Delaware Supreme Court Validates Federal Forum Provisions
March 18, 2020
Publication| Corporate Transactions| Corporate & Chancery Litigation
In the highly anticipated decision of Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020), the Delaware Supreme Court, reversing the Delaware Court of Chancery’s decision, confirmed the facial validity of provisions in the certificates of incorporation of Blue Apron Holdings, Inc., Stitch Fix, Inc., and Roku, Inc. requiring all claims under the Securities Act of 1933 (the “’33 Act”) to be brought in federal courts (“Federal Forum Provisions”). Similar provisions have been adopted by dozens of Delaware corporations and are intended to address the inefficiencies of multi-jurisdictional ’33 Act litigation in light of the increasing number of ’33 Act claims filed in state, rather than federal, courts.
In its opinion, the Supreme Court confirmed that Delaware’s General Corporation Law (the “DGCL”) generally, and Section 102(b)(1) of the DGCL specifically, are broadly enabling and “allow[] immense freedom for businesses to adopt the most appropriate terms for the organization, finance and governance of their enterprise.” (Broadly speaking, Section 102(b)(1) of the DGCL provides that the certificate of incorporation may include 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 so long as those provisions are not contrary to the laws of Delaware.) The Supreme Court concluded that the intra-corporate matters addressed by Federal Forum Provisions fall within the plain language of Section 102(b)(1), holding that the Court of Chancery erred when it determined that the scope of Section 102 was restricted only to matters that would be governed by Delaware law under the internal affairs doctrine.1 The Supreme Court also rejected the argument that Federal Forum Provisions are prohibited by Section 115 of the DGCL, which generally provides that a corporation’s certificate of incorporation or bylaws may require that “internal corporate claims” be brought solely and exclusively in the courts in the State of Delaware.
Turning to public policy arguments, the Supreme Court held that Federal Forum Provisions do not violate federal law or public policy. The Supreme Court noted that “perhaps the most difficult aspect of this dispute is … [the] question of whether [Federal Forum Provisions] will be respected and enforced by our sister states.” Recognizing that such questions “should not drive the initial facial validity inquiry,” the Supreme Court nonetheless explained why traditional principles applicable to contractual forum selection provisions would support the enforceability of Federal Forum Provisions, and why, in the Supreme Court’s view, those provisions do not offend principles of horizontal sovereignty.
The Salzberg decision is an important reaffirmation of the broadly enabling nature of the DGCL, and Delaware’s support for innovation and private ordering.
1 In this regard, the Supreme Court also noted that the Court of Chancery applied an unduly narrow definition of “internal affairs,” and it reaffirmed the proper scope of the internal affairs doctrine under both Delaware and federal law as encompassing “matters which are peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”