On March 18, 2020, the Delaware Supreme Court decided Salzberg v. Sciabacucchi, 2020 WL 1280785 (Del. March 18, 2020), rejecting a challenge to the validity of federal-forum provisions (FFPs) adopted in the corporate charters of three Delaware companies before their initial public offerings (IPOs). The challenged FFPs designated the federal courts as the exclusive venue for shareholder suits under the federal Securities Act of 1933. While concluding that FFPs can survive a facial challenge, the decision raises several new questions, including how the opinion will apply to forum selection clauses adopted in different contexts, such as mandatory-arbitration clauses. After briefly summarizing the Salzberg decision, we assess its impact on these and other questions.

The 'Salzberg' Decision

FFPs address the Securities Act's venue provision. That provision allows private litigants alleging Securities Act violations—most often misstatements or omissions in registration statements (§11) or prospectuses (§12(a)(2)) and control-person liability (§15)—to sue in state or federal court. And as the U.S. Supreme Court recently clarified in Cyan v. Beaver County Employees' Retirement Fund, 138 S. Ct. 1061 (2018), Securities Act class actions brought in state court cannot be removed to federal court. Corporations thus face a risk of simultaneous securities litigation on two fronts, since companies cannot remove state-court class actions and consolidate them with parallel federal-court suits. FFPs mitigate that risk by requiring shareholders to bring all Securities Act suits against the company and its directors and officers in federal court.

The three defendant-corporations in Salzberg are Delaware corporations that, before their 2017 IPOs, adopted FFPs in their corporate charters. The plaintiff bought shares in each and then sued these three companies and their directors, seeking a declaratory judgment that FFPs are facially invalid under Delaware Law. The Delaware Supreme Court ruled in favor of the defendants, holding that the FFPs could withstand a facial challenge. The court reasoned that FFPs fall within the broad ambit of Delaware General Corporation Law (DGCL) §102(b)(1), which allows corporations to adopt (1) "provision[s] for the management of the business and for the conduct of the affairs of the corporation," and (2) "provision[s] creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders." Del. Code Ann. tit. 8, §102(b)(1). The court determined that FFPs could fall into either of these categories of so-called "intra-corporate affairs" under §102(b)(1). Salzberg, 2020 WL 1280785, at *4.

The court rejected the argument that FFPs violate DGCL §115, which bars forum selection provisions that prevent "internal corporate claims" from being brought in "the courts of [Delaware]." Del. Code Ann. tit. 8, §115. According to Salzberg, "internal corporate claims" are those concerning "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders," such as claims for breach of fiduciary duty. 2020 WL 1280785, at *14. "Internal corporate claims" are thus a subset of claims concerning "intra-corporate affairs"—i.e., claims that a shareholder brings against another shareholder, claims that a shareholder brings against the corporation, and claims that the corporation brings against a shareholder.

In other words, Salzberg reasoned, FFPs are facially valid under §102(b)(1) because they relate to intra-corporate affairs, and §115 because they do not relate to "internal corporate claims."

Key Takeaways and Open Questions

Should private companies adopt their own FFP before going public? While Salzberg established that FFPs as a general matter do not violate Delaware law, some still might. The court in Salzberg explained that an FFP might violate Delaware law:

(1) if it requires that shareholders litigate "internal corporate claims" in a forum other than the courts of Delaware; or

(2) if its enforcement would be unreasonable or unjust, it is the product of "fraud or overreaching," or it violates public policy.

2020 WL 1280785, at *21.

While the FFPs in Salzberg were adopted in the charters, the court's language suggests that similar provisions in bylaws would likely pass muster. Thus, the circumstances surrounding the FFP's adoption and the specific language of the provision will ultimately be relevant in determining its validity.

What about mandatory-arbitration provisions? Salzberg suggested that all manner of forum selection clauses—including mandatory-arbitration provisions—for securities claims would be valid under §102(b)(1) and would also be valid under §115, so long such clauses do not cover "internal corporate claims." The court made clear that §115 forbids corporations from requiring shareholders to arbitrate "internal corporate claims" since such a requirement would deprive shareholders of the ability to litigate such internal claims in the "courts of [Delaware]." Salzberg, 2020 WL 1280785, at *23, n.169.

Yet despite the court's suggestion that Delaware law might allow mandatory-arbitration provisions, the SEC has repeatedly indicated that such provisions might violate federal law, including in 2012 when SEC concern over a proposed mandatory-arbitration provision in the Carlyle Group's governing documents caused Carlyle to remove the clause before its IPO.

More recently, however, the SEC has suggested that the question remains open under federal law. In a 2019 letter regarding Johnson & Johnson's decision to omit from its proxy materials a shareholder proposal for a mandatory-arbitration provision in its governing documents, the SEC granted no-action relief because the New Jersey Attorney General had expressed that the provision would violate New Jersey law.

What about FFPs adopted once a company is already public? While Salzberg concerned FFPs implemented in corporate charters before each company's IPO, Salzberg's language strongly suggests that FFPs adopted post-IPO would withstand at least a facial challenge. The court noted that FFPs govern litigation arising out of a company's "IPO or secondary offering" (implying that an FFP might be adopted between an IPO and secondary offering). Salzberg, 2020 WL 1280785, at *4.

Still, corporations adopting FFPs via amendment to a corporate charter or bylaws after their IPO may face other challenges. For instance, the proxy advisory firm Glass Lewis generally recommends voting against proposals seeking to implement such provisions and against the governance committee chair, in each case unless certain conditions are met. Glass Lewis also notes that the adoption of forum selection clauses prior to a company's IPO will be a relevant consideration in whether to recommend voting against directors who were on the board at the time of adoption of such clauses. Although Institutional Shareholder Services (ISS), another key proxy advisory firm, and Vanguard, one of the largest mutual fund and ETF providers, seemingly take more nuanced views of forum selection provisions—recommending a case-by-case assessment—the Glass Lewis, ISS, and Vanguard guidelines all note that the rationale for the forum selection clause matters.

In short, while companies may adopt FFPs with little resistance before an IPO, large, sophisticated shareholders may create headwinds that are relevant for a post-IPO adoption. And if a corporation proposes a post-IPO forum selection provision, such a proposal will fare better if accompanied by well-reasoned rationale.

Additional Drafting Considerations

Salzberg also leaves open how courts will deal with FFPs and mandatory-arbitration provisions when faced with a complaint alleging both securities claims and "internal corporate claims." The FFPs in Salzberg, which designated the federal courts "the exclusive forum for the resolution of any complaint asserting a cause of action under the Securities Act," would presumably require that a complaint alleging Securities Act violations be brought in federal court, regardless of what other claims it contains. That provision likely complies with §115 so long as §115's requirement that shareholders be allowed to bring internal corporate claims in "the courts of [Delaware]" includes federal courts—a reading that Salzberg "presum[ed]" but did not decide. 2020 WL 1280785, at *8. If that reading is correct, a provision requiring shareholders to bring all complaints containing Securities Act claims in federal courts would comply with §115 because it would still allow shareholders to sue in the Delaware federal court. By contrast, requiring shareholders to bring such a complaint in arbitration would seem to flout §115, which as Salzberg notes, prevents corporations from forcing internal corporate claims into arbitration. 2020 WL 1280785, at *23 n. 169. Thus, one way to prevent shareholders from defeating forum selection clauses by joining Securities Act and internal corporate claims might be to specify that Securities Act claims (rather than complaints including such claims) must be brought in federal court.

Recap

After Salzberg, companies considering forum selection provisions for "intra-corporate" affairs should keep in mind a few key points:

• Consider the SEC's current position before adopting any mandatory-arbitration clause.
• Adopt FFPs before an IPO, if possible.
• If adopting FFPs post-IPO, ensure there is a clear rationale, thorough disclosure, and shareholder engagement.
• Ensure FFPs are appropriately tailored to the needs of the company.
• Draft FFPs to apply to claims, not complaints.

Pamela Marcogliese and Ethan Klingsberg are corporate and M&A partners at Freshfields Bruckhaus Deringer. Valerie Ford Jacob is a partner and co-head of the firm's global capital markets. Meredith Kotler is a disputes and litigation partner at the firm. Special counsel Scott Eisman and senior associate Lauren Kaplin assisted in the preparation of this article.