Recently, in Matthew B. Salzberg v. Matthew Sciabacucchi, unpublished opinion of the Supreme Court, issued March 18, 2020 (Docket No. 346, 2019), the Delaware Supreme Court approved corporate charter provisions requiring lawsuits under the Federal Securities Act to be bought in federal court, not in state court. Not only did the Supreme Court find these provisions constitutional, but its decision also provides ideas of what to include in a corporation’s Articles of Incorporation, or a limited liability company’s Articles of Organization, especially if the company is considering going public in the future.
Since the early 20th century, the state of Delaware has been the leading state of formation for business entities. In fact, more than 60 percent of the Fortune 500 companies are incorporated in Delaware, including corporations such as General Motors and Ford. By being incorporated in Delaware, these corporations are able to take advantage of the provisions of Delaware corporate law. Delaware court decisions are also often considered important for interpreting the corporate laws of other states.
In Salzberg, after buying shares of Delaware corporations, Appellee had filed a putative class-action complaint in the Court of Chancery, seeking a declaratory judgement that federal-forum provisions are invalid under Delaware law. The Court of Chancery agreed with Appellee, holding that “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.”
On appeal, the Delaware Supreme Court reversed the lower court’s judgement, holding that federal-forum provisions are valid, as they fall within the plain text of Section 102 of the Delaware General Corporation Law, which governs the matter contained in a corporation’s certificate of incorporation. The Supreme Court explained that under Section 102(b)(1), two broad types of provisions are permitted:
“any 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 the stockholders, . . . if such provisions are not contrary to the laws of this State.”
The Supreme Court went on to hold that because federal-forum provisions involve a type of securities claim related to the management of litigation arising out of the Board’s disclosures to current and prospective stockholders in connection with an IPO or secondary offering, these provisions could easily fall into either of these broad categories. Therefore, federal-forum provisions are facially valid under Delaware law.
Going forward from Salzberg, companies should consider whether a similar federal-forum provision would be beneficial to them. As for shareholders and similar individuals, they should understand the importance of carefully reading all the provisions of a corporation’s Articles of Incorporation and By-Laws, even the “boilerplate” provisions.
A link to the opinion can be found here: https://law.justia.com/cases/delaware/supreme-court/2020/346-2019.html.
