Overview
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Shareholder claims based on negative events have been climbing for years. We expect the ongoing pandemic will fuel that trend further, increasing already record-breaking numbers and dollar amounts of shareholder securities and derivative claim filings seen last year. To mitigate risk from these claims, Delaware-incorporated businesses should consider adopting exclusive forum clauses requiring that all derivative claims be brought in the Delaware Court of Chancery and all claims under the Securities Act of 1933 ('33 Act) be brought in federal court.
Charters and bylaws clauses remain important tools to protect shareholder value from litigation risk: The Delaware courts are attuned to the issues raised in corporate litigation and poised to act quickly in the event such claims are asserted. Since Delaware decisional law likely will apply to derivative claims, the Delaware courts also offer a uniformity – and therefore a predictability – that is not always present in other states. Similarly, '33 Act claims will receive more uniform treatment when considered in federal court under a fully developed body of federal decisional law.
The risks of such claims can be mitigated with prudent planning. Delaware codified the judicial endorsement of exclusive forum clauses for derivative cases in 2015 by providing that a corporation's certificate of incorporation or bylaws may require that "any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State . . . ." 8 Del. C. § 115. The statute defines "internal corporate claim" as claims "that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity."
Following the Supreme Court's opinion in Cyan, Inc. v. Beaver County Emps.' Ret. Fund, 138 S.Ct. 1061 (2018), plaintiffs'-side firms have increasingly brought claims under the '33 Act in state courts, which have parallel jurisdiction, with California being a particularly favored jurisdiction for such claims. A study by Cornerstone Research found that settlement values for securities claims brought in California state court had twice the median settlement value of comparable cases brought in federal court.
Many companies adopted exclusive forum clauses governing securities claims to address this, and cases challenging those clauses have been working their way through the courts. Last week, in Sciabacucchi v. Salzberg, the Delaware Supreme Court reversed a trial court opinion invalidating one of these clauses to permit Delaware corporations to adopt such restrictions on shareholder claims under the '33 Act. Access the full opinion.
The case endorsed forum clauses governing '33 Act claims with language substantially similar to the following:
"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]."
Delaware-incorporated companies, particularly those considering new share offerings, should strongly consider adopting similar clauses if they have not done so already.
