Delaware Supreme Court Holds that Federal Forum Selection Clauses for Securities Cases Are Valid in Delaware Corporate Charters
Reversing the Court of Chancery, the Delaware Supreme Court has concluded that federal forum selection clauses, requiring that litigation under the Securities Act of 1933 (“’33 Act”) may only be filed in federal courts, are allowable provisions in a Delaware corporation’s certificate of incorporation or bylaws.
Under recent U.S. Supreme Court precedent, private plaintiffs may bring ’33 Act claims in either federal or state court. A wave of securities class actions filings in state courts inspired corporations to consider limiting such actions to federal courts through charter or bylaw provisions. A stockholder-plaintiff brought suit and sought a declaration that provisions designed to limit a plaintiff’s choice of forum for an action arising under the ’33 Act to federal courts were invalid under Delaware law. The Court of Chancery agreed with the plaintiff, holding that Section 102(b)(1) of the Delaware General Corporation Law (“DGCL”) prohibited a corporate charter from “bind[ing] 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.”
Specifically, under DGCL Section 102(b)(1), a corporate charter may generally contain (1) “any provision for the management of the business and for the conduct of the affairs of the corporation” and (2) “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.” Citing Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), the Court of Chancery held that Section 102(b)(1) endowed the corporation only with the power to govern claims arising under the internal affairs of the corporation – in this case, claims addressing “the rights and powers of the plaintiff-stockholder as a stockholder.” A federal securities claim involves a claim of fraud in connection with the sale of securities; the fact that the company involved might be incorporated in Delaware is “incidental” to the claim. Instead, the corporate charter must defer to the rights granted pursuant to the external federal statute, which allows for state and federal jurisdiction.
The Delaware Supreme reversed, finding that Section 102(b)(1) endowed Delaware charters with broad powers, and that the statute “bars only charter provisions that would achieve a result forbidden by settled rules of public policy.” The Court reasoned that “corporate charters are contracts among a corporation’s stockholders, … and that, Delaware’s legislative policy is to look to the will of the stockholders in these areas.” The Court agreed that Section 102(b)(1) precluded a charter from purporting to govern the location of filings of actions arising under a corporation’s external affairs, but held that federal securities laws were “Intra-Corporate Affairs” – an area that comprised a band of claims between truly external affairs (such as tort claims) and a corporation’s “internal affairs” (such as stockholder derivative actions). A ‘33 Act claim could be brought by an existing stockholder purchasing more shares, and such a claim would seem to fit within the language in Section 102(b)(1) allowing for provisions “creating, defining, limiting and regulating the powers of the … the stockholders, or any class of the stockholders.” As such, it could not be said that in all cases such provisions were invalid. The Supreme Court also held that corporate bylaws may similarly include such forum selection clauses.Share