In Sciabacucchi v. Salzberg, 2018 Del. Ch. LEXIS 578, Vice Chancellor J. Travis Laster ruled that a Delaware corporation’s certificate of incorporation and bylaws cannot restrict the forum in which stockholders may bring a federal claim. The decision attracted the attention of both practitioners and academicians. In a recent paper (available here), Professors Dhruv Aggarwal (Yale University), Albert H. Choi (University of Michigan), and Ofer Eldar (Duke University) explore the implications of Vice Chancellor Laster's ruling.
The authors note that adoption rates of federal forum selection provisions "substantially increased after the US Supreme Court case, Cyan Inc. v. Beaver County Employees Retirement Fund, [138 S. Ct. 1061 (2018)] which validated concurrent jurisdiction for both federal and state courts for 33 Act claims". Not surprisingly, however, they also found that Vice Chancellor Laster's decision in Salzberg "led to a substantial slowdown in the adoption" of federal forum selection provisions.
California enters the picture because the authors found that while virtually all of the companies adopting federal forum selection provisions are incorporated in Delaware, more than one-half are headquartered in California. They point out several reasons why these companies may want to stay out of California state courts, including:
- The low-ranking of California's judicial climate (47th in U.S. Chamber of Commerce survey);
- California's low pleading standard; and
- California's allowance of discovery before the motion to dismiss stage.
If these authors are correct, then one consequence, albeit unintended, of Vice Chancellor Laster's ruling in Salzberg may well be to drive litigation under the Securities Act of 1933 into California state courts. In that case, these corporations may look to reincorporate in a jurisdiction that espouses more lenity to federal forum selection provisions.