Amending the Delaware Corporate Code by Going to Court
Written By: Zachary J. Gubler
In December 2018, the Delaware Chancery Court issued an opinion that may have vast implications for the way corporate America manages its litigation matters. Under federal securities laws, any individual who purchases a security from an issuer has the right to sue for material misstatements or omissions included in various disclosures that public companies are required to make. These lawsuits can be useful in holding bad management accountable. However, they can also be used by clever plaintiff’s lawyers to extract payoffs from companies that have engaged in no wrongdoing, but for whom it would not be cost-effective to fight the claims. In response, some companies include provisions in their corporate charters requiring any claims under the Securities Act of 1933 (“the 1933 Act”) to be litigated in federal, rather than state, court. Strategically, by routing such claims to a more sophisticated forum, the companies could avoid some of the inefficient consequences of the 1933 Act. Many commentators also see this as a step in the direction of corporations’ ultimate goal: mandatory arbitration of all securities-law claims.
A group of plaintiff stockholders challenged these so-called federal forum provisions in Sciabacucchi v. Salzberg. In a closely watched opinion, the Delaware Chancery court invalidated federal forum provisions on the basis that they fall outside of the domain of Delaware law, which, in the court’s view, is circumscribed by the so-called “internal affairs doctrine.”
This Article argues that the Sciabacucchi opinion is flawed because it treats choice of law provisions and form contracts differently without justification. The court uses the internal affairs doctrine—the choice of law rule in question—as a means of determining what the corporation and stockholders are allowed to contract for, instead of its intended use: a means of determining what law applies to whatever the parties did, in fact, contract for. In determining the validity of the corporate contract, the Sciabacucchi court simply asks the wrong question. Under contract law, the corporate contract, like other take-it-or-leave-it contracts, is only valid to the extent that the counterparty who did not participate in the drafting (in this case, the stockholders) would not be surprised by the contents of the contract. The question then is whether the federal forum provision at issue falls into a plausible, even if not the best, reading of the section of the Delaware statute that establishes the contract’s permissible subject matter. This article argues that the statute permits the corporate contract to deal with the rights of stockholders, even if those rights or powers of stockholders are not exclusive to stockholders and do not arise exclusively under Delaware law. However, the statute does not permit the corporate contract to grant rights that have nothing to do with a stockholder’s status as such. Under this reading, federal-forum provisions easily pass muster, and therefore the Delaware Supreme Court should overturn the Chancery Court’s ruling.