What's New in Corporate Governance and Securities Law
On March 18, 2020, the Supreme Court of Delaware held that the “relatively recent phenomenon” of federal forum provisions (“FFPs”) in Delaware companies’ charters, which mandate that stockholder claims arising under the Securities Act of 1933 (“Securities Act”) be brought exclusively in federal courts, are lawful under Section 102(b) of the Delaware General Corporation Law (“DGCL”). See Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020). With this ruling, Delaware companies can now ensure, post-Cyan, that they receive the benefits of litigating stockholder Securities Act claims exclusively in federal court by adopting FFPs in their charters or bylaws.
In 2017, before launching their respective IPOs, Blue Apron, Stich Fix, and Roku each adopted an FFP in their corporate charters, which required that any stockholder claims “arising under the Securities Act of 1933” be brought exclusively in federal court. An investor who purchased each company’s stock in the IPOs then brought suit in the Delaware Court of Chancery, seeking a declaration that the companies’ FFPs were invalid. The Court of Chancery granted summary judgment for the investor, holding that the FFPs were invalid because 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 in a lengthy decision, holding that, among other things, FFPs are valid under the plain language of DGCL § 102(b)(1), which permits Delaware companies to include in their charters “any provision for the management of the business and for the conduct of the affairs of the corporation,” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.” The Supreme Court held that, consistent with § 102(b)(1), FFPs (1) “classically fit the definition of a provision ‘for the management of the business and for the conduct of the affairs of the corporation,’” and (2) constitute “provision[s] ‘defining, limiting and regulating the powers of the corporation, the directors and the stockholders,’ since FFPs prescribe where current and former stockholders can bring [Securities Act] claims against the corporation [and its] directors and officers.” The Supreme Court also found that FFPs are valid “as a matter of Delaware public policy” because they promote “certainty. . . predictability, uniformity, and prompt judicial resolution to corporate disputes.”
There are numerous benefits to defendants associated with litigating Securities Act claims in federal court as opposed to state court, including certainty that the defendant will receive the protections afforded by the federal Private Securities Litigation Reform Act of 1995 (“PSLRA”), such as the automatic stay of discovery during the pendency of a motion to dismiss and limitations on recoverable damages and attorneys’ fees. Some plaintiffs have strategically avoided federal court for that reason, instead bringing their Securities Act claims in state court. The Securities Act prohibits removal of such state court actions to federal court, thus preventing defendants from securing the benefits of a federal forum. As the Delaware Supreme Court explained, under Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), “federal and state courts have concurrent jurisdiction over class actions based on claims brought under the [Securities] Act, and . . . such claims are not removable to federal court.” Thus, “[w]hen parallel state and federal actions are filed, no procedural mechanism is available to consolidate or coordinate multiple suits in state and federal court,” leading to “obvious” increased “costs and inefficiencies of multiple cases being litigated simultaneously in both state and federal courts.”
With Salzberg now on the books, Delaware companies can avoid these burdens by simply adopting FFPs directing that stockholder Securities Act claims be brought in federal court, where they can secure the benefits of a federal forum, including the PSLRA, consolidation or coordination of multiple suits, and consistency in rulings and judgments. Public companies can elect to adopt FFPs through a bylaw amendment, which for most companies can be done by simple board action (followed with a filing of a Form 8-K (Item 5.03) within four business days of the change), or they can amend their certificate of incorporation to adopt FFPs following board approval and stockholder approval at a special or annual meeting of stockholders.