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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MATTHEW SCIABACUCCHI, on behalf
of himself and all others similarly situated,
Plaintiff,
v.
MATTHEW B. SALZBERG, JULIE M.B.
BRADLEY, TRACY BRITT COOL,
KENNETH A. FOX, ROBERT P.
GOODMAN, GARY R. HIRSHBERG,
BRIAN P. KELLEY, KATRINA LAKE,
STEVEN ANDERSON, J. WILLIAM
GURLEY, MARKA HANSEN, SHARON
MCCOLLAM, ANTHONY WOOD, RAVI
AHUJA, SHAWN CAROLAN, JEFFREY
HASTINGS, ALAN HENRICKS, NEIL
HUNT, DANIEL LEFF, and RAY
ROTHROCK,
Defendants,
-and-
BLUE APRON HOLDINGS, INC.,
STITCH FIX, INC. and ROKU, INC.,
Nominal Defendants.
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C.A. No. 2017-0931-JTL
DEFENDANTS’ ANSWERING BRIEF IN FURTHER SUPPORT OF
THEIR CROSS-MOTION FOR SUMMARY JUDGMENT
EFiled: Jul 16 2018 05:17PM EDT Transaction ID 62244534
Case No. 2017-0931-JTL
-
OF COUNSEL:
Boris Feldman
David J. Berger
WILSON SONSINI GOODRICH
& ROSATI, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
(650) 493-9300
DATED: July 16, 2018
WILSON SONSINI GOODRICH
& ROSATI, P.C.
William B. Chandler III (#116)
Randy J. Holland (#4)
Bradley D. Sorrels (#5233)
Lindsay Kwoka Faccenda (#5772)
222 Delaware Avenue, Suite 800
Wilmington, Delaware 19801
(302) 304-7600
Attorneys for Katrina Lake, Steven Anderson,
J. William Gurley, Marka Hansen, Sharon
McCollam, Anthony Wood, Ravi Ahuja,
Shawn Carolan, Jeffrey Hastings, Alan
Hendricks, Neil Hunt, Daniel Leff, Ray
Rothrock, and Nominal Defendants Stitch
Fix, Inc. and Roku, Inc.
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT
...............................................................................
1
ARGUMENT
.............................................................................................................
6
I. The Federal Forum Provisions are Valid Under Section
102(b)(1) ................ 6
II. The Federal Forum Provisions are Consistent with This
Court’s Guidance
in Chevron
.......................................................................................................
9
III. Plaintiff’s Reliance on Other Federal Court Decisions and
Commentators
is Unavailing
..................................................................................................
13
IV. Section 115 is Irrelevant in Determining the Validity of the
Federal
Forum Provisions.
..........................................................................................
15
V. The Policy Considerations Advanced by Plaintiff Do Not
Support
Invalidating the Federal Forum Provisions
................................................... 21
CONCLUSION
........................................................................................................
25
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-iv-
TABLE OF AUTHORITIES
Page(s)
CASES
Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d
934 (Del. Ch. 2013)
..................................................................passim
Cyan, Inc. v. Beaver County Employees Retirement Fund,
138 S.Ct. 1061 (2018)
................................................................................
5, 23
Delaware State Univ. v. Delaware State Univ. Chapter of Am.
Ass’n of
Univ. Professors, 2000 WL 33521111 (Del. Ch. May 16, 2000)
................. 17
Douzinas v. Am. Bureau of Shipping, Inc.,
888 A.2d 1146 (Del. Ch. 2006)
.......................................................................
8
Elf Atochem N. Am., Inc. v. Jaffari,
727 A.2d 286 (Del. 1999)
................................................................................
8
Emmons v. Hartford Underwriters Ins. Co.,
697 A.2d 742 (Del. 1997)
................................................................................
8
Frankel v. Donovan,
120 A.2d 311 (1956)
........................................................................................
8
Ingres Corp. v. CA, Inc.,
8 A.3d 1143 (Del. 2010)
................................................................................
20
Iuso v. Snap,
LA 17-cv-7176-VAP-RAO (C.D. Cal. Nov. 21, 2017)
................................ 13
Jones Apparel Grp., Inc. v. Maxwell Shoe Co.,
883 A.2d 837 (Del. Ch. 2004)
...............................................................
8-9, 24
Medicis Pharm. Corp. v. Anacor Pharms., Inc., 2013 WL 4509652
(Del. Ch. Aug. 12, 2013)
.................................................. 8
Robb v. Ramey Associates, Inc.,
14 A.2d 394 (Del. Super.
1940).....................................................................
17
-
-v-
Rodriguez de Quijas v. Shearson/American Express, Inc.,
490 U.S. 477
(1989).......................................................................................
22
Sagusa, Inc. v. Magellan Petroleum Corp.,
1993 WL 512487 (Del. Ch. Dec. 1, 1993), aff’d, 650 A.2d 1306
(Del. 1994)
.......................................................................................................
9
Siegman v. Columbia Pictures Entm’t, Inc.,
576 A.2d 625 (Del. Ch. 1989)
.........................................................................
8
State ex rel. Green v. Foote, 35 Del. 514, 168 A. 245 (1933)
.....................................................................
19
STATUTES
8 Del. C. § 102(b)(1)
.........................................................................................passim
OTHER AUTHORITIES
John C. Coffee, Jr., What Happens Next?, BANK &
CORPORATE
GOVERNANCE LAW REPORTER (2015) available at
http://www.lawreporters.com/jun15b&c.pdf.................................................
14
J. Robert Brown, Jr., Staying in the Delaware Corporate
Governance
Lane: Fee Shifting Bylaws and a Legislative Reaffirmation of
the Rules of the Road, 54 BANK AND CORPORATE
GOVERNANCE LAW REPORTER 4 (2015)
............................................. 15
John C. Coffee, Jr., Delaware Throws A Curveball, THE CLS
BLUE
SKY BLOG (Mar. 16, 2015),
http://clsbluesky.law.columbia.edu/2015/03/16/delaware-
throws-a-curveball/
........................................................................................
14
Joseph A. Grundfest & Kristen A. Savelle, The Brouhaha over
Intra–
Corporate Forum Selection Provisions: A Legal, Economic,
and Political Analysis,68 BUS. LAW. 325 (2013)
....................................... 14
Lawrence A. Hamermesh & Norman M. Monhait, Fee-Shifting
Bylaws: A Study in Federalism, THE INSTITUTE OF
DELAWARE CORPORATE AND BUSINESS LAW
(June 29, 2015)
..............................................................................................
18
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Matthew C. Baltay, Exclusive Forum Bylaws Are Going
Mainstream:
What’s Next, Bylaws Eliminating Shareholder Class Actions?,
Boston B.J. (Spring 2015)
.............................................................................
15
Richard A. Rosen & Stephen P. Lamb, Adopting and
Enforcing
Effective Forum Selection Provisions in Corporate Charters
and Bylaws, PAUL WEISS (Jan. 8, 2015), available at
http://www.paulweiss.com/media/2756381/fsc_article.pdf
.......................... 14
Valian A. Afshar, A Blended Approach to Reducing the Costs
of
Shareholder Litigation, 113 Mich. L. Rev. 315 (2014)
................................ 15
Marcel Kahan & Edward Rock, Symbiotic Federalism and the
Structure of Corporate Law, 58 VAND. L. REV. 1573 (2005)
...................... 7
Verity Winship, Contracting Around Securities Litigation:
Some
Thoughts on the Scope of Litigation Bylaws, 68 SMU L. REV.
913 (2015)
......................................................................................................
15
James D. Cox & Thomas Lee Hazen, TREATISE ON THE LAW OF
CORPORATIONS (2010)
..............................................................................
7
David A. Drexler, Lewis S. Black Jr. & A. Gilchrist Sparks
III,
Delaware Corporation Law and Practice, § 6.02[1] (2016)
.......................... 9
“Explanation of Council Legislative Proposal,” released by
Corporation Law Council (2015)
............................................................ 17,
18
http://www.paulweiss.com/media/2756381/fsc_article.pdf
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PRELIMINARY STATEMENT
Despite the volume of material cited by Plaintiff in his Opening
Brief (“Pl.
Br.”), the question posed by this case remains simple: Are the
charter provisions at
issue here (the “Federal Forum Provisions”), which designate the
federal courts of
the United States as the exclusive forum for claims arising
under the Securities Act
of 1933 (the “’33 Act”), permitted under the broad, enabling
language of Section
102(b)(1)? The answer to that question is found in Section
102(b)(1) of the
Delaware General Corporation Law (“DGCL”) and is unquestionably
yes.
As Defendants explained in their Opening Brief (“Def. Br.”), the
Federal
Forum Provisions relate to the “management of the business” and
“the conduct of
the affairs of the corporation” insofar as they reflect a
common-sense
determination to have Section 11 claims based on the
corporation’s registration
statement heard in the most efficient forums. The Federal Forum
Provisions also
“regulat[e] the powers of . . . stockholders” insofar as they
regulate where
stockholders may bring Section 11 claims, which necessarily
relate to the purchase
of their shares pursuant to that registration statement. Def.
Br. at 21-24.
Accordingly, these provisions are permissible pursuant to the
broad authority set
forth in Section 102(b)(1).
Remarkably, Plaintiff makes no effort to analyze the language of
Section
102(b)(1) in arguing that the Federal Forum Provisions fall
outside of its scope.
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Plaintiff instead purports to engage in a “simple syllogism” by
citing to two non-
Delaware treatises that refer to the scope of bylaws as limited
to provisions that
govern the “internal affairs” of the corporation, see Pl. Br. at
1-2 n. 3, 20 n.55, to
argue that only forum provisions that regulate stockholder
litigation involving
claims governed by the internal affairs doctrine are permitted.
But nothing in the
language of Section 102(b)(1) imposes a limitation on the types
of stockholder-
related litigation that can be regulated through a validly
adopted forum provision.
Unable to rely on the language of Section 102(b)(1) to explain
why it is
limited in the manner he proposes, Plaintiff searches for
implied limitations in this
Court’s decision in Boilermakers Local 154 Retirement Fund v.
Chevron Corp., 73
A.3d 934 (Del. Ch. 2013) (“Chevron”) and the recently
promulgated Section 115
of the DGCL. But neither authority extends as far as Plaintiff
claims; nor do they
overcome the broad enabling language of Section 102(b)(1).
Far from undermining the Federal Forum Provisions, Chevron
recognized
the authority of a corporation (there, under Section 109(b) of
the DGCL) to adopt
forum selection provisions like the Federal Forum Provisions.
The Chevron Court
emphasized that such provisions are “process-oriented” and only
regulate “where
stockholders may file suit, not whether the stockholder may file
suit or the kind of
remedy that the stockholder may obtain.” Id. at 951-52.
Critically, the Court did
not hold that forum provisions governing “internal affairs”
claims were the only
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type of forum provision permitted. Despite Plaintiff’s attempt
to obfuscate the
court’s holding, Chevron did not weigh in on the validity of a
forum provision
regulating federal securities claims either. Rather, the Chevron
Court held that the
bylaws at issue in that case “easily” met the standard under
Section 109(b) to bind
existing and former stockholders.
At the same time, the Chevron Court observed that bylaws
purporting to
regulate “external matters” would be outside Section 109(b)’s
scope and provided
now familiar examples of contract or tort claims brought by
stockholders that have
nothing to do with their rights as stockholders. That is plainly
not the case,
however, with the Federal Forum Provisions that regulate Section
11 claims.
Section 11 claims can only be brought by an existing or former
stockholder in
connection with his or her purchase of shares pursuant to a
company-issued
registration statement. In that sense, the Federal Forum
Provisions are far closer to
the provisions validated in Chevron than the “external” types of
claims that the
Court posited would be outside the scope of the statute.
Nor does the recently promulgated Section 115 provide an
“implicit
prohibition” on other types of forum provisions as Plaintiff
suggests. Section 115
was adopted following Chevron and City of Providence v. First
Citizens
Bancshares, Inc., 99 A.2d 229 (Del. Ch. 2014) (“First
Citizens”), in which this
Court held that a Delaware corporation could choose the
corporation’s principle
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place of business as the exclusive forum for litigation for
internal corporate claims.
The Synopsis accompanying Section 115 makes clear that it was
only intended to
codify the holding in Chevron that provisions selecting the
courts in Delaware as
the exclusive forum for “internal corporate” claims are valid.
The Synopsis was
equally clear that Section 115 was not intended to address the
validity or invalidity
of other types of forum provisions, like the provision at issue
in First Citizens,
other than to invalidate any provision that precluded a
stockholder from bringing
suit in Delaware consistent with the express language of the
statute. If the
Legislature wanted to prohibit forum selection provisions that
govern claims other
than “internal corporate” claims, it could have done so, either
by stating it
explicitly in Section 115 or by limiting the scope of Section
102(b)(1).
Finally, Plaintiff attempts to distract from the basic question
under Delaware
law regarding what Section 102(b)(1) permits by contending the
Federal Forum
Provisions would “vitiate . . . [a] bedrock principle of the
federal securities regime”
that prevents ‘33 Act claims from being removed from state
courts. Pl. Br. at 1.
Again, this misstates the impact of the Federal Forum
Provisions. This case has
nothing to do with removal or whether state courts have
jurisdiction over ’33 Act
claims. This case has to do with parties’ ability to
contractually agree to select an
exclusive forum for asserting ’33 Act claims, which they are
able to do under
longstanding United States Supreme Court precedent. Nothing in
the recent
-
-5-
United States Supreme Court decision in Cyan, Inc. v. Beaver
County Employees
Retirement Fund, 138 S.Ct. 1061 (2018) (“Cyan”) expressly or
even implicitly
overrules that precedent.
The Federal Forum Provisions fall within the broad ambit of
Section
102(b)(1). They are not otherwise contrary to law or public
policy. They are
consistent with Delaware’s strong public policy of enabling
private ordering of
corporate charters. Defendants respectfully request that the
Court grant their
motion for summary judgment.
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-6-
ARGUMENT
I. The Federal Forum Provisions are Valid under Section
102(b)(1).
This case begins and ends with the text of Section 102(b)(1),
which defines
the scope of permissible charter provisions under Delaware law.
The statute
permits a Delaware corporation to include in its charter “[a]ny
provision for the
management of the business and for the conduct of the affairs of
the corporation,
and any provision creating, defining, limiting and regulating
the powers of the
corporation, the directors, and the stockholders . . . if such
provisions are not
contrary to the laws of this State.” 8 Del. C. § 102(b)(1).
Section 102(b)(1) was
drafted to enable corporations to adopt any provision on a broad
array of topics,
including those relating to the management of the business and
the relationship
between and among corporate constituents. This grant of
authority is subject only
to the limitation that charter provisions must not be contrary
to Delaware law.
As is by now beyond dispute, Section 102(b)(1) employs broad,
enabling
language. For the reasons explained in detail in Defendants’
Opening Brief, the
Federal Forum Provisions relate to the “management of the
business” and “the
conduct of the affairs of the corporation” and “regulat[e] the
powers of . . .
stockholders” to the extent that they regulate where existing
and former
stockholders may bring Section 11 claims related to the purchase
of their shares
pursuant to the corporation’s registration statement. Def. Br.
at 21-24. Indeed, as
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Stitch Fix’s registration statement noted, Stitch Fix adopted
its two forum
provisions so that “the Court of Chancery of the State of
Delaware and the federal
district courts of the United States will be the exclusive
forums for substantially all
disputes between us and our stockholders.” Ex. A at 32.
Plaintiff, on the other hand, eschews analysis of the text of
Section
102(b)(1). Plaintiff instead admits to relying on a form of
syllogism based on two
non-Delaware treatises that observe that “bylaws” and
“Delaware’s corporate law”
are largely confined to matters related to the “internal
affairs” of the corporation.1
On that basis, Plaintiff concludes that only forum selection
provisions that regulate
litigation asserting claims governed by the internal affairs
doctrine are permitted.
But that argument conflates two different concepts. Nothing in
the language
of Section 102(b)(1) imposes that limitation on the types of
stockholder-related
litigation that can be regulated by a forum provision. Rather,
the language of
Section 102(b)(1) speaks in terms of “regulating” the rights and
powers of
stockholders. There is no basis in the language of the statute
to conclude that
1 See Pl. Br. at 1-2 n. 3, 20 n.55 (citing James D. Cox and
Thomas Lee Hazen,
TREATISE ON THE LAW OF CORPORATIONS (2010) (noting that
“[b]ylaws deal with such matters as how the corporation’s internal
affairs are to be conducted…”); Marcel Kahan & Edward Rock,
Symbiotic Federalism and the Structure of Corporate Law, 58 VAND.
L. REV. 1573, 1607 (2005) (observing that “Delaware’s corporate law
. . . largely does not address matters beyond the internal affairs
of the corporation.”).
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forum selection provisions may only regulate stockholder-related
claims grounded
in state law and not stockholder-related claims arising from
federal securities laws.
Delaware Courts “will interpret a provision as broadly as it is
drafted,”
Medicis Pharm. Corp. v. Anacor Pharms., Inc., 2013 WL 4509652,
at *9 (Del. Ch.
Aug. 12, 2013), and will not imply limitations not found within
the express
language of the statute. Emmons v. Hartford Underwriters Ins.
Co., 697 A.2d 742,
746-47 (Del. 1997).2 Indeed, Defendants cited the litany of
Delaware authority
spanning the last 75 years recognizing that Section 102(b)(1),
in particular, is
interpreted broadly consistent with the State’s strong public
policy to enable
corporations to privately order their affairs. See Def. Br. at
18-21.3
2 As purely a matter of statutory interpretation, the use of the
indefinite article,
“any,” is notable. Delaware courts uniformly construe such
language broadly. E.g., Elf Atochem N. Am., Inc. v. Jaffari, 727
A.2d 286, 294 (Del. 1999) (holding that the Court of Chancery
correctly construed a provision barring “any claim arising out of
or related to this Agreement” because of the use of very broad
language); Emmons v. Hartford Underwriters Ins. Co., 697 A.2d 742,
746 (Del. 1997) (“We note that, in drafting the provision, Hartford
repeatedly used the indefinite article ‘an’ instead of ‘the’ or
‘the same’ or ‘such’ or other language that would have limited the
insureds who are eligible to recover UM benefits to those who had
sustained bodily injury.”); Douzinas v. Am. Bureau of Shipping,
Inc., 888 A.2d 1146, 1152 n.32 (Del. Ch. 2006) (holding that the
use of “broad language” in an arbitration clause covering “any
dispute related to the” LLC Agreement easily encompassed the claims
because it clearly covered claims of managerial misconduct);
Siegman v. Columbia Pictures Entm’t, Inc., 576 A.2d 625, 632 (Del.
Ch. 1989) (“broad language such as ‘any’”).
3 See, e.g., Frankel v. Donovan, 120 A.2d 311, 316 (1956)
(“Charter provisions which facilitate corporate action and to which
a stockholder assents by becoming a stockholder are normally upheld
by the court unless they contravene a principle implicit in
statutory or settled decisional law governing corporate
management”); Jones Apparel Grp., Inc. v. Maxwell
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-9-
* * *
Because the Federal Forum Provisions are consistent with the
broad grant of
authority under Section 102(b)(1), Plaintiff’s effort to search
out implied
limitations in Chevron and Section 115 must fail. For the
reasons explained below,
none of those authorities support invalidating the Federal Forum
Provisions.
II. The Federal Forum Provisions are Consistent with this
Court’s Guidance in Chevron.
Plaintiff principally relies on Chevron as support for limiting
the scope of
permissible forum selection provisions to those governing
“internal corporate”
claims. But Chevron in fact supports the validity of the Federal
Forum Provisions.
In finding that the bylaws at issue in that case were
permissible under
Section 109(b), the Chevron Court focused on the fact that the
bylaws established
“procedural rules for the operation of the corporation,” and
thus “plainly relate to
the ‘business of the corporation,’ the ‘conduct of [its]
affairs,’ and regulate the
‘rights or powers of [its] stockholders.’” Chevron, 73 A.3d at
939. The Court
Shoe Co., 883 A.2d 837, 845 (Del. Ch. 2004) (recognizing that
Section 102(b) “embod[ies] Delaware’s commitment to private
ordering in the charter” and is of “broad effect” and applies “to a
myriad of issues involving the exercise of corporate power.”)
(emphasis added); Sagusa, Inc. v. Magellan Petroleum Corp., 1993 WL
512487, at *2 (Del. Ch. Dec. 1, 1993), aff'd, 650 A.2d 1306 (Del.
1994) (“[T]he public policy applicable to Delaware's corporation
law is expressed in 8 Del. C. § 102(b)(1), which authorizes
companies to include in their charters any corporate governance
provisions that do not violate Delaware law.”); see also David A.
Drexler, Lewis S. Black Jr. and A. Gilchrist Sparks III, Delaware
Corporation Law and Practice, § 6.02[1] (2016) (“This expansive
provision [Section 102(b)(1)] permits great flexibility”).
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-10-
emphasized that the bylaws were not intended to regulate
substantive matters, like
what suits may be brought, but only where such suits may be
brought. Id. at 943.
The Court further concluded that the bylaws fell within the
ambit of Section
109(b), because they related to the “conduct of the corporation”
insofar as they
channeled internal affairs cases into courts of the state of
incorporation. Id. at 951.
The bylaws also related to the “rights of stockholders” insofar
as they designated
where current and former stockholders could bring claims that
implicated the
“rights and powers of the [stockholders] as stockholders.” Id.
Moreover, in
making that determination, the Chevron Court expressly rejected
the argument that
binding former stockholders would bring the bylaw outside the
ambit of Section
109(b). Id. at 952 n.80. The Court reasoned that a former
stockholder’s right to
assert direct claims for breach of fiduciary duty “continues to
be based on her
status as a stockholder.” Id.
Like the provisions at issue in Chevron, the Federal Forum
Provisions are
“process-oriented, because they regulate where stockholders may
file suit, not
whether the stockholder may file suit or the kind of remedy that
the stockholder
may obtain.” Id. at 951-52. The Federal Forum Provisions “do not
contain
substantive mandates, but direct how the corporation, the board,
and its
stockholders may take certain actions.” Id. at 951. The Federal
Forum Provisions
also address proper subject matter because they relate to the
“conduct of the
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-11-
corporation” by channeling ‘33 Act claims against directors and
officers into
federal courts that are experienced in hearing those types of
claims. The Federal
Forum Provisions also relate to the “rights of stockholders” by
regulating where
Section 11 claims, which may only be brought by existing or
former stockholders,
may be asserted. See id. at 950-51. The ability of former
stockholders to assert
Section 11 claims also continues to be based on his or her
“status as a stockholder”
insofar as the claims relate to misstatements made in connection
with his or her
purchase of the corporation’s stock.
In acknowledging the breadth of Section 109(b), the Chevron
court also
acknowledged its limitations, speculating that certain “external
claims” may not be
the proper subject matter of a forum provision contained in a
bylaw. Plaintiff
obfuscates the Chevron Court’s discussion of “external claims”
to suggest that the
Chevron Court rejected the notion that Securities Act claims
could be governed by
forum selection charter provisions. See Pl. Br. at 21-22. It did
not. Rather, the
Court noted that bylaws would be regulating “external matters”
if, for example,
they purported to bind a plaintiff (even a stockholder
plaintiff) who sought to bring
a tort claim for personal injury that occurred on the
corporation’s premises or a
contract claim based on a commercial contract with the
corporation. Id. at 952.
The Court reasoned that such claims would not deal with the
rights and powers of
the plaintiff-stockholder as a stockholder. Id.
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Critically, the Chevron Court did not characterize federal
securities claims as
the type of “external claims” that would fall outside the scope
of Section
109(b).4 Indeed, for the reasons stated in Defendants’ Opening
Brief, Section 11
claims are readily distinguishable from the types of tort and
contract claims
considered by the Chevron Court. See Def. Br. at 23-24.
Plaintiff concedes that
Section 11 plaintiffs only have standing to pursue such claims
by reason of the fact
that they purchased stock in the corporation. See Pl. Br. at
12-13 n.31. Such
claims are thus necessarily tied to a plaintiff’s status as a
stockholder. In addition,
because Section 11 claims may only be asserted against
individuals who signed a
registration statement, such claims also necessarily implicate
the relationship
4 The Chevron Court only discussed federal securities claims in
rejecting
plaintiff’s argument that there might be hypothetical situations
where the bylaws operated unreasonably by precluding a plaintiff
from bringing a claim that must be brought exclusively in federal
court. The Court explained that because the bylaws at issue were
limited to “internal affairs” claims they did not foreclose a
plaintiff from exercising any substantive federal statutory right
of action. The Court observed that a defendant seeking dismissal of
a claim arising under the Exchange Act based on the forum selection
bylaws would have trouble because such a claim “does not fit within
any category of claim” enumerated by the bylaws, and because a
bylaw restricting the forum for an Exchange Act claim may conflict
with the Exchange Act’s anti-waiver provision. Id. at 962. That
issue does not apply here. For the reasons discussed in Defendants’
Opening Brief, a bylaw designating a forum for ‘33 Act claims does
not run afoul of any anti-waiver provisions. See Def. Br. at 29.
And, like the bylaws at issue in Chevron, the Federal Forum
Provisions do not “foreclose anyone from exercising any substantive
federal rights,” but rather regulate the procedure by which a
stockholder may pursue such rights. Chevron, 73 A.3d at 939.
Critically, in analyzing the hypotheticals posited by the plaintiff
in that matter, nowhere does the Court purport to assess the
validity of forum selection provisions regulating Securities Act
claims.
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-13-
between stockholders and those who manage the corporation. For
these reasons,
the Federal Forum Provisions are far closer to the forum
selection provisions
upheld in Chevron than the types of tort or contract disputes
that the Chevron
Court speculated may exceed the scope of Section 109(b).5
III. Plaintiff’s Reliance on Other Federal Court Decisions and
Commentators Is Unavailing.
Plaintiff also relies on a number of federal court decisions and
legal
commentary that do not support invalidating the Federal Forum
Provisions.
As noted in Defendants’ Opening Brief, all but one of the
federal court
decisions that invalidated federal forum selection provisions
did so without
analyzing Delaware law at all. See Def. Br. at 21 n.15. In the
one federal court
decision that purported to address the question under Delaware
law, Iuso v. Snap,
the Court largely relied on the fact that defendants there had
failed to point to any
Delaware case squarely addressing the question. Iuso v. Snap, LA
17-cv-7176-
VAP-RAO (C.D. Cal. Nov. 21, 2017). Importantly, the Iuso Court
did not attempt
5 As explained in Defendants’ Opening Brief, this Court’s
observation in
Activision that a federal securities law claim is a “personal”
claim and “not a property right associated with the shares” does
not alter this analysis. See Def. Br. at 24 n.16. The Activision
Court merely addressed the alienability of federal securities
claims and noted that federal securities claims, unlike Delaware
corporate law claims, do not adhere to the shares themselves once
they are sold. The Court did not suggest that federal securities
claims—and, specifically, Section 11 claims related to the purchase
of shares pursuant to a registration statement—do not relate in any
way to the rights and powers of stockholders as stockholders.
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-14-
to undertake its own analysis of whether such provisions fell
within the scope of
Section 102(b)(1).
Though Plaintiff cites various law review articles to contend
that
commentators “have concluded that the Federal Forum Provisions
are invalid,” see
Pl. Br. at 23-24, Plaintiff overstates his conclusion. In fact,
most of the articles
cited do not contend that the Federal Forum Provisions are
invalid. Rather, those
articles merely advise that, under the current state of Delaware
law, only forum
provisions regulating internal corporate claims are definitively
valid.6 Certain
other commentators relied upon by Plaintiff merely speculate or
point to “hints”
that a court may not validate a provision designating forums for
federal securities
claims.7 In any case, other commentators implicitly support the
view that a bylaw
or charter provision could regulate claims under the Securities
Act.8
6 See Richard A. Rosen & Stephen P. Lamb, Adopting and
Enforcing Effective
Forum Selection Provisions in Corporate Charters and Bylaws,
PAUL WEISS (Jan. 8, 2015), available at
http://www.paulweiss.com/media/ 2756381/fsc_article.pdf (explaining
that forum selection provisions regulating claims other than
internal affairs claims are “open to litigation challenges”);
Joseph A. Grundfest & Kristen A. Savelle, The Brouhaha over
Intra–Corporate Forum Selection Provisions: A Legal, Economic, and
Political Analysis, 68 BUS. LAW. 325, 370 (2013) (observing that
the conclusion that forum selection charter provisions are valid
“would arguably not follow (or not hold as strongly)” if the
provision purported to regulate causes of action that were not
intra-corporate in nature).
7 See John C. Coffee, Jr., What Happens Next?, BANK &
CORPORATE GOVERNANCE LAW REPORTER 11 n.2 (2015), available
http://www.lawreporters.com/jun15b&c.pdf (noting that the
Court’s comments in Activision could be a “hint” that “personal”
claims cannot be regulated by Section 109, but that “time will
tell”); John C. Coffee, Jr., Delaware Throws A Curveball, THE CLS
BLUE SKY BLOG n.3 (Mar. 16,
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-15-
IV. Section 115 Is Irrelevant in Determining the Validity of the
Federal Forum Provisions.
Plaintiff concedes, as he must, that Section 115 of the DGCL is
limited to
defined “internal corporate claims” and does not apply to the
Federal Forum
Provisions. Pl. Br. at 25. That is because, by its literal
terms, Section 115 merely
codifies the holding in Chevron permitting a specific type of
forum selection
provision, one governing defined “internal corporate claims,”
and further requires
2015),
http://clsbluesky.law.columbia.edu/2015/03/16/delaware-throws-a-curveball/
(speculating that federal courts “would not easily tolerate” a
bylaw that required securities claims to be brought in Delaware
federal courts); see also J. Robert Brown, Jr., Staying in the
Delaware Corporate Governance Lane: Fee Shifting Bylaws and a
Legislative Reaffirmation of the Rules of the Road, 54 BANK AND
CORPORATE GOVERNANCE LAW REPORTER 4, 13 & n.9 (2015)
(discussing fee shifting bylaws); Verity Winship, Contracting
Around Securities Litigation: Some Thoughts on the Scope of
Litigation Bylaws, 68 SMU L. REV. 913, 921-22 (2015) (noting that
one commentator suggested that charters could be read to be
contracts about the shareholder as a holder but not as a purchaser
or seller, and contemplating that if such a distinction was drawn,
“contracting about federal securities litigation” could be beyond a
charter’s scope).
8 See Pl. Br. at 9 (describing the “Grundfest Solution”); Valian
A. Afshar, A Blended Approach to Reducing the Costs of Shareholder
Litigation, 113 Mich. L. Rev. 315 (2014) (recommending the adoption
of forum selection and arbitration bylaws for corporate law claims
and securities claims to reduce litigation costs); see generally
Matthew C. Baltay, Exclusive Forum Bylaws Are Going Mainstream:
What's Next, Bylaws Eliminating Shareholder Class Actions?, Boston
B.J. at 27, 32 (Spring 2015) (“Once one accepts that bylaws are
viewed as contractual in nature, there is no reason why corporate
bylaws could not include the wide variety of litigation-control
devices that practitioners commonly see in commercial and consumer
contracts”).
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-16-
that any such provision permit those defined claims to be
brought in the courts in
Delaware.9
Plaintiff instead makes a slightly different argument, based on
the
interpretive principal expressio unius est exclusio alterius,
that Section 115’s
express authorization of forum provisions governing “internal
corporate” claims
equates to an “implicit prohibition” on any other type of forum
provision. That
argument fails for two reasons.
First, as a matter of statutory construction, expressio unius
est exclusio
alterius is a general principal of statutory interpretation that
aids courts in
interpreting a statute in the absence of express legislative
history. But the
legislative history here was not silent as to the intent behind
Section 115. To the
contrary, the Synopsis accompanying Section 115 made clear that
it was intended
to “confirm” the holding in Chevron and was careful to state
that it was not
addressing the validity (or invalidity) of a provision that
selected another state as
an additional forum for internal corporate claims. In other
words, the Legislature
made clear that it was not expressly validating or invalidating
anything that was
9 “Internal corporate claims” are defined in the text of Section
115 as “claims,
including claims in the right of the corporation, (i) that are
based upon a violation of a duty by a current or former director or
officer or stockholder in such capacity, or (ii) as to which this
title confers jurisdiction upon the Court of Chancery.” The
Synopsis to Section 115 further elaborates that it was intended to
capture “claims arising under the DGCL, including claims for breach
of fiduciary duty by current or former directors or officers or
controlling stockholders of the corporation, or persons who aid and
abet such a breach . . .” Chapter 40, Laws of 2015, Synopsis of
Section 115.
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-17-
not covered by the words of the statute. See Def. Br. at 17-18
n.13.10 Where the
legislative history specifically indicates that the statute is
not exhaustive, the
principle of expressio unius est exclusio alterius does not
apply. See Delaware
State Univ. v. Delaware State Univ. Chapter of Am. Ass'n of
Univ. Professors,
2000 WL 33521111, at *5 (Del. Ch. May 16, 2000) (declining to
employ the
expressio unius principle to imply an exclusion of term in
statute where the
legislative history indicated that Legislature intended for
statute to apply to the
term); Robb v. Ramey Associates, Inc., 14 A.2d 394, 396 (Del.
Super. 1940)
(expressio unius est exclusio alterius “is not a rule of
universal application, but is
to be applied only as an aid in arriving at intention, and not
to defeat the apparent
intention”) (citation omitted).
For the same reason, after-the-fact statements of two members of
the
Corporation Law Council as to their views on the validity of
provisions regulating
federal securities claims, see Pl. Br. at 25 n. 70, are
irrelevant. In any event, the
article authored by Larry Hamermesh and Norman Monhait, and
cited in Plaintiff’s
10 See also “Explanation of Council Legislative Proposal,”
released by
Corporation Law Council, at 9 (2015) (the “Council Memo”).
Consistent with the Synopsis, the explanatory Council Memo released
by the Corporation Law Council in connection with Section 115 made
clear that the proposed legislation was intended to provide a
“statutory endorsement” of the holding in Chevron. Id. At the same
time, it also made clear that the proposed legislation “would not
address the validity of a bylaw specifying a non-Delaware venue,
which the Court of Chancery found facially valid in [First
Citizens]” but, consistent with the text of the proposed Section
115, “would insist . . . that no such provision could preclude
bringing intracorporate claims in Delaware courts as a venue.” Id.
at 9 n.7.
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-18-
Opening Brief, actually undermines Plaintiffs’ reading of
Section 115. That article
makes clear that the validity of a provision purporting to
affect federal securities
class actions “remains exactly as it was before the legislation
was enacted” and
“must be determined under Delaware case law interpreting the
scope of DGCL
Section 102(b)(1) and 109(b).” Lawrence A. Hamermesh &
Norman M. Monhait,
Fee-Shifting Bylaws: A Study in Federalism, THE INSTITUTE OF
DELAWARE
CORPORATE AND BUSINESS LAW (June 29, 2015). Moreover, far
from
proscribing other types of bylaw or charter provisions, the
Council Memo released
by the Corporation Law Council emphasized that the DGCL is
“broadly enabling”
and endorsed further private ordering related to stockholder
litigation:
[T]he proposed legislation does not deprive corporations of the
ability
to adopt other provisions that address unproductive
stockholder
litigation by means other than fee-shifting. The DGCL is
broadly
enabling and gives wide authority to boards – and stockholders –
to
adopt binding bylaws and charter provisions. ATP and the recent
case
law addressing forum selection have respected the broadly
enabling
nature of the DGCL and suggest that some
litigation-regulating
provisions may be facially valid. . .
[The members of the Council] also believe that the market
may
continue to experiment with litigation-regulating bylaws that do
not
have the in terrorem effect of feeshifting provisions, and that
the
courts will be able to develop an equitable jurisprudence that
fairly
regulates such provisions.
Council Memo at 9, 12 (2015).
Second, even if the legislative history was not clear,
Plaintiff’s alleged
“implicit prohibition” in Section 115 cannot override an express
grant of statutory
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-19-
authority. Stated differently, if, as Defendants contend, the
broad enabling
language of Section 102(b) permits the Federal Forum Provisions,
it would be
nonsensical to imply that Section 115 supersedes the prior
express grant of
authority in Section 102(b). See State ex rel. Green v. Foote,
35 Del. 514, 168 A.
245, 247 (1933) (“Whether such statutes repeal the previously
existing law, in the
absence of a repeal in express terms, depends upon the presence
or absence of an
irreconcilable inconsistency between them, unless it is
manifestly clear that the
later enactment is intended to supersede the earlier law and
embrace the whole
subject–matter.”) (citations omitted).
Moreover, Plaintiff’s reliance on Section 102(b)(7) to
illustrate the expressio
unius est exclusio alterius principle misses the mark. Section
102(b)(7) was
enacted because a charter provision exculpating directors from
monetary liability
for breaches of fiduciary duty would have otherwise been invalid
under Section
102(b)(1) as “contrary to laws of this State” insofar as it
would have been
inconsistent with common law fiduciary duty principles. 8 Del. C
§ 102(b)(1). In
adopting Section 102(b)(7), the Legislature thus overrode those
common law
fiduciary duty principles and provided that directors could be
exculpated from
monetary liability subject to certain carve-outs (such as duty
of loyalty claims) that
remained subject to the common law. Section 102(b)(7)’s silence
as to charter
provisions exculpating officers and aiders and abettors is not
an “implicit
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-20-
authorization” of such provisions because they remain
inconsistent with common
law fiduciary duty principles and therefore would remain
impermissible.
Here, in contrast, no inference can be drawn from Section 115’s
silence as to
other types of forum selection provisions because such
provisions are not
otherwise impermissible under Delaware statutory or common law.
To the
contrary, forum selection provisions are generally enforceable
under Delaware law,
see, e.g., Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010),
and, for the reasons
previously stated, the Federal Forum Provisions are permissible
under Section
102(b)(1). Stated differently, unlike Section 102(b)(7), Section
115 was not
required in order to render forum selection bylaws regulating
“internal corporate”
claims permissible in the face of contrary statutory or common
law—such bylaws
were already valid as previously held in Chevron. Section 115
was instead
adopted, in part, to codify Chevron but also to impose the
further requirement that
any such forum provisions governing “internal corporate” claims
must allow for
those claims to be brought in the Delaware courts. For that
reason, the fact that
Section 115 does not expressly address certain other types of
forum selection
provisions cannot be read to imply that those other types of
provisions are therefore
impermissible.
Nor is there any implication to draw, as Plaintiff suggests,
from the “express
prohibitions” in Section 102(b)(7)—i.e., the carve-outs
prohibiting provisions that
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-21-
exculpate directors for monetary liability for, among other
things, claims for
breaches of the duty of loyalty or acts or omissions not in good
faith. Plaintiff sets
up a strawman by claiming that Defendants rely on Section 115’s
silence as an
“implicit endorsement” of other types of forum provisions. If
that were true,
Plaintiff continues, Section 102(b)(7)’s silence as to other
prohibitions—for
example, provisions exculpating officers or aiders and
abettors—would render
those provisions valid. That makes little sense. Section
102(b)(7) only permits
directors to be exculpated for certain claims. Officers and
aiders and abettors
would still be subject to the common law prohibition on
exculpation. In other
words, there is no need to expressly carve out other corporate
actors from Section
102(b)(7) because it does not apply to them in the first
place.
In any event, to be clear, Defendants do not contend that
Section 115 is an
“implicit endorsement” of the Federal Forum Provisions. See Pl.
Br. at 26. To the
contrary, Defendants’ position has always been that Section 115
is not implicated
by the Federal Forum Provisions. As noted above, the relevant
inquiry is
under Section 102(b)(1), which, for the reasons stated above,
permits the Federal
Forum Provisions.
V. The Policy Considerations Advanced by Plaintiff Do Not
Support Invalidating the Federal Forum Provisions.
Lastly, none of the policy considerations advanced by Plaintiff
provides a
compelling basis for invalidating the Federal Forum Provisions.
Plaintiff contends
-
-22-
that validation of the Federal Forum Provisions would exacerbate
conflicts
between Delaware law and the federal securities regime. The
perceived “conflicts”
cited by Plaintiff do not in fact exist. For example, to support
his claim that the
Federal Forum Provisions violate federal law, Plaintiff points
to dicta in Chevron
where the Court, in the context of analyzing a hypothetical
situation, speculated
that a forum provision governing Exchange Act claims may run
afoul of anti-
waiver provisions. This dicta is irrelevant, however, because,
as explained in
Defendants’ Opening Brief, the United States Supreme Court has
held that the anti-
waiver provisions of the Securities Act do not preclude parties
from
designating appropriate forums for such claims via a forum
selection provision.
Def. Br. at 29; Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S.
477, 481 (1989).
Forum selection provisions designating available forums for
Securities Act
claims are permissible and frequently enforced. See Def. Br. at
30-31. Plaintiff
has not offered any compelling distinction between these
oft-enforced provisions
and the Federal Forum Provisions that would render the latter in
violation of
federal law or public policy. Indeed, there is no such
distinction. Because charters
are contracts between stockholders and the corporation,
statutorily permissible
forum selection provisions are analyzed like any other forum
selection provision.
Chevron, 73 A.3d at 940. Thus, there is no basis to invalidate
the Federal Forum
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-23-
Provisions in light of binding United States Supreme Court
precedent upholding
comparable forum selection provisions.
For this reason, Plaintiff’s reliance on Cyan is also misplaced.
Cyan does
not overrule Rodriguez or otherwise affect the ability of
private parties to agree to
a particular forum for Securities Act claims. Rather, Cyan dealt
with whether a
defendant may remove to federal court a Securities Act claim
that was properly
filed in state court—e.g., it was not filed in contravention of
an enforceable forum
selection provision. It did not address whether parties could
agree ex ante that
such claims should be filed exclusively in federal court through
a contractual
forum provision.
Nor does the fact that Cyan recognized that SLUSA did not divest
state
courts of jurisdiction over ’33 Act claims equate to a public
policy requiring that
contractual forum provisions must preserve the ability to file
in state court.
Plaintiff conflates statutory authority conferring jurisdiction
on a particular court
with a public policy rejecting any forum selection provision
that prevents a party
from filing in that court. But every forum selection provision
operates in that
manner, limiting the forum(s) for bringing claims from among the
available forums
that have jurisdiction to hear those claims. If Plaintiff’s
logic were correct, every
forum provision, even those adopted pursuant to Section 115,
could be invalidated
-
-24-
on the theory that they run afoul of some stated public policy
reflected in the
statutory grant of jurisdiction on courts in the contractually
excluded forums.
Ultimately, Plaintiff ignores key policy considerations that
weigh in favor of
validating the Federal Forum Provisions. Delaware courts have
consistently
emphasized that corporations and stockholders should have
freedom to privately
order their affairs as they see fit. See Jones Apparel Grp.,
Inc. v. Maxwell Shoe
Co., 883 A.2d 837, 845 (Del. Ch. 2004); Chevron, 73 A.3d at 951
n.73, 956 n.100
(citations omitted). In addition, ample authority supports the
enforcement of forum
selection provisions, subject to the Bremen test. See Def. Br.
at 25.
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-25-
CONCLUSION
For the foregoing reasons and the reasons set forth in
Defendants’ Opening
Brief, Defendants’ Motion for Summary Judgment should be GRANTED
and
Plaintiff’s Motion for Summary Judgment should be DENIED.
OF COUNSEL:
Boris Feldman
David J. Berger
WILSON SONSINI GOODRICH
& ROSATI, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
(650) 493-9300
DATED: July 16, 2018
WILSON SONSINI GOODRICH
& ROSATI, P.C.
/s/ William B. Chandler III
__________________________________
William B. Chandler III (#116)
Randy J. Holland (#4)
Bradley D. Sorrels (#5233)
Lindsay Kwoka Faccenda (#5772)
222 Delaware Avenue, Suite 800
Wilmington, Delaware 19801
(302) 304-7600
Attorneys for Katrina Lake, Steven Anderson,
J. William Gurley, Marka Hansen, Sharon
McCollam, Anthony Wood, Ravi Ahuja,
Shawn Carolan, Jeffrey Hastings, Alan
Hendricks, Neil Hunt, Daniel Leff, Ray
Rothrock, and Nominal Defendants Stitch
Fix, Inc. and Roku, Inc.
Words: 6,102
I. The Federal Forum Provisions are Valid under Section
102(b)(1).II. The Federal Forum Provisions are Consistent with this
Court’s Guidance in Chevron.III. Plaintiff’s Reliance on Other
Federal Court Decisions and Commentators Is Unavailing.IV. Section
115 Is Irrelevant in Determining the Validity of the Federal Forum
Provisions.V. The Policy Considerations Advanced by Plaintiff Do
Not Support Invalidating the Federal Forum
Provisions.CaptionCourtNamelblSupStateDate2TOCHeadingTOCPage
