On The Case

Landmark Dela. Supreme Court case asks: What is a Securities Act claim, anyway?

(Reuters) - Arguments are firming up in Blue Apron v. Sciabacucchi, a landmark Delaware Supreme Court case that will determine whether corporations can require shareholders to sue in federal court, rather than state court, over alleged violations of the Securities Act of 1933. I told you last month about the opening brief by three companies whose forum selection clauses were deemed invalid by Vice-Chancellor Travis Laster in 2018’s Sciabacucchi v. Salzberg. Those corporations – Blue Apron, Roku and Stitch Fix – have since been joined by amici from the U.S. Chamber of Commerce and eight other companies that included Securities Act forum selection provisions in their charters or bylaws.

Shareholders filed their response brief last week. This week, they received amicus backing from the Council of Institutional Investors (CII) and 19 highly respected securities law professors, including Delaware’s own Lawrence Hamermesh of Widener University.

I've now read all of the filed briefs (and yes, I regard that as an accomplishment). All of them acknowledge that the critical precedent is 2013’s Boilermakers Local 154 v. Chevron, in which then Chancellor Leo Strine gave his blessing to forum selection provisions for shareholders’ breach of duty suits, and 2014’s ATP Tour v. Deutscher Tennis Bund, in which the Delaware Supreme Court held a fee-shifting bylaw to be enforceable. And all of the briefs agree that the key question for Delaware’s justices is whether the state’s corporate code, which gives companies vast power over “the conduct of the affairs of the corporation,” encompasses federal securities claims.

What I’ve come to realize, after plowing through both sides’ arguments, is that at heart, the corporations and their shareholders are presenting the Delaware Supreme Court with two different definitions of a federal securities claim.

The companies and their amici contend that Securities Act claims of misleading IPO documents are a matter of internal dispute between a corporation and its shareholders, a federal analog to claims under Delaware law that directors breached their fiduciary duties. As the Chamber’s lawyers at Wachtell Lipton Rosen & Katz put it in their amicus brief, “The very essence of a Section 11 claim implicates the conduct of the corporation’s directors and officers — the sweet spot of Delaware corporate law.”

Under that definition, they argue, Strine’s emphasis in the Boilermakers ruling on corporations’ right to adopt forum selections provisions for internal claims is no bar against similar forum steering for Securities Act claims. Vice-Chancellor Laster, they argue, gave too broad a reading to the Boilermakers’ precedent when he ruled in the Sciabacucchi case that the corporate code permits forum selection only for claims involving “internal affairs.” But even if Laster was correct, they assert, Securities Act claims meet that requirement.

By contrast, shareholders and their backers from CII and the legal academy argue that Securities Act litigation arises outside of Delaware’s regulation of the relationship between corporations and shareholders. (Sciabbacucchi’s lawyers at Block & Leviton also pointed out that the companies’ counsel at Wilson Sonsini Goodrich & Rosati did not argue in Chancery Court that Securities Act claims are akin to breach-of-duty assertions.) The Boilermakers’ decision specifically said that federal securities claims are external, shareholders said. And the U.S. Supreme Court, they added, has rejected arguments that shareholder claims under federal securities law are analogous to fiduciary duty suits, in 1977’s Santa Fe Industries v. Green and other cases.

“While a 1933 Act claim may, by coincidence, share some similarities with a fiduciary duty claim, the plaintiff’s status as a stockholder is irrelevant to the federal claim,” wrote the law profs’ counsel from Bernstein Litowitz Berger & Grossmann. “The 1933 Act claim is external because it does not ‘deal with the rights and powers of the plaintiff-stockholder as a stockholder.’”

Lurking just beneath the surface of the briefs by shareholders and their amici is the fear that if the Delaware Supreme Court allows corporations to steer Securities Act suits to federal court, it’s just a matter of time until a corporation attempts to mandate that shareholders must arbitrate federal securities claims. Wilson Sonsini, as I told you last month, avoided that roiling controversy in its brief for Blue Apron, Roku and Stitch Fix. The companies’ backers at the U.S. Chamber focused their policy arguments on the proliferation of Securities Act suits in state courts, where pleading standards may be less rigorous and discovery rules more lenient than in federal court.

But shareholders warned the Delaware justices of the policy implications of allowing corporations to bypass congressional intent and Supreme Court precedent to bar Securities Act suits in state court. “This would take Delaware out of its lane and encourage a federal response,” Block & Leviton wrote, noting that the Securities and Exchange Commission has long evinced “hostility to charter provisions limiting securities plaintiffs’ choice of forum.”

What makes the Delaware Supreme Court’s consideration of the Sciabbacucchi case so important, of course, is recent evidence that the SEC’s longstanding hostility may be abating. If the Delaware justices agree that Securities Act claims are internal matters between corporations and shareholders, will fraud claims under the Securities and Exchange Act be next?