreme Court's ruling leaves many of the key questions to be resolved in future cases. The answers will determine whether the demise of securities class actions is imminent or is instead — as Mark Twain said about rumors of his own death — greatly exaggerated.
1. Does the ruling apply to all securities claims?
The plaintiff in Sciabacucchi raised a facial challenge to the forum selection provisions, and so the Delaware Supreme Court was able to reject that challenge by identifying a single type of securities claim to which the provisions could validly be applied: Corporations may choose a federal forum, the court held, for claims under Section 11 of the 1933 Securities Act.2 Those claims are typically brought against the officers and directors of a company for misstatements made in the prospectus of a security being offered for sale.
The Delaware Supreme Court didn't consider whether other types of securities claims could similarly be channeled to federal court, though, and there is reason to think the type of claim could matter. As the court explained, Section 11 claims "aris[e] out of the Board's disclosures to current and prospective stockholders in connection with an [initial public offering] or secondary offering."3
The court thus considered those claims to be an appropriate subject for a charter provision under Delaware corporate law, reasoning that the "drafting, reviewing, and filing of registration statements by a corporation and its directors is an important aspect of a corporation's management of its business and affairs and of its relationship with its stockholders."4
The same cannot necessarily be said of other securities law claims.
For instance, a claim under Rule 10b-5,5 which implements Section 10(b) of the Exchange Act of 1934,6 is often brought against someone other than a corporate officer or director — and often for conduct unrelated to the "corporation's management of its business and affairs and of its relationship with its stockholders." Privately filed Rule 10b-5 claims also require proof of reliance, a feature that focuses the claim on circumstances that are particular to the plaintiff, rather than inherent in the corporate relationship.
It is therefore unclear whether the Delaware Supreme Court would approve use of a forum selection provision for channeling such claims. The answer may well depend on the specific allegations involved in the claim, requiring the enforceability of the forum selection clause to be determined on a case-by-case basis.
2. What about suits by first-time stock purchasers?
The Delaware Supreme Court similarly relied on the facial nature of the challenge in Sciabacucchi when conceiving of a hypothetical plaintiff whose claims could validly be channeled to a federal forum.
The Delaware Court of Chancery had rejected use of forum selection language for Section 11 claims on the premise that such claims are external to the corporate relationship — and hence not an appropriate subject for a charter provision — because they "arise from the investor's purchase of the shares," rather than from existing share ownership.7 But the Delaware Supreme Court rejected that premise as factually inaccurate.
"[I]t is possible to have a scenario," the court explained, where "existing stockholders could assert that a prospectus relating to shares of stock the directors were selling in a registered offering, signed by the directors of a Delaware corporation, contained material misstatements and omissions."8
The Delaware Supreme Court's response to the Court of Chancery — stating that a nonexternal claim was "possible," and pointing to an existing stockholder's suit as an example — suggests that a different result might be appropriate if the claim were instead brought by a plaintiff who was purchasing shares for the first time. In that case, it could be argued that charter language shouldn't be used to address such a claim, because the claim doesn't arise out of any preexisting relationship between the corporation and its stockholders; it instead relates only to the formation of that relationship.
On the other hand, any dispute brought by a litigant in his status as a shareholder is arguably a proper subject for a charter provision, even if the litigant is a first-time purchaser. The Delaware Supreme Court gave some support for this latter view when it identified, as examples of truly "external" claims, "a tort claim for personal injury suffered by the plaintiff on the premises of the company or a contract claim involving a commercial contract."9 These examples are obviously far afield from shareholder suits.
All that can be said for certain at this point, however, is that suits by existing shareholders are sufficiently internal, while tort and commercial contract suits are external. The gray area between those two extremes is still very much up for grabs.
3. Can corporations adopt forum selection language in their bylaws?
The three companies at issue in Sciabacucchi adopted forum selection provisions in their certificates of registration, which stockholders approved before the companies went public. In upholding the use of such provisions, therefore, the Delaware Supreme Court had no occasion to decide whether the same analysis would apply to analogous language adopted by the corporation in a post-IPO charter amendment or in its bylaws.
Again, the court's decision leaves ample room for interpretation.
Under Delaware law, the court noted, forum-selection clauses that have been agreed upon contractually are presumptively enforceable, and "corporate charters are viewed as contracts among the corporation's stockholders."10 But what about, for instance, a forum selection provision adopted in a bylaw by a board of directors without shareholder input — would that be sufficiently contractual in nature?
The opinion in Sciabacucchi can be read to support either view: It emphasized that "charter provisions must be subjected to and approved by a vote of the stockholders,"11 but also praised state corporate law as being highly "flexible" because "it leaves the parties to the corporate contract (managers and stockholders) with great leeway to structure their relations."12
4. Can corporations limit suits against them to particular federal courts?
The forum selection provisions at issue in Sciabacucchi required suit to be brought in "the federal district courts of the United States," without attempting to specify which federal court.13 But it's easy to imagine a corporation wanting to further limit that choice to a particular jurisdiction — perhaps the US District Court for the District of Delaware, or wherever the corporation has its principal place of business.
The Delaware Supreme Court's decision doesn't shed much light on whether it would approve such a limitation, other than its observation that "Delaware forum provisions" have in recent years been "sanctioned" by the Court of Chancery and also "respected by other states."14 A corporation's choice of another forum, by contrast, may or may not receive the same sanction, or command the same respect.
5. Can corporations require arbitration of securities claims?
As the Delaware Supreme Court acknowledged, "[m]uch of the opposition" to federal forum provisions can be traced to concern about the "next" likely step: charter or bylaw provisions requiring arbitration of securities claims.15 Allowing corporations to adopt arbitration-only language would profoundly change the legal landscape.
Such clauses can — and increasingly do — specify that arbitration must be conducted on a bilateral (one-on-one) basis, and the US Supreme Court has made clear that, per the Federal Arbitration Act, that choice must be respected.16 Companies could thus use arbitration provisions to opt out of class litigation entirely, at least for certain categories of securities claims.
The Delaware Supreme Court attempted to address this concern in a footnote. The court stated that, from its own "state law perspective," a mandatory arbitration provision would be unlawful.17 Such a provision, the court explained, would violate Delaware's statutory ban on charter and bylaw language that prohibits bringing internal corporate claims "in the courts of this state."18
That response is unlikely to put the issue to rest, however. For one thing, the court had already held, earlier in its decision, that 1933 Securities Act claims "are not 'internal corporate claims,'" such that the statutory ban "does not apply" to them.19 That conclusion, which was based on the court's doubts that "the General Assembly intended to encompass federal claims within the definition of internal corporate claims," would seem to apply just as readily to arbitration provisions as to federal forum provisions.20
But even if the footnote were conclusive as to the impermissibility of arbitration clauses under Delaware law, that would only raise the further question whether such a state law prohibition was consistent with federal law.
The US Supreme Court has read the FAA as establishing an "equal-treatment principle" that forbids states from discriminating against arbitration agreements.21 A state statute that allowed forum-selection language opting for federal court, but forbade comparable language selecting an arbitral forum, would seem to run afoul of that rule. Even if the Delaware Supreme Court correctly identified a road block under state law to mandatory arbitration of securities claims, therefore, there is good reason to think it would be preempted under the FAA.
That said, the extinction of the securities class action is hardly inevitable.
Some corporations have resisted shareholders' calls to adopt language on mandatory arbitration, giving rise to proxy fights and litigation.22 The US Securities and Exchange Commission has thus far been unwilling to approve corporate registration statements that include arbitration clauses, although there are signs that at least some commissioners are open to the idea.23 And commentators have argued that the FAA, which applies only when arbitration has been chosen through voluntary contractual arrangements, simply doesn't apply to the corporation-shareholder relationship.24
Sciabacucchi was arguably a big step toward a world in which securities claims are routinely arbitrated, but the future of securities litigation is still yet to be written.
1. Salzberg v. Sciabacucchi, No. 346, 2020 WL 1280785 (Del. Mar. 18, 2020).
7. Sciabacucchi v. Salzberg, 2018 WL 6719718, at *2 (Del. Ch. Dec. 19, 2018).
12. Id. at *6 (quoting Jones Apparel Grp., Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845 (Del. Ch. 2004)).
16. See, e.g., Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010).
21. Kindred Nursing Ctrs. Ltd. v. Clark, 137 S. Ct. 1421, 1426 (2017).
23. See, e.g., Comm'r Hester M. Pierce, Wolves and Wolverines: Remarks at the University of Michigan Law School (Sept. 24, 2018), https://www.sec.gov/news/speech/speech-peirce-092418.
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