Earlier this month, the Delaware Supreme Court held in Salzberg v. Sciabacucchi that provisions in a Delaware corporation’s certificate of incorporation requiring lawsuits arising under the 1933 Securities Act to be filed in federal court are valid under Delaware law.
Exclusive federal forum provisions (“FFP”) benefit companies seeking to avoid litigating duplicative Securities Act claims in multiple forums. Salzberg is an important development following the Supreme Court’s holding in Cyan v. Beaver, discussed in an earlier blog on my website.
Briefly, after enactment in 1998 of the Private Securities Litigation Reform Act (“PSLRA”), plaintiffs’ attorneys began to file such cases in state court to avoid the federal court’s more onerous pleading requirements. Cyan held that Securities Act class actions may be brought in state court and are not removable to federal court. Cyan accelerated the migration of Securities Act claims to state court. There are no procedural mechanisms to consolidate or coordinate simultaneous federal and state actions filed in different forums. Consequently, post Cyan, companies were confronted with potentially significant expense from duplicative state and federal court Securities Act litigation.
With this background, companies adopted exclusive FFPs in their corporate documents that required Securities Act litigation to be filed in federal court. Their objective was to avoid duplicative, parallel actions in federal and state courts, and to gain a perceived advantage in litigating such cases in a more defendant friendly post-PSLRA federal forum. In a unanimous decision, the Delaware Supreme Court held in Salzberg that FFPs merely seek to regulate the forum of Securities Act litigation and are valid under Delaware law.
As a result of Salzberg, most Delaware companies will adopt an FFP, while companies in other jurisdictions will strongly consider doing so, relying upon the same legal principles the Salzberg Court enunciated to uphold such provisions under Delaware law. It remains to be seen how courts outside of Delaware will view such FFPs.
Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau, and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at www.JDBMediation.com