(Reuters) - It’s on! A landmark Delaware Chancery Court decision (2018 WL 6719718) that is widely seen as a bulwark against the prospect of corporations requiring shareholders to arbitrate securities claims is now before the Delaware Supreme Court.
On Friday, Wilson Sonsini Goodrich & Rosati filed an opening brief asking the state justices to bless corporate charter provisions that force shareholders to litigate suits asserting violations of the Securities Act of 1933 in federal court. According to the brief, submitted on behalf of Blue Apron, Stitch Fix and Roku, Delaware corporate law stands for the proposition that corporations are entitled to broad discretion in running their own affairs, as long as they don’t adopt provisions contrary to state law. The forum selection clause that Vice-Chancellor Travis Laster struck down in 2018’s Sciabacucchi v. Salzberg (2018 WL 6719718) merely requires shareholders to litigate Securities Act cases in federal court, Wilson Sonsini argued. So according to Blue Apron and the other companies, the vice-chancellor erred when he held the clauses to be invalid on their face.
I’ll tell you more about the brief’s argument in support of the forum selection clauses, but it’s important to understand why the Sciabacucchi case is so closely watched. What does a forum selection clause for Securities Act claims, in other words, have to do with mandatory shareholder arbitration?
You would think, from reading the new Delaware Supreme Court brief by Blue Apron and the other companies, that the answer to that question is nothing at all. The brief focuses on the history of shareholders’ claims under the Securities Act, which gives shareholders a right to sue in either state or federal court over misleading registration statements. The U.S. Supreme Court confirmed that dual jurisdiction in 2018’s Cyan v. Beaver County Employees Retirement Fund (138 S.Ct. 1061).
Shareholders are increasingly likely to take advantage of state court jurisdiction. Discovery rules are often more lenient in state court than federal court, and pleading standards are less rigorous. According to the new Delaware Supreme Court brief, in the first half of 2019, plaintiffs’ lawyers filed 75% of all Securities Act suits in state court.
To combat the trend, startups like Blue Apron, Roku and Stitch Fix began a few year ago to include forum selection clauses in their corporate charters, requiring shareholders to file their Securities Act suits in federal court. Forum selection clauses, as you know, are not a new phenomenon in corporate law. Nearly a decade ago, when plaintiffs’ lawyers routinely filed M&A shareholder class actions simultaneously in multiple jurisdictions, Delaware corporations began adopting forum selection provisions mandating that shareholders litigate breach-of-duty claims in Chancery Court. In 2013’s Boilermakers Local 154 v. Chevron (73 A.3d 934), then Chancellor Leo Strine ruled that such provisions are valid and enforceable. Proponents of Securities Act forum selection provisions argued that they are a logical extension of the provisions Strine approved in the Chevron case.
But opponents – led in the Blue Apron litigation by shareholders’ lawyers from Block & Leviton – contended that there is a fundamental difference between state-law breach-of-duty claims, which involve a corporation’s internal affairs, and Securities Act allegations, which involve federal law outside the bounds of a corporation’s contract with its shareholders.
Here’s where mandatory shareholder arbitration comes in. Arbitration, after all, is just another forum for dispute resolution. So shareholder litigation advocates warned that if Delaware court permitted corporations to pick a forum for federal claims under Securities Act, companies would subsequently try to push shareholders out of court altogether and into arbitration.
Mandatory shareholder arbitration once seemed unthinkable in the face of staunch opposition from the Securities and Exchange Commission. But it has become a less remote prospect after the Supreme Court’s most recent pro-arbitration rulings and softening attitudes at the SEC. The Blue Apron forum selection litigation was seen as a critical test of corporate power to restrict shareholders’ autonomy over federal securities claims.
Vice-Chancellor Laster’s ruling last December that corporations cannot dictate where shareholders bring those claims has been a boon to advocates of shareholder class actions. As I’ve explained, Laster’s decision in Sciabacucchi prompted New Jersey’s attorney general to conclude that New Jersey law precludes mandatory shareholder arbitration, which, in turn, led the SEC to allow Johnson & Johnson to sidestep a shareholder vote on a proposal that would strip them of the right to sue. The ruling also plays a starring role in the first federal-court test of mandatory shareholder arbitration, now under way before U.S. District Judge Michael Shipp of Trenton.
Wilson Sonsini has always taken the position that mandatory arbitration of securities fraud claims is a red herring in the litigation over forum selection clauses in the Blue Apron, Roku and Stitch Fix charters. Friday’s brief to the Delaware Supreme Court avoided the entire subject of the 1934 Act.
Wilson Sonsini tried to streamline the case, urging the Delaware justices to focus on the broad enabling language of the state’s corporate law and on former Chancellor Strine’s ruling in the Chevron case. (Strine, now Delaware’s chief justice, has announced that he will step down by the end of October.) Federal Securities Act claims of misleading registration statements are the federal-law equivalent of breach-of-duty allegations, the brief argued. Delaware precedent has already concluded that corporations can channel breach-of-duty suits to the forum of their choice. So there’s no reason, according to the brief, that corporations cannot require shareholders to bring federal Securities Act claims in federal court.
Shareholders’ lawyer Joel Fleming of Block & Leviton declined to comment on the Wilson Sonsini Supreme Court brief. (In addition to challenging the vice-chancellor’s ruling on the validity of their forum selection clauses, the companies are also asking the Delaware justices to vacate a $3 million fee award to plaintiffs’ lawyers.) But it’s a sure bet that despite Wilson Sonsini’s effort to narrow the case, shareholders and amici are going to fight hard to preserve the Sciabacucchi precedent.