Companies cannot compel shareholders to file lawsuits alleging fraud in initial public offerings only in federal courts, a Delaware judge ruled Wednesday.
Delaware Chancery Court Vice Chancellor Travis Laster invalidated the federal forum selection clauses adopted by Blue Apron, Roku and Stitch Fix that require shareholders to bring Securities Act of 1933 lawsuits in federal court.
All three firms are registered in Delaware, where many companies choose to incorporate because of favorable corporate-tax laws.
The three firms' forum-selection clauses in their 2017 charters are "ineffective and invalid" because the provisions were not established under Delaware corporate law, Mr. Laster wrote.
"Under existing Delaware authority, a Delaware corporation does not have the power to adopt in its charter or bylaws a forum-selection provision that governs external claims," he wrote. Delaware can use its corporate laws to regulate the corporation's internal affairs, but that authority "does not extend to external relationships, particularly when the laws of other sovereigns govern those relationships," he said.
The ruling also referenced a 2018 Supreme Court decision that resolved a federal circuit split by holding that states can continue to have concurrent jurisdiction over claims by private plaintiffs. The case involved a lawsuit brought in California state court by the Beaver County (Pa.) Employees' Retirement Fund against Cyan Inc. The justices in that case held that class actions filed in state courts asserting 1933 Act violations could not be removed to federal court, and plaintiffs could maintain actions in state or federal court.
"Forum-selection clauses have a significant impact on investors' ability to protect their substantive rights, and that's what makes this case so important," said Joel Fleming, with the law firm Block & Leviton LLP, who represented the lead plaintiff.
