On The Case

Ex-Dela. judges defend Securities Act forum clauses in Calif. Dropbox case

(Reuters) - As corporations and shareholders fight over the application of last spring’s Delaware Supreme Court ruling that corporations can steer Securities Act class actions to federal court, six former Delaware Chancery and Supreme Court judges have banded together in an amicus brief to defend Delaware’s authority to determine the validity of these forum selection provisions.

The filing, signed by Grover Brown, Jack Jacobs, Stephen Lamb, Henry duPont Ridgely, Myron Steele and Norman Veasey, comes in a class action in San Mateo County in which Dropbox shareholders allege the company violated the Securities Act in its 2018 IPO materials.

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The Dropbox case, in which shareholders are represented by Robbins Geller Rudman & Dowd, is shaping up as an early test of the application of the Delaware Supreme Court’s landmark decision in Salzberg v. Sciabacucchi that forum selection clauses requiring shareholders to litigate Securities Act claims in federal court are facially valid because they concern the corporation’s internal affairs.

After the Delaware Supreme Court’s Sciabacucchi ruling, Dropbox asked San Mateo Superior Court Judge Nancy Fineman to dismiss the state-court class action. It argued that under the Delaware ruling, its federal forum selection clause is valid on its face and must therefore be enforced because the provision does not “diminish the rights of California residents in a way that violates a statute or public policy of the state.”

Robbins Geller countered that Dropbox’s provision – and Delaware’s approval of it – is contrary to the U.S. Constitution, federal securities law and California contract law. (Quite a trifecta!)

As you know, the U.S. Supreme Court held in 2018’s Cyan v. Beaver County Employees’ Retirement Fund that both state and federal courts have jurisdiction to hear shareholders’ Securities Act claims. That ruling prompted dozens of companies, including Dropbox, to adopt charter or bylaw provisions mandating that the class actions be litigated in federal court, where pleading standards are high and uniform.

By holding such provisions to be valid on their face, Robbins Geller said, the Delaware Supreme Court disregarded the Commerce and Supremacy Clauses of the U.S. Constitution. “Allowing a Delaware statute to regulate whether a California court may exercise jurisdiction expressly given to it by Congress over a claim arising under federal law is invalid,” the shareholder brief argued. (The brief also claimed that investors did not knowingly consent to the forum selection bylaw provision merely by buying Dropbox shares.)

In response, the former Delaware jurists argued that applying Delaware law to federal forum selection provisions for companies incorporated in Delaware does not impinge on other states’ authority. Securities Act claims, the brief argued, stem from the conduct of corporate officers who approved offering documents. That is an internal matter, the brief said. So the forum selection provisions must be evaluated under the internal affairs doctrine, which says that states of incorporation have the authority to regulate a company’s internal affairs.

“Nothing in Sciabacucchi, or in similar Delaware precedent, represents an attempt by Delaware to reach out beyond the proper purview of that state’s law,” the ex-judges argued. “Rather, that decision gives Delaware corporations a tool, authorized under Delaware law, for ensuring that claims fundamentally based on a plaintiff’s status as an owner of company stock are litigated in a single, efficient forum.”

The former judges’ amicus brief was organized by Dropbox counsel William Chandler (a former Delaware chancellor) of Wilson Sonsini Goodrich & Rosati and by Stanford law professor Joseph Grundfest, according to Grundfest, who is also a former commissioner of the Securities and Exchange Commission. Grundfest is so closely associated with post-Cyan federal forum selection clauses that Robbins Geller refers to the provisions in its brief in the Dropbox case as “Grundfest clauses.”

Grundfest, who also signed the former judges’ brief, told me that he and Chandler reached out to former Delaware jurists after concluding that the Robbins Geller brief misstated Delaware law and Sciabacucchi precedent. In a section of the brief not joined by the ex-judges, Grundfest argued that the SEC has reviewed – and blessed – dozens of securities registration statements containing federal forum selection provisions. If the provisions were unconstitutional or contrary to federal securities law, as Robbins Geller argued, the SEC would not have allowed companies to proceed with their IPOs, Grundfest said.

Dropbox said in its own reply brief that shareholders’ constitutional arguments were groundless because the Delaware Supreme Court’s Sciabacucchi decision addressed provisions adopted by private companies, not a Delaware law impinging on other states’ rights. “It is black letter law that an action undertaken by a private party that is merely authorized by a statute does not constitute state action,” the Dropbox brief said.

“In order for plaintiffs to prevail here, they have to persuade the court to ignore prevailing U.S. Supreme Court precedent, persuade the court to misread Sciabacucchi, and argue that every corporation in America is ungovernable and that the SEC does not know federal securities law,” Grundfest said.

Shareholder counsel Darren Robbins of Robbins Geller said Grundfest and Wilson Sonsini are continuing to fight a battle they already lost in the Supreme Court’s Cyan ruling. “We are right back where we were in Cyan,” he said, noting that Wilson Sonsini launched the state court jurisdictional challenge that the justices ruled on in the Cyan case. “They have an undue fixation on impinging on shareholders’ desire to vindicate their rights in state court.”

I asked about the Delaware ex-judges’ brief. Robbins said he’s not concerned by Dropbox’s effort to “go corral and induce jurists now in private practice to tell a California court what the law means.”

Dropbox has proposed a July 31 hearing on its dismissal motion. Should be a fireworks show.