Alert / Risk Management
Delaware Supreme Court provides relief for new public companies

Federal forum provisions held facially valid

In a stunning reversal, on March 18, 2020, the Delaware Supreme Court overruled the Chancery Court decision in Sciabacucchi v. Salzberg, C.A. No. 2017-093-JTL (Del. Ch. Dec. 19, 2018) and permitted Delaware public companies to designate the federal courts as the exclusive forum for shareholders to bring claims under the Securities Act of 1933 (“’33 Act”). This ruling gives companies a weapon to combat the proliferation of ’33 Act claims brought in multiple forums, an increasingly problematic issue since the United States Supreme Court’s ruling in Cyan permitted such claims to be brought in federal or state courts.

By way of background, forum selection provisions are commonly found in contracts and designate an exclusive place where a lawsuit can be filed. A few years ago, this mechanism was added to corporate bylaws and articles of incorporation to battle merger objection lawsuits that were brought all over the country. By selecting one exclusive forum, many far-flung lawsuits against the same defendant could be consolidated to one court, thereby reducing defense expenses and risk of inconsistent rulings.

This same strategy was deployed to address the proliferation of ’33 Act claims, the federal statute that governs disclosures for IPOs and other public debt and equity offerings. The Cyan decision allowed such claims to be filed in either federal or state court and led to multiple lawsuits filed in different courts with no way to consolidate them. Unfortunately, the Delaware Chancery Court held companies could not designate Delaware federal courts as the exclusive forum for these lawsuits, but that decision has now been overturned. A Delaware incorporated company planning a public offering may now include a provision in its articles of incorporation that designates federal court as the exclusive forum for ’33 Act claims.

While this is a helpful ruling, its reach has limits. Only Delaware corporations are governed by it; other states may not enforce such provisions. Many legal issues still need to be clarified through litigation that will most likely take place in California where state court ’33 Act claims are common. The next legal battle will be if a court enforces a federal forum provision added by a company that is already public, is added to the bylaws or concerns a non-Delaware corporation.

Frankly, the biggest winners from this decision are D&O insurers, several of which helped fund this appeal and who typically suffer the most in these multiple-claims-against-one-insured scenarios. In an insurance market that will only grow more challenging due to the COVID-19 pandemic, any relief for insurers will benefit insureds and is welcome. Any predictions that the Sciabacucchi decision will lead to premium reductions need to be taken with a healthy grain of salt.

Mark Weintraub, J.D.
Lockton Financial Services

Not legal advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton are not privileged under the attorney-client privilege.

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