Tag: exclusive federal forum provisions

Will the California courts enforce a Delaware exclusive federal forum provision?

In Salzberg v. Sciabacucchi (pronounced Shabacookie), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims are “facially valid.” (See this PubCo post.) Given that Sciabacucchi involved a facial challenge, the Court had viewed the question of enforceability as a “separate, subsequent analysis” that depended “on the manner in which it was adopted and the circumstances under which it [is] invoked.” With regard to the question of enforceability of exclusive federal forum provisions if challenged in the courts of other states, the Court said that there were “persuasive arguments,” such as due process and the need for uniformity and predictability, that “could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in a federal court does not offend principles of horizontal sovereignty,” and should be enforced. But would they be? Following Sciabacucchi, many Delaware companies that did not have FFPs adopted them, and companies with FFPs involved in current ’33 Act litigation tried to enforce them by moving to dismiss state court actions. One such case is currently being fought in California state court involving ’33 Act claims against Dropbox, and, as noted in this column in Reuters, a group of former Delaware jurists and a former SEC Commissioner have filed an amicus brief in support of the company’s effort to enforce the FFP in that case.

Delaware Supreme court upholds facial validity of exclusive federal forum provisions

Yesterday, in  Salzberg v. Sciabacucchi (pronounced Shabacookie!), the Delaware Supreme Court unanimously held that charter provisions designating the federal courts as the exclusive forum for ’33 Act claims are “facially valid,” thereby reversing the decision of the Chancery Court, which had invalidated the provisions in the charters of three Delaware companies. The Chancery Court had previously invalidated the exclusive federal forum provisions (FFPs) at issue in the case because, among other reasons, Delaware’s enabling statute (Section 102(b)(1))—which provides general authority for non-mandatory charter provisions—was, in the lower court’s view, inherently limited to “internal affairs” and FFPs were “external” matters. On de novo review, the Delaware Supreme Court rejected this analysis.  It characterized FFPs as intra-corporate matters, located in a new territory—the “outer band” between internal and external matters—which fell within the statutory scope of Section 102(b)(1) and are, therefore, valid on their face. Given the substantial benefits of an FFP in the event of ’33 Act litigation (which includes Section 11 claims), companies that do not have an FFP in their charters or bylaws, whether as a result of uncertainty about the validity of FFPs or otherwise—may want to revisit the issue.

Will the Delaware Supreme Court revive exclusive federal forum provisions for ’33 Act claims?

Yesterday, the Delaware Supreme Court heard the appeal in Sciabacucchi v. Salzberg (pronounced Shabacookie!) in which the Chancery Court held invalid exclusive federal forum provisions for ’33 Act litigation in the charters of three Delaware companies. Few of the justices revealed their inclinations, so it’s difficult to predict the outcome.  We’ll have to wait for the Court’s final decision.