Amazon, eBay, Etsy, and Pinterest offer hundreds of items, from t-shirts to coffee mugs to posters, warning against agreement for the sake of agreement.* My wife has, on more than one occasion, reminded me of the danger.[1] And now, Delaware’s Supreme Court has reason to be on alert.

In oral argument on the appeal of Sciabacucchi before the Delaware Supreme Court,[2] petitioners and respondents concurred that federal forum provisions are not “internal corporate claims” as defined by DGCL 115.[3] But neither side reconciled this assertion with the statute’s plain text or legislative history, and no justice pressed them to support their assertion.

Justice Valihura came closest when she observed that the Synopsis states that Section 115 is “not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction.”[4] Yet, that is precisely the consequence of any decision invalidating federal forum provisions. Rodriguez[5] establishes that there is no immutable right to litigate Securities Act claims in state court. The Bremen[6] and its progeny establish a strong federal policy favoring the validity of forum selection provisions, such as federal forum provisions. A holding that federal forum provisions are invalid under Delaware law would, for the first time in Delaware history, deploy Delaware law to prevent a federal practice in federal court that is valid under federal law. It would “foreclose suit in a federal court based on federal jurisdiction,” and would, as Justice Valihura suggested, conflict with the statute’s legislative history.

The colloquy, however, never connected the Delaware General Assembly’s clear warning regarding foreclosure of federal claims in federal court to the discussion of “internal corporate claims” under Section 115. The litigants dodged a bullet because neither of them would have been able to defend that proposition against the statute’s plain text or legislative history.

Section 115 defines “internal corporate claim[s]” as those “based upon a violation of a duty by a current or former director or officer or stockholder in such capacity…” (emphasis supplied).[7] The statutory text does not require that the internal corporate claim directly allege a violation of a duty arising under Delaware corporate law. Nor does it require that the claim even “arise from” such violation. It is sufficient that the claim is merely “based upon” such violation.

This is not a random linguistic tic. This broad locution is essential for the statute’s effective operation because narrower wording would make it trivially easy for litigants to avoid the statute’s reach. Plaintiffs would simply describe a violation of Delaware fiduciary law as an actionable breach under the laws of California, New York, or some other jurisdiction, and would never state a violation of Delaware law in their complaint. Under that reading, any plaintiff would be able to evade Section 115 through the simplest of pleading practices, and Section 115 would be rendered a nullity. Accordingly, to be covered as an “internal corporate claim” it cannot be that the claim must state a violation of the DGCL. The statute must therefore mean precisely what it says: It is sufficient that the claim is “based on” a violation of Delaware law, even if it never directly alleges a violation of Delaware law.

Claims alleging violations of Section 11 of the Securities Act of 1933 can obviously be “based upon a violation of a duty by a current or former director or officer….” Consider directors who knowingly draft a defective registration statement used to sell their own shares at an inflated price to existing stockholders. This conduct violates a Delaware duty.[8] The Section 11 claim is based upon the violation of that duty. Indeed, the proposition can be stated far more strongly. On this example, the Section 11 claim arises only because of the underlying Delaware fiduciary breach. The Delaware fiduciary breach is here a necessary precondition to the existence of the Section 11 claim. The connection between a Section 11 violation and the Delaware violation can therefore establish “but-for” causation in a manner far stronger than the statute’s “based upon” requirement.  Put another way, fact patterns giving rise to some Section 11 claims are not merely “based upon” Delaware law violations. They can, in and of themselves, constitute Delaware law violations.

Further, because Sciabacucchi is a facial challenge, in order to conclude that federal forum provisions are not “internal corporate claims,” plaintiffs have to establish that it is impossible for a Section 11 claim ever to be based on a Delaware violation. “Plaintiffs’ burden on a facial challenge is a difficult one: they must show that the [forum selection provision] cannot operate lawfully or equitably under any circumstances.”[9] Even one counter-example, such as the one already presented, is sufficient to defeat the claim that federal forum provisions are not “internal corporate claims.”

The fact that the Section 11 claim arises under federal law makes no difference to the analysis. Nothing in the text says that an “internal corporate claim” cannot also be a federal claim, just as nothing says it cannot be a California or New York claim.  Indeed, Section 202 of the DGCL makes clear that charter provisions can permissibly provide that purchasers who are not yet stockholders must agree to comply with provisions of federal law that provide a regulatory advantage to the corporation.[10] That is precisely the case presented by federal forum provisions. Further, Delaware’s Supreme Court recognizes that federal and Delaware law are complementary, and that violations of Delaware fiduciary law can simultaneously constitute violations of Delaware law.[11]  An “internal corporate claim” is thus easily described as a violation of Delaware law that also supports a federal claim.

Section 11 claims are also “internal affairs” claims as that term is defined by the United States and Delaware supreme courts. Both define “internal affairs” as those matters “peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”[12] The Section 11 claim can clearly be “peculiar to the relationship” among officers, directors, and shareholders, and as a practical matter, generally involves claims by shareholders against officers, directors, and the corporation itself. These patterns are prototypically internal as per the two supreme courts’ shared definition. Thus, whether one looks to the statutory definition of “internal corporate claims” or to the definition of the “internal affairs” doctrine, the conclusion is identical: Section 11 claims can be both “internal corporate claims” and covered by the “internal affairs” doctrine.

Section 115’s legislative history reinforces this conclusion. In adopting Section 115, the Delaware General Assembly explained that “Section 115 is also not intended to authorize a provision that purports to foreclose suit in a federal court based on federal jurisdiction…” This legislative history has two important implications.

First, it establishes that the legislature was thinking of the interplay between federal and state law when it adopted Section 115. It could not have cited to federal law unless it was thinking of federal law. Having thought of federal law, and having not excluded federal claims from the scope of “internal corporate claims,” there is no reason to impose on the plain text of the statute a limitation as to which there is no support in the text or in the legislative history. And, in any event, legislative history cannot override the statutory text. The legislative history thus buttresses the conclusion that the plain text means precisely what it says, and that the General Assembly decided not to exclude federal claims from the category of “internal corporate claims” defined by Section 115.

Second, and perhaps even more powerfully, this language makes clear that federal forum provisions are entirely consistent with Section 115. A decision to invalidate such provisions would “foreclose suit in a federal court based on federal jurisdiction,” and would directly contravene the General Assembly’s intent. While Justice Valihura pointed to the implications of this legislative history, neither litigant connected that question with its implications for the analysis of Section 115 and for the definition of “internal corporate claims.”

If additional precedent is necessary to prove the point, the Delaware Supreme Court’s decision in Moran[13] is instructive. There, appellants contended that Section 157 could not authorize a rights plan because that section had never before “served the purpose of authorizing a takeover defense”[14] and that “nothing in its legislative history suggests a purpose that has anything to do with corporate control or a takeover defense.”[15] The Supreme Court responded that “[a]ppellants are unable to demonstrate that the legislature, in its adoption of § 157, meant to limit the applicability of § 157 to only the issuance of Rights for the purposes of corporate financing. Without such affirmative evidence, we decline to impose such a limitation upon the section that the legislature has not. Compare Providence & Worchester Co. v. Baker, Del.Supr., 378 A.2d 121, 124 (1977) (refusal to read a bar to protective voting provisions into 8 Del.C. § 212(a)).”[16]

Applying identical logic to Section 115 implies that federal forum provisions must be viewed as internal corporate claims because there is no “affirmative evidence” that the legislature intended to impose any of the limitations on Section 115 suggested by the litigants. To the contrary, the statute’s plain text combined with the legislative history creates a far stronger foundation supporting the validity of federal forum provisions than was available to support the validity of poison pills in Moran. If Delaware’s Supreme Court can, in Moran, reason that poison pills are valid under the DGCL, then, a fortiori, federal forum provisions are valid under the DGCL.

Litigants’ agreement in Sciabacucchi that Section 11 claims are not “internal corporate claims” does not make it so. The proposition conflicts with statutory text and legislative history. It was unsupported. “If I agreed with you, we’d all be wrong,” might be another message of oral argument in Sciabacucchi.

ENDNOTES

* This article presumes familiarity with the complex debate over the validity of federal forum provisions – charter or bylaw provisions mandating that federal claims arising under Section 11 of the Securities Act of 1933 be litigated in federal, not state court. For a more detailed discussion of that debate see Joseph A. Grundfest, The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi (September 12, 2019). Rock Center for Corporate Governance at Stanford University Working Paper No. 241. Available at SSRN: https://ssrn.com/abstract=3448651or http://dx.doi.org/10.2139/ssrn.3448651 (forthcoming, 75 Bus. L. 1319 (2020)).

[1] Affidavit on file with the author.

[2] Matthew B. Salzberg, et al. and Blue Apron Holdings, Inc., et al. v. Matthew Sciabacucchi, No. 346, 2019, hearing (Del. Jan. 8, 2020) (hereinafter cited as Sciabacucchi oral argument). The description of oral argument in this post relies on the viewing of the oral argument available at https://courts.delaware.gov/supreme/oralarguments/, as well as the description provided in The Chancery Daily, edition of January 10, 2020. The decision below is reported in Sciabacucchi v. Salzberg et al., C.A. No. 2017-0931-JTL, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018).

[3] Del. Code Ann. tit. 8, § 115 (West 2019).

[4] S. 75 § 5 synopsis, 148th Gen. Assemb. (Del. 2015).

[5] Rodriguez de Quijas v. Shearson/Am. Exp., Inc., 490 U.S. 477 (1989).

[6] M/S Bremen v. Zapata Off-Shore Co. 407 U.S. 1, 10 (1972).

[7] Del. Code Ann. tit. 8, § 115 (West 2019).

[8] Malone v. Brincat, 722 A.2d 5, 13 (Del. 1998).

[9] Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 948 (Del. Ch. 2013) (emphasis in original).

[10] See Grundfest, supra note *, at SSRN version, pages 50-52, and 75 Bus. L. at 1372-1374 for detailed discussion of Section 202 and its implications for the validity of Federal Forum Provisions.

[11] Malone v. Brincat, 722 A.2d 5, 13 (Del. 1998).

[12] Edgar v. MITE Corp., 457 U.S. 624, 645 (1982); VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108, 1112 (Del. 2005); McDermott Inc. v. Lewis, 531 A.2d 206, 214 (Del. 1987).

[13] Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del. 1985).

[14] Id. at 1351.

[15] Id.

[16] Id.

This post comes to us from Joseph A. Grundfest, the William A. Franke Professor of Law and Business at Stanford Law School and a commissioner of the United States Securities and Exchange Commission  from 1985 to 1990.