Delaware Supreme Court Upholds Federal Forum Selection Provisions

Delaware Corporations May Now Adopt Federal Forum Selection Provisions for Securities Act Claims
Client Alert
May 6, 2020

On March 18, 2020, the Delaware Supreme Court reversed the Delaware Court of Chancery and held that Delaware corporations can adopt federal forum selection provisions for claims arising under the Securities Act of 1933 (the “Securities Act”).  

Delaware Supreme Court Holds that Delaware Corporations May Adopt Federal Forum Selection Charter Provisions

In its recent ruling in Salzberg v. Sciabacucchi, the Delaware Supreme Court held that federal forum selection provisions are allowed under Section 102(b)(1) of the Delaware General Corporation Law and as a matter of Delaware public policy.  As a result, corporations incorporated in Delaware may benefit by adopting forum selection provisions in their charters requiring Securities Act claims to be brought in federal court. 

In the US Supreme Court’s 2018 decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, the US Supreme Court held that shareholders are able to file Securities Act class actions in either state or federal court and such cases filed in state court could not be removed to a federal forum. The Cyan holding has led to a surge in state court class actions claiming violations of Sections 11 and 12 of the Securities Act in connection with offering documents for IPOs and secondary offerings. Issuers have responded by incorporating federal forum selection provisions into their organizational documents. In Salzberg, noting that Delaware law allows immense freedom for businesses to adopt provisions for their organization and governance, the Delaware Supreme Court confirmed the facial validity of forum selection clauses in certificates of incorporation of Delaware corporations that limit litigation of federal securities law claims to federal courts. 

Practical Implications

The cost and risks to Delaware corporations of not adopting federal forum selection provisions are significant.  Prior to Cyan, federal claims tried in federal courts could result in inconsistent rulings, but inconsistencies could be reconciled by federal courts of appeals.  Further, federal district courts are seen as more likely to respect the precedential effect of prior district court rulings than are courts of one state to courts of another state. Further, when federal courts of appeals disagree on important issues under federal law, the Supreme Court, sooner or later, tends to resolve the dispute by taking a suitable case, in large part because of the existence of the dispute. Federal claims tried in state courts, in contrast, must be appealed through state appellate courts, leaving a discretionary appeal to the Supreme Court as the only route to a federal ruling on federal law. Accordingly, corporations lacking forum selection clauses encompassing federal claims will face the additional risks of inconsistent state court rulings, more burdensome litigation costs, potential increased D&O insurance premiums, and, where parallel state and federal actions are filed, no procedural mechanism capable of consolidating multiple suits in state and federal court. Delaware corporations can mitigate these risks by adopting federal forum selection provisions in their organizational documents, which often can be accomplished by each company's board of directors.

Sister-State Enforceability

The Delaware Supreme Court acknowledged that the most difficult, and still unanswered, aspect of its decision in Salzberg was whether federal forum selection provisions would be enforceable in other states. Although the Delaware Supreme Court offered the rationale for enforceability in other states of federal forum selection provisions by Delaware corporations that such provisions do not offend the principles of horizontal sovereignty or federal policy, that issue remains open. Even if not uniformly honored in other states, and assuming no Congressional action in the meanwhile, inconsistent rulings on enforceability are likely to accelerate eventual Supreme Court review of the narrow issue of enforceability.

Benefits of Adopting Federal Forum Selection Provisions Now

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If you would like further information regarding the above referenced cases or the adoption and benefits of forum selection provisions for Delaware corporations, please contact the lawyer at Sullivan & Worcester LLP with whom you regularly consult, or any of the lawyers listed above.

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