On September 28, 2018, the Delaware Chancery Court heard oral argument on the question of whether a corporation could enact a bylaw designating a federal district court as the exclusive forum for claims under the Securities Act of 1933 (the “Securities Act”). Such bylaws are the latest salvo in a long-running battle between plaintiffs seeking to litigate federal Securities Act claims in state court and defendants seeking to remove these claims to federal court. The Supreme Court recently resolved a circuit split on the removability of Securities Act claims in Cyan, Inc. v. Beaver Cty. Emps. Retirement Fund. The Court decided that the statutory provisions of the Securities Act, which provide for concurrent state and federal jurisdiction over Securities Act claims, were not superseded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), which sought to make federal courts the exclusive jurisdiction for securities class actions. Federal forum selection clauses are now the last battleground in whether plaintiffs will continue to be able to litigate Securities Act claims in state court. This article addresses the recent litigation surrounding the enforceability of these bylaws.
After the stock market crash of 1929, Congress enacted legislation to regulate securities markets and transactions. During this time, two main pieces of legislation were passed, the Securities Act and the Securities and Exchange Act of 1934 (the “Exchange Act”). The Securities Act governs initial public offerings of securities and is intended to provide investors with greater transparency in a company’s financial statements. This Act prohibits material misstatements and omissions in initial public offering (“IPO”) materials. Additionally, the Securities Act provides investors with a private right of action and concurrent jurisdiction for these claims in either state or federal court.
The Exchange Act governs open-market trading including purchases and sales of securities on securities exchanges. As enacted originally, the Exchange Act allowed for exclusive federal jurisdiction of claims brought under the Act. The U.S. Supreme Court determined this statute created an implied private right of action for investors, also exclusively in federal court.
Over sixty years after the enactment of the Securities Act and the Exchange Act, in 1995, Congress adopted the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The stated purpose of the PSLRA was to limit the filings of frivolous or unwarranted securities claims. The PSLRA sought to accomplish this goal by implementing procedural and substantive requirements for class actions brought under federal securities laws. Eliminating the race-to-the-courthouse, first-to-file regime for securities fraud cases, the PSLRA imposed heightened pleading standards for securities fraud cases filed in federal court and a procedural framework for the appointment of a lead plaintiff and lead counsel. Following this legislation, there was an increase in filings of securities fraud claims in state court as plaintiffs, and their lawyers, sought to avoid the PSLRA’s additional pleading requirements and the lead plaintiff appointment provisions.
In effort to prevent this state law loophole, Congress adopted SLUSA in 1998. SLUSA gave federal courts the “exclusive venue for most securities fraud class actions.” Congress passed SLUSA to “prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State court, rather than Federal court.” SLUSA pre-empts state law class action securities fraud claims that allege misrepresentation or manipulation in connection with the purchase or sale of a covered security. Specifically, SLUSA precluded private parties from pursuing “covered class actions,” (those seeking damages for over 50 people) in state court by making such claims removable to federal court and/or subject to dismissal on the basis of pre-emption.
Nonetheless, SLUSA remained unclear as to whether covered class actions solely alleging Securities Act claims may be filed in state court given the explicit concurrent jurisdiction provision in the Securities Act and SLUSA’s silence as to whether these provisions were superseded. The courts also differed in their interpretation as to whether SLUSA allowed “covered class actions” brought under the Securities Act to be removed to federal court. The language in these statutes resulted in a split among federal district courts. For example, the Ninth Circuit in Luther v. Countrywide et al., concluded that SLUSA did not supersede the Securities Act’s jurisdiction provisions and allowed plaintiffs to pursue claims in state court.  While the Second Circuit in Knox v. Agria Corp., concluded that SLUSA preempted state court jurisdiction of Securities Act claims. The practical reality of the Luther opinion was the expansion of parallel litigation in state courts within the Ninth Circuit of Securities Act claims that were simultaneously being pursued in federal court under the PSLRA’s framework. Defendants attempted, with varying degrees of success, to coordinate these parallel proceedings, through pursuit of state or federal stays, and preemption doctrines like the Colorado River doctrine.
In March 2018, the Supreme Court in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018), resolved this circuit split. The Supreme Court unanimously held that SLUSA only applied to claims arising under state law, and not federal claims brought in state court. Thus, state courts retain jurisdiction to hear claims arising under the Securities Act and these actions are not removable from state court to federal court. The Supreme Court noted that SLUSA’s statutory language “does nothing to deprive state courts of their jurisdiction to decide class action brought under the” Securities Act.  Justice Kagan further explained, “[w]e do not know why Congress declined to require as that [Securities Act] class actions be brought in federal court . . . But in any event, we will not revise that legislative choice, by reading [the statute] in a most improbable way, in an effort to make the world of securities litigation more consistent or pure.” 
In the wake of the Luther decision in the Ninth Circuit, and an increase in the filing of Securities Act claims in state courts within the Ninth Circuit, some companies adopted federal forum selection bylaws designating federal courts as the exclusive jurisdiction for claims asserting violations of the Securities Act. For example, Snap, Inc., which went public in March 2017, included a bylaw in its corporate charter assigning federal district courts as the “exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.” The inclusion of forum provisions in a corporation’s bylaws is not a novel idea. Professor Joseph Grundfest, a former Commissioner of the Securities and Exchange Commission and current professor at Stanford University, first introduced the idea of including an intra-corporate (i.e. relating to internal corporate affairs) forum provision in a corporation’s bylaws in 2010.  Following this, many corporations have included these provisions in their charters. Notably, the Delaware Chancery Court has upheld the validity of these provisions under Delaware law.  The impetus to extend the intra-corporate forum selection bylaw to federal forum selection bylaws for claims arising under the Securities Act also appears to have originated with Professor Grundfest.
In response to these bylaws, on December 29, 2017, an investor filed suit styled as Sciabacucchi v. Salzburg et al., in Delaware Chancery Court against three Delaware incorporated and California based companies alleging that the federal forum bylaws their Boards adopted were improper. The investor sued Blue Apron Inc., a meal kit delivery service, Roku Inc., a streaming device manufacturer, and Stitch Fix Inc., an online subscription and personal shopping service. Specifically, the plaintiff ’s complaint alleges that the companies’ federal forum provisions are invalid under Delaware law because the bylaws purport to regulate the forum in which a claim may be brought despite the claim not relating to an internal corporate issue governed by Delaware law.
Delaware General Corporation Law (“DGCL”) allows Delaware corporations’ to include bylaws that govern the internal affairs of the corporation. This includes bylaws that designate Delaware state courts as the exclusive forum for claims regarding “internal corporate affairs,” such as shareholder derivative claims brought under DGCL. Specifically, DGCL § 102(b)(1) states, “the [company’s] certification of incorporation may also contain . . .[a]ny provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of stockholders, or the governing body, members . . . if such provisions are not contrary to the laws of [Delaware].”
Moreover, DGCL § 115 states that “no provision of the certificate of the incorporation or the bylaws may prohibit bringing such claims in the courts of this State.”  This section was promulgated following several Delaware state court decisions permitting Delaware corporations to choose the corporation’s principal place of business as the exclusive forum for litigation involving internal corporate claims.
In Sciabacucchi, the plaintiff asserted that even if the court determines that stockholder securities class actions are internal corporate affairs, these federal forum provisions are still invalid under DGCL §115 because they purport to limit the ability of a plaintiff to bring such claims in Delaware state court. In other words, DGCL § 115 expressly prohibits corporations from drafting forum provisions that preclude claims involving “internal corporate affairs” from being brought in Delaware state courts. The plaintiff argues that as written, these federal forum provisions designate claims arising under the Securities Act as “internal corporate affairs.” Because the federal forum provisions then prohibit these claims from being brought in Delaware state court, they violate DGCL § 115.
The Arguments Before the Chancery Court
On September 27, 2018, the parties presented oral arguments regarding their cross-motions for summary judgment before the Honorable J. Travis Laster, Vice Chancellor of the Court of Chancery for the State of Delaware. During oral argument, the plaintiff presented similar arguments as those summarized in the complaint. The plaintiff presented three principal reasons for the invalidity of the federal forum selection bylaws:
• DGCL § 102(b)(1)’s language did not extend beyond internal corporate matters and Delaware state courts consistently interpreted this statute to govern only the internal affairs of the corporation and intra-entity disputes. The purpose of the federal forum bylaw to regulate external affairs was evidenced by Professor Grundfest himself who was quoted as stating that the purpose of the provisions he envisioned was to “regulate a stockholder’s ability to bring a securities fraud claim or any other claim that was not an intra-corporate matter.”
• A federal securities claim is not “a right of stockholders” as stated in DGCL, but instead vests in the purchaser and seller of securities who may, or may not be a current stockholder. Claims under the Securities Act remain with a person even after they are no longer a stockholder. Moreover, a Securities Act claim may be brought against a person who does not traditionally manage a corporation, such as underwriters, auditors, and general counsel, and thus, cannot be said, at a minimum for such claims, to involve the internal affairs of the corporation.
• Court’s applying Delaware’s so-called “stay-in-your-lane policy” consistently interpreted Delaware laws so as to not conflict with the federal government’s regulation of the securities markets. As drafted, these federal forum selection bylaws are in tension with this established policy.
The Court did not engage with the plaintiffs’ presentation of arguments but pressed the defendants on their counter. According to the defendants, DGCL § 102(b)(1) should be broadly construed to permit federal forum selection bylaws as the statute states that “the [company’s] certification of incorporation may also contain . . . [a]ny provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation.” The defendants argued that Delaware state courts interpreted the phrase “any provision” expansively and that this language should extend to the manner in which stockholders may pursue their rights. The defendants further contended that these federal forum provisions relate to the “affairs of the corporation” and the “management of the business” because they regulate Securities Act claims that are brought following an IPO and channel these claims to the federal district court where they are heard more efficiently. This in turn regulates the manner in which stockholders may bring Securities Act claims, which arise from their stock ownership. The defendants asserted that there is nothing in DGCL § 102 that suggests the “affairs of the corporation” means only internal affairs, and as such, only claims governed strictly by Delaware law.
The defendants also urged that the bylaws did not impact any substantive right of a stockholder and was merely procedural in so far as they dictate only where and not whether a Securities Act claim may be brought.
Lastly, the defendants argued from a public policy standpoint the federal forum provisions for Securities Act claims are procedurally efficient as federal courts are in the best position to hear a federal securities claim. This forum selection clause is beneficial as it prevents almost identical claims under the Securities Act from being heard simultaneously in federal and state court. Allowing companies to include this federal forum provision in its charter will create efficiency among the courts and will not waste stockholder dollars on litigating the same claims in multiple forums.
The court seemed skeptical about the defendants’ efforts to fit the federal forum provisions within the plain language of DGCL § 102(b)(1), notwithstanding the defendants’ efforts to characterize federal securities claims as relating to “the management of the business,” “the conduct of the affairs of the corporation,” or as a provision that limits and regulates the powers of the corporation, directors, and the stockholders.
The court also queried how to frame the connection between stock ownership and the Securities Act claim, so that these claims could be regulated in charters or bylaws. The court expressed concern that if this federal forum provision is found valid then all forum provisions relating to a person’s status as a stockholder would be valid. The court sought clarity as to what type of forum provisions would then be invalid under DGCL 102(b)(1) if this federal forum provision is allowed. The defendants responded that the framing of the connection must be broad because federal securities claims arise out of the relationship between the constituents mentioned in DGCL § 102. The defendants contested that regardless of whether the claim arises under Delaware state law, a corporation could include a federal forum provision in its bylaws as long as the claim relates to stock ownership. In the end, the court stated that it still failed to follow the defendants’ logic as to how the language of DGCL § 102 could be expanded to cover any stockholder claim arising from any source of law.
The defendants also argued that the Plaintiffs’ claims were not ripe for adjudication because the bylaw in question had not yet deterred a party from bringing its federal securities claims and no defendant to date had invoked the provision. The court, however, disagreed with this logic noting that it is impossible to tell whether the provision has deterred any claims as the base rates of who would have brought this claim in state court is unknown. Therefore, it is unclear how many potential claims the defendants already deterred.
Ultimately, this case will clarify how broadly Delaware state courts interpret the management and affairs of the corporation under DGCL § 102(b)(1). The decision of the court will depend on whether it interprets the “management of the business” and “the conduct of the affairs of the corporation” to extend to all claims brought by shareholders. While predicting how the court might rule on the issue is fraught, there were signs in the argument that the Court was skeptical of the defendants’ arguments. During its questioning, the court appeared hesitant to extend DGCL § 102(b)(1)’s regulation of traditional intra-corporate affairs to claims explicitly created by federal law. The court recognized the tension in finding that rights endowed by federal law could be construed as part of the internal affairs of a public corporation. Or more broadly, whether any claim by a stockholder against a corporation, including a breach of contract claim, should be governed by DGCL § 102(b)(1) to include any stockholder claim brought under any source of law. The defendants sought to reassure the Court by suggesting that the forum provision is limited by a person’s status and capacity as a stockholder and that the forum provision is procedural in nature because it merely dictates which court a Securities Act claim may be brought.
Implications Moving Forward
The increased frequency of parallel state and federal litigation arising under the Securities Act creates some uncertainty in the litigation of securities claims, the potential for duplicative litigation, and the possibility of conflicting outcomes. Yet, there are existing mechanisms under state and federal law to stay or render irrelevant duplicative cross-jurisdictional proceedings. These mechanisms include pre-emption doctrines, state or federal litigation stays, and the class action procedural device itself, which arguably renders parallel state litigation moot once a case in a federal forum is certified as a class action or vice versa. Federal forum bylaws assume that all state law litigation of Securities Act claims is duplicative of other federal litigation (and frivolous to boot) but there are several examples of state litigation being pursued in the wake of the Cyan decision that do not have parallel federal cases. From an investor standpoint, having a choice of either state of federal court to prosecute claims arising from initial offerings, where the federal court dockets are increasingly over-burdened and slow-acting, is an important choice.
It is also likely that to the extent state courts begin to see more Securities Act litigation, there will be a convergence towards common procedural mechanisms between state and federal courts, such as discovery stays, consistent processes for lead plaintiff appointments, and deference to proceedings in other forums, and to the extent such proceedings are truly duplicative.
In the unlikely event that the Delaware Chancery Court determines that the federal forum bylaws are permissible (and this decision is upheld on appeal to the Delaware Supreme Court and potentially the U.S. Supreme Court) we can expect these bylaws to become standard provisions in new IPOs and the marshalling of any such precedent to further erode shareholder litigation in significant and harmful ways, such as including shareholder arbitration clauses in corporate bylaws.
 See 15 U.S.C. § 77a, et seq.
 H.R. Rep. No. 105-803 (1998).
 15 U.S.C. § 78bb(f)(1); see Merrill Lynch, 547 U.S. 71 at 87.
 Luther v. Countrywide Fin. Corp., 195 Cal. App. 4th 789, 797-98 (2011).
 Knox v. Agria Corp., 613 F.Supp.2d 419, 425 (S.D.N.Y. 2009).
 See e.g., Cervantes v. Dickerson, 2015 WL 6163573. See generally Colo. River Water Conservation Dist. v. U.S., 424 U.S. 800 (1976).
 Cyan v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1078 (2018).
 Snap Inc. Form S-1 Registration Statement p. 160 (Feb. 2, 2017).
 Pl. Br. Summ. J. 8.
 See e.g., City of Providence v. First Citizens Bancshares, Inc., 99 A.2d 229 (Del. Ch. 2014);Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).
 Joseph Grundfest, Presentation at the Rock Center for Corporate Governance (2016);see also Pl. Br. Summ. J. 9 (arguing that Professor Grundfest allegedly made this proposal in 2016 during a presentation at the Rock Center for Corporate Governance).
 Sciabacucchi v. Salzberg, et al., No. 2017-0931 (Del. Ch. argued Sept. 28, 2018).
 Del. Code tit. 8, §102(b)(1) (1953).
 Del. Code tit. 8, §115 (2015).
 See e.g., City of Providence v. First Citizens Bancshares, Inc., 99 A.2d 229 (Del. Ch. 2014);Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).
 Pl. compl. at pg. 20., para 50.
 Tr. (Sept. 28, 2018).
 See Pfizer Inc., SEC No-Action Letter (Feb. 22, 2012); Gannett Co., Inc., SEC No-Action Letter (Feb. 22, 2012).