Mandatory Shareholder Arbitration in Delaware

December 26, 2018

A recent ruling in a Delaware Chancery Court case, Sciabucchi v Salzberg, mandates that corporations cannot force shareholders to litigate initial public offering (IPO) fraud claims in federal court through forum selection clauses in their corporate charters. This decision invalidated provisions in the corporate charters of three companies that went public in 2017 that demanded shareholders bring Securities Act lawsuits in federal court.

The implications of the decision go well beyond the forum selection clauses that were addressed. In fact, if this decision is affirmed by the Delaware Supreme Court, it will crush a growing movement to allow corporations to force shareholders to arbitrate their securities fraud claims. The reasoning is this: Corporations can’t regulate federal securities litigation through their charters or bylaws, and even if they attempt to insert mandatory arbitration provisions in contracts with their shareholders, those provisions cannot be enforced.

This ruling draws a firm line between shareholder claims brought under Delaware law that arise out of the stockholder relationship, and federal securities claims. With the former, Delaware corporations can adopt forum selection provisions; with the latter, they can’t. The basis for this is those claims do not arise through internal corporate relationships. Incorporation does not support the application of the chartering state’s law to external claims.

The above reasoning is grounded in precedent. In Boilermakers Local 154 Retirement Fund v. Chevron, from 2013, forum selection clauses that require shareholders to litigate breach-of-duty claims in Delaware Chancery Court were validated. It was emphasized, in fact, that the forum selection clauses were restricted to internal affairs litigation that arose from “the corporation’s business, the conduct of its affairs, and the rights of its stockholders [qua stockholders].”  Importantly, this did not include the forum for tort or contract claims against the company.

If the Supreme Court agrees, Delaware corporations will not be able to force mandatory shareholder arbitration of federal securities claims through corporate charters or bylaws, even if the Securities and Exchange Commission does not object.

This decision is a step in allowing investors to protect their substantive rights and avoid forced arbitration.

At Jacobs & Crumplar, P.A., we work tirelessly to fight for your corporate rights. Please call 302-656-5445 to learn more, or contact us online. The firm represents clients in upstate and downstate Delaware from our offices in Wilmington and Georgetown, Delaware.