Earlier today the Delaware Supreme Court issued an important en banc decision1 upholding the right of Delaware corporations to adopt forum-selection provisions in their charters requiring claims under the Securities Act of 1933 (the "'33 Act") to be brought in federal court (the "Federal Forum Provisions"). The Supreme Court's decision provides a critical tool for pre-IPO companies to address the increase in the number of lawsuits brought in state court asserting claims under Section 11 of the '33 Act challenging disclosures in their registration statements. Prior to this ruling, many such claims were brought in state courts which had led to inconsistent and unpredictable rulings. As a result, D&O insurance premiums for such claims have increased dramatically in recent years.
Wilson Sonsini Goodrich & Rosati represented Stitch Fix, Inc. and Roku, Inc., and their respective directors. Wilson Sonsini partner William B. Chandler III argued the appeal before the Supreme Court.
The Supreme Court's decision reversed an earlier decision by the Delaware Court of Chancery, which invalidated the provisions in a December 2018 ruling. The Supreme Court's decision recognizes that Section 102(b)(1) of the Delaware General Corporation Law, which broadly permits corporations to adopt charter provisions for the "management of the business and for the conduct of the affairs of the corporation" and to regulate the powers of the corporation, its directors, and its stockholders, allows the adoption of forum selection provisions for '33 Act claims. The Supreme Court concludes that regulation of "intra-corporate litigation" that may arise under federal or other positive law fits squarely within the broad language of Section 102(b)(1) and that Section 102(b)(1) is not coterminous with notions of the "internal affairs" doctrine or limited to regulating litigation arising under Delaware state law. In doing so, the Supreme Court stressed the broad and enabling nature of Section 102(b)(1) and the importance that Delaware places on private ordering and permitting corporations to adapt to new situations—like the rise of state court Section 11 litigation. As such, this case will likely have broader import with respect to other ways in which Delaware corporations can innovate. Notably, although the Supreme Court's opinion is limited to the facial validity of the provisions under Delaware law, the court also made a strong case for why Federal Forum Provisions should be upheld by other states on future "as applied" challenges when companies seek to enforce the provisions to dismiss state court '33 Act cases.
For further information, please contact any member of the Wilson Sonsini's corporate governance and securities litigation practices.
[1] The case is Salzberg et al. v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020).
