Delaware Supreme Court to Decide Whether Corporations Can Limit Investors’ Access to Courts in Securities Fraud Case

Blog Post Authors: Alec Berin (aberin@sfmslaw.com); Nicolas A. Lussier (nlussier@sfmslaw.com)

In January, 2020, the Delaware Supreme Court heard arguments in Salzberg, et al. v. Sciabacucchi, Case No. 346, 2019, an appeal that will determine the degree to which corporations can limit investors’ access to judicial forums through language in their corporate bylaws.

Specifically, the appeal concerns the validity of corporate bylaws that require cases under the Securities Act of 1933 (“Securities Act”), one of the cornerstones of the federal securities laws, to be brought in federal court.  While state courts have historically exercised jurisdiction over Securities Act claims, which the Supreme Court recently reiterated in Cyan Inc. v. Beaver County. Employees Ret. Fund, No. 15-1439, 583 U.S. ____ (2018), the appeal of Salzberg threatens that jurisdiction.

The appeal comes on the heels of Vice Chancellor J. Travis Laster’s decision in Sciabacucchi v. Salzberg, et al., Case No. 207-0931-JTL (Del. Ch. Dec. 19, 2018), which invalidated forum selection provisions in the charters of three Delaware corporations that required claims arising under the Securities Act to be brought exclusively in federal courts.  Relying on Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A. 3d 934 (Del. Ch. 2013), Vice Chancellor Laster’s decision focused on the distinction between bylaw provisions aimed at the “internal” and “external” affairs of a corporation, holding that a forum selection clause is permissible with respect to the former, but not the latter.  As the name suggests, internal affairs are claims like breach of fiduciary duty, accounting, constructive fraud, waste, and gross management.  Retired Chancellor William B. Chandler III, counsel to two of the corporations involved, argued that Vice Chancellor Laster misinterpreted the Boilermakers holding and Delaware’s corporation law.

A reversal of Vice Chancellor Laster’s decision would offer corporations an end-run around state court jurisdiction in Securities Act cases. Indeed, if the Delaware Supreme Court holds that corporate bylaw provisions mandating exclusive federal court jurisdiction over Securities Act claims are valid, it is likely that investors would see a significant forum for such litigation closed, given the large number of corporations that call Delaware home.

SFMS will provide a further update when the Delaware Supreme Court issues its decision.

The legal team at SFMS has significant experience litigating securities matters. If you have any questions regarding this subject or this posting, please contact John Roberts (jroberts@sfmslaw.com) or Alec Berin (aberin@sfmslaw.com). We can also be reached toll-free at 877-891-9880.

Shepherd, Finkelman, Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, and Pennsylvania. SFMS is an active member of International Advisory Group (www.iag.global), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.

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