The Delaware Supreme Court recently held that Delaware law permits corporations to adopt a requirement in their certificates of incorporation or bylaws that shareholder lawsuits under the federal Securities Act of 1933 (which governs registration statements and prospectuses) be brought only in federal court. As publicly traded companies face a bear market and a heightened risk of securities litigation, this decision provides a way to stem the growing trend of securities plaintiffs filing in state courts where some plaintiffs’ lawyers might perceive having a strategic advantage.
For several years, many Delaware companies have already included forum-selection provisions in their certificates of incorporation or bylaws that require “internal affairs” claims to be brought in Delaware state courts. Internal affairs claims include things like shareholder derivative actions against the board (often for alleged mismanagement of the company). Delaware courts have endorsed these forum-selection provisions for such claims, and courts across the country have enforced them.
More recently, some companies have tried to expand these provisions to cover Securities Act claims. Specifically, as shareholder plaintiffs began to file more Securities Act lawsuits in state courts, companies began including in their certificates of incorporation or bylaws forum-selection provisions limiting Securities Act claims to federal courts only. Plaintiffs’ lawyers challenged the validity of these provisions and, in late 2018, the Delaware Chancery Court ruled that it was not within companies’ power to prescribe a federal forum for claims under the federal securities laws.
The Delaware Supreme Court has now overruled that decision, deciding that forum-selection provisions specifying that Securities Act claims must be brought exclusively in federal court are consonant with Delaware law. The court noted the inefficiencies of unconsolidated and uncoordinated litigation in multiple state and federal forums as a justification for why forum selection bylaw or charter provisions should be permitted for federal securities claims.
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Publicly traded Delaware companies should strongly consider adopting such a provision in their bylaws or certificate of incorporation. An example of such a provision is here:
Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of [the Company] shall be deemed to have notice of and consented to [this provision].
Note that provisions like these are unnecessary with respect to claims under the federal Securities Exchange Act of 1934 since those claims only can be brought in federal court. The provisions that the court reviewed did not attempt to restrict shareholder plaintiffs to a particular federal venue, i.e., a specific district court, and so it is unclear whether a provision requiring the litigation of such claims to be filed in a particular federal court, such as the federal court sitting in the jurisdiction where the company is headquartered, would also be permitted.