Federal Forum Provisions and the Internal Affairs Doctrine
41 Pages Posted: 25 Aug 2019 Last revised: 16 Sep 2019
Date Written: August 18, 2019
A key question at the intersection of state and federal law has been whether corporations can use their charters or bylaws to restrict securities litigation to federal court. The Delaware Chancery Court recently answered this question in the negative in a landmark decision, Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the venue for claims brought under the Securities Act of 1933 (“33 Act”), to the exclusion of state courts. The decision held that the internal affairs doctrine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions to restrict rights under federal law.
This article presents the first empirical analysis of federal forum provisions. Using a hand-collected data set, we examine the patterns of adoption of such provisions and the characteristics of adopting firms. We show that adoption rates are higher for firms with characteristics (such as industry) that make them more vulnerable to claims under the 33 Act, and that adoption rates substantially increased after the US Supreme Court case, Cyan Inc. v. Beaver County Employees Retirement Fund, which validated concurrent jurisdiction for both federal and state courts for 33 Act claims. We also find that the firms that adopt FFPs at the initial public offering (“IPO”) stage tend to share characteristics that have been associated with relatively good corporate governance. To assess the impact of the Salzberg decision, we also conduct an event study. We find that the decision is associated with a large negative stock price effect for companies that had FFPs in their charters or bylaws. The effect is robust even for firms that had better governance features, that underpriced their stock at the IPOs, and whose stock price traded at or above the IPO price prior to the Salzberg decision.
In light of the empirical findings suggesting that federal forum provisions may serve shareholders’ interests by mitigating excessive 33 Act litigation, we consider alternative legal theories for validating federal forum provisions. In particular, we argue that shareholder lawsuits under the 33 Act may be viewed as being intimately related to the internal affairs of the corporation, and could therefore be seen as within the scope of corporate charters and bylaws. Our approach is consistent with the classical understanding of the scope of internal affairs doctrine, which governs matters related to shareholder’ wealth, while federal law protects broader stakeholders’ interests.
Keywords: corporate law, forum selection, securities litigation, internal affairs, Delaware, private ordering
JEL Classification: K22
Suggested Citation: Suggested Citation