The Delaware Court of Chancery ruled today that Delaware corporations do not have the power to use charter or bylaw provisions to require that claims under the Securities Act of 1933 (1933 Act) be litigated in federal court. In Sciabacucchi v. Salzberg (C.A. No. 2017-0931-JTL), Vice Chancellor J. Travis Laster found that such mandatory forum provisions in the certificates of incorporation of three companies — Blue Apron Holdings, Inc., Stitch Fix, Inc. and Roku, Inc. — were unenforceable, and granted summary judgment in favor of stockholders who had challenged the propriety of those clauses.
In response to the plaintiffs' bar increasingly filing 1933 Act claims in state courts over the past several years, many companies have adopted such provisions in their charter documents or bylaws. The enforceability of those clauses assumed greater importance after the United States Supreme Court's March 2018 decision in Cyan, Inc. v. Beaver County Employees' Retirement Fund, which confirmed that plaintiffs may choose to file 1933 Act claims in either state or federal court.
Vice Chancellor Laster held that while certificates of incorporation and bylaws create contractual relationships between companies and their stockholders, such "corporate contract[s]" cannot "dictate mechanisms for bringing claims that do not concern corporate internal affairs, such as claims alleging fraud in connection with a securities sale." In other words, while charter documents and bylaws may properly specify that claims involving the "internal affairs" of Delaware corporations — e.g., those involving the fiduciary duties of officers and directors, voting rights of stockholders, etc. — be litigated in Delaware, they may not regulate matters involving federal law or other "external issues."
The decision will presumably be appealed to the Delaware Supreme Court. In the meantime, companies will want to know what (if anything) they should do in response. For most companies, the best answer is to sit tight. While companies that have adopted a 1933 Act forum provision obviously cannot enforce it, the logical course of action is to wait and see what the Delaware Supreme Court does before amending the charter or bylaws. For those companies that have not yet adopted such a provision, it makes little sense to add one until and unless the Sciabacucchi decision is reversed.
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