There have certainly been many developments in securities claims jurisdiction in the past several years, particularly in the area of “exclusive forum” provisions contained in charters or bylaws. Exclusive forum provisions typically provide that a certain court (e.g., the Delaware Court of Chancery) is the sole and exclusive forum for certain types of litigation involving the company. These provisions are often tested in the courts, especially when they seem to be in conflict with controlling precedent. For example, in 2018 in Cyan v. Beaver Cty. Empls. Ret. Fund, the United States Supreme Court concluded that federal law did not bar state courts from adjudicating class actions alleging only claims under the 1933 Act, and it also prohibited the removal of such class actions from state to federal court.
Following Cyan, several Delaware companies attempted to avoid litigating 1933 Act class actions in state court by adopting charter-based federal forum provisions, which required stockholders to file any claim under the 1933 Act in federal court. Those efforts to circumvent the consequence of Cyan, however, failed when in a December 2018 case (Sciabacucchi v. Salzberg), the Delaware Court of Chancery rejected use of these federal forum provisions. The court reasoned that Delaware corporations could only adopt forum-selection provisions for “internal-affairs claims.” According to the Delaware Court of Chancery, “a 1933 Act claim is external to the corporation.” Therefore, because 1933 Act claims are external to Delaware corporations, charter provisions requiring a federal forum for 1933 Act class actions brought by corporation shareholders were invalid under Delaware law.
Notwithstanding the above related to the 1933 Act class actions, federal courts continue to have “exclusive jurisdiction” to hear claims brought under the 1934 Act as a result of Section 27(a) of that law.
SEC Comments on Exclusive Forum Provisions
As expected, the usage and evolution of “exclusive forum” provisions by companies in charters and bylaws have been a frequent subject of comment in the Staff review process. For example, in a recently published SEC comment letter (repeated below for reference), the SEC required the company to clarify whether the designation of the Delaware Court of Chancery as the exclusive forum would apply in lawsuits brought to enforce any duty or liability created by the 1934 Act. The comment and responses are repeated below, with the text underlined for emphasis in the original comment letter.
Anti-Takeover Effects of Certain Provisions of Delaware Law . . . .
Exclusive Forum, page 159
- We note that the amended and restated Certificate of Incorporation that will be effective on closing of this offering and your disclosure here identifies the Delaware Court of Chancery as the exclusive forum for certain litigation, including “any derivative action.” Please disclose whether this provision applies to actions arising under the Exchange Act. In this regard, we note that Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. If this provision does not apply to actions arising under the Exchange Act, please ensure that the exclusive forum provision in your governing documents states this clearly.
The Company respectfully advises the Staff that it plans to include exclusive forum provisions in the Company’s Amended and Restated Bylaws (the “Amended Bylaws”) that will be effective upon the closing of this offering instead of the Company’s Amended and Restated Certificate of Incorporation that will be effective upon the closing of this offering and has revised the disclosure in the Registration Statement accordingly. In addition, the Company advises the Staff that the exclusive forum provisions in the Amended Bylaws will clarify that the designation of the Delaware Court of Chancery as the exclusive forum will not apply in certain circumstances, including actions where another court has exclusive jurisdiction. The Amended Bylaws state that, “[u]nless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or the corporation’s stockholders, (iii) any action arising pursuant to any provision of the General Corporation Law of the State of Delaware or the corporation’s certificate of incorporation or these bylaws (as either may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim (A) as to which such court determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable party does not consent to the personal jurisdiction of such court within ten (10) days following such determination), (B) which is vested in the exclusive jurisdiction of a court or forum other than such court, or (C) for which such court does not have subject matter jurisdiction” (emphasis added). Accordingly, the provision does not designate the Court of Chancery as the exclusive forum for any derivative action arising under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) since there is exclusive federal jurisdiction for such an action, and instead designates the federal district court for the District of Delaware in such instance. Further, in response to the Staff’s comment, the Company has updated the disclosure on pages 59, 60 and 167 of the Registration Statement to clarify the exceptions to the exclusive forum designation in the Company’s Amended Bylaws.
Additional Examples of Recent Comments Involving Exclusive Forum Provisions
- Dyadic International, Inc., dated February 7, 2019 (Staff asked company to clarify whether exclusive forum provision applies to actions arising under the 1933 Act or 1934 Act)
- Eyenovia, Inc., dated December 4, 2018 (Staff asked company to provide additional disclosure regarding its exclusive forum provision in the “Description of Securities” section of its registration statement)
- Monocle Acquisition Corporation, dated October 29, 2018, Yeti Holdings, Inc., dated September 21, 2018 and Agiliti, Inc., dated September 22, 2018 (Staff asked each company to disclose whether its respective exclusive forum provision applied to actions arising under the federal securities laws)
- Guardant Health, Inc., dated September 21, 2018 (Staff asked company to clarify whether exclusive forum provision applies to actions arising under the 1934 Act)
- AMERI Holdings, Inc., dated September 18, 2018 (Staff asked company to address the exclusive forum provision in its bylaws)
- Fundrise Real Estate Investment Trust, LLC, dated June 20, 2018 and AHS Holding Company, Inc., dated May 25, 2018 (Staff asked each company to expand disclosure to address the reasons for adopting its respective exclusive forum provision)
- Impact Housing REIT, LLC, dated June 6, 2018 (Staff asked company to revise a risk factor to address how the exclusive forum provision may impact shareholders, reasons for adopting the exclusive forum provision and questions about the enforceability of the provision)
- Walt Disney Company, dated May 8, 2018 (Staff asked company to include disclosure in its prospectus regarding the exclusive forum provision, its scope, its enforceability and its potential impact on the rights of investors)
As evidenced by the above, registrants and counsel that are considering including exclusive forum provisions should be prepared for a close SEC Staff review of the provisions as well as the explanatory disclosure in the prospectus.
For questions or additional information, contact authors Jay Knight or Taylor Wirth.