Forum Selection Clauses in Delaware Corporate Charters Invalid as to Securities Claims

The Delaware Chancery Court recently faced a challenge to forum selection clauses in certificates of incorporation of three Delaware corporations that required shareholder claims under the Securities Act of 1933 be brought in U.S. federal court, thereby barring the state forum.  For securities cases, defendant corporations generally prefer the U.S. federal courts which are viewed as less plaintiff friendly than state courts, particularly at the motion to dismiss stage.  Recognizing that the 1933 Act established concurrent federal and state court jurisdiction for claims thereunder with no right of removal, the Delaware Court held that such clauses barring the state forum were “ineffective and invalid.”  Sciabacucchi, et al. v. Salzberg, et al., C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).

Background

The plaintiff in this action had purchased securities in the initial public offerings of three corporations.  As such, he had standing to bring claims under Section 11 of the 1933 Act for any material misrepresentations or omission in connection with those offerings.  The plaintiff brought an action for declaratory judgment seeking to invalidate those corporations’ federal forum selection clauses that barred 1933 Act claims from being brought in state court.

The Ruling

In a December 19, 2018 decision, the Chancery Court agreed.  While Sections 102(b)(1) and 109(b) of the Delaware General Corporate Law permit forum selection clauses in certificates of incorporation and bylaws to regulate claims involving the internal affairs of Delaware corporations, the Court found that claims under the Securities Act of 1933 do not relate to a corporation’s internal affairs.  The Court observed that such a claim arises from an investor’s purchase of shares at a time the purchaser is not yet a stockholder “and lacks any relationship with the corporation that is grounded in corporate law.”

The Court further held  that “Delaware’s authority as the creator of the corporation does not extend to its creation’s external relationships, particularly when the laws of other sovereigns govern those relationships.”  The Court’s ultimate holding extended well beyond claims under the 1933 Act: “Under existing Delaware authority, a Delaware corporation does not have the power to adopt in its charter or bylaws a forum-selection provision that governs external claims.”