Federal Forum Provisions and the Internal Affairs Doctrine

41 Pages Posted: 25 Aug 2019 Last revised: 16 Sep 2019

See all articles by Dhruv Aggarwal

Dhruv Aggarwal

Yale University, Law School, Students

Albert H. Choi

University of Michigan Law School

Ofer Eldar

Duke University School of Law; Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Date Written: August 18, 2019

Abstract

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

Aggarwal, Dhruv and Choi, Albert H. and Eldar, Ofer, Federal Forum Provisions and the Internal Affairs Doctrine (August 18, 2019). U of Michigan Law & Econ Research Paper No. 19-009; U of Michigan Public Law Research Paper No. 646; Duke Law School Public Law & Legal Theory Series No. 2019-58. Available at SSRN: https://ssrn.com/abstract=3439078 or http://dx.doi.org/10.2139/ssrn.3439078

Dhruv Aggarwal

Yale University, Law School, Students ( email )

127 Wall Street
New Haven, CT 06511
United States

Albert H. Choi

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

HOME PAGE: http://www.law.umich.edu/FacultyBio/Pages/FacultyBio.aspx?FacID=alchoi

Ofer Eldar (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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