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Companies can restrict securities suits to federal courts


In an eagerly awaited decision, Delaware’s Supreme Court has unanimously overturned a lower court ruling and held that companies’ charters can require actions filed under federal securities law to be filed only in federal court.

The “federal-forum” provisions in several Delaware corporations charters, which require actions arising under the federal Securities Act of 1933, are valid under Delaware law, said the court, in Wednesday’s ruling in Matthew B. Salzberg, et al. and Blue Apron Holdings Inc. Stitch Fix Inc., and Roku Inc. v. Matthew Sciabacucchi.

The ruling says permitting shareholders to file this litigation in state court has led to increased litigation, causing higher costs and inefficiencies.

Attorneys who had represented companies in the case said they were pleased with the decision.

Matthew Sciabacucchi, who had bought shares of these companies in their initial public offering, sought a declaratory judgment in Delaware’s Court of Chancery that the federal forum provisions were invalid.

The Court of Chancery held in its 2018 ruling the provisions 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.”

In overturning that ruling, the Supreme Court said the Private Securities Litigation Reform Act of 1995, which limited recoverable damages and attorneys fees, had the unintended consequence of prompting some members of the plaintiffs bar to avoid federal courts and file in state courts instead. That led some companies to adopt the forum-selection provisions.

“This court has viewed the overlap of federal and state law in the disclosure area as ‘historic,’ ‘compatible,’ and ‘complementary,’” said the Supreme Court ruling.

“Accordingly, a by-law that seeks to regulate the forum in which such ‘intra-corporate’ litigation can occur is a provision that addresses the ‘management of the business’ and the ‘conduct of the affairs of the corporation,” is “facially valid” under Delaware law.

The ruling points to the U.S. Supreme Court’s March 2018 ruling in Cyan Inc. et al. v. Beaver County Retirement Fund et. al., which held securities offerings litigation can be heard in state court in addition to federal court, which led to an escalation of cases filed in state court.

“When parallel state and federal actions are filed, no procedural mechanism is available to consolidate or coordinate multiple suits in state and federal court,” said the ruling. “The costs and inefficiencies of multiple cases being litigated simultaneously in both state and federal courts are obvious.

“The possibility of inconsistent judgments and rulings on other matters, such as stays of discovery, also exist,” the ruling said.

“Our law strives to enhance flexibility in order to engage in private ordering, and to defer to case-by-case development. Delaware courts attempt ‘to achieve judicial economy and avoid duplicative efforts among courts in resolving disputes,’” said the ruling in citing an earlier case. “FFPs advance these goals,” it said, in reversing the Chancery Court’s ruling.

Attorneys who represented the companies praised the decision. William B. Chandler III, a partner with Wilson Sonsini Goodrich & Rosati P.C., in Wilmington, Delaware, said in a statement, “I do think this is a very important opinion that will have far-reaching implications for Delaware corporate law. 

“It reaffirms and underscores the central tenet of Delaware corporate law, which is that we believe in private ordering and the ability of stockholders and managers to innovate in corporate governance in ways designed to address novel or emerging issues.”

Catherine G. Dearlove, a director with Richards, Layton & Finger PA in Wilmington, said in a statement, “We are very pleased with the Supreme Court’s decision, which confirms that Delaware’s corporate law will continue to permit corporations to adopt innovative corporate governance provisions.”

An attorney for Mr. Sciabacucchi could not immediately be reached for comment.









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