(Article from Securities Law Alert, September/October 2020)
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On September 1, 2020, a California Superior Court held that a federal forum provision (“FFP”) requiring Securities Act claims to be brought in federal court is legal and enforceable under federal law and California law. Wong v. Restoration Robotics, No. 18-civ-02609 (Cal. Super. Ct. 2020) (Weiner, J.).
The court considered the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi, 227 A.D.3d 102 (Del. 2020), which holds that an FFP is facially valid under Section 102(b)(1) of the Delaware General Corporation Law.[1] The Delaware Supreme Court compared FFPs to arbitration clauses. But the California Superior Court found that “unlike an arbitration clause, the FFP does not take away the rights of the parties to litigate in court, or to have a jury trial, or to appeal” but merely “remove[s] the opportunity to use the different procedural advantages of a state court forum.” The court determined that an FFP “is most akin to a contractual forum selection clause.”
The court found that defendants had demonstrated that the FFP was a mandatory forum selection clause, which was “subject to shareholder vote and approval, and was not applied retroactively.” The court determined that the burden of proof therefore shifted to plaintiffs to demonstrate that the clause is “unenforceable, unconscionable, unjust or unreasonable”—and found plaintiffs failed to meet that burden.
The court rejected plaintiffs’ contention that state court jurisdiction of Securities Act claims is non-waivable under Section 14 of the Securities Act. The court explained that such a clause “would not be legal or enforceable if [it] . . . attempted to create jurisdiction or select jurisdiction where none would otherwise exist. But Section 22 of the Securities Act does allow federal jurisdiction over these claims, and the FFP does not attempt to limit the venue of any federal district action.”
The court emphasized that the FFP causes “no disruption of the substantive rights of the shareholders to all protections provided by the Securities Act of 1933” and impacts “only the procedural aspect of state versus federal forum.” The court stated that “[t]here is no procedural loss of Due Process, as they can present their federal claims to a federal court” and “have the opportunity for discovery, and trial by jury.” The court observed that “[t]here is even greater authority in federal court to obtain personal jurisdiction over defendants, and to subpoena witnesses to trial.”
While the court dismissed claims against the issuer and its directors and officers, the court denied motions without prejudice brought by the underwriter and venture capital defendants, noting that further substantiation was needed to determine if they are entitled to the benefit of the FFP.
[1] Section 102(b)(1) provides that a company’s certificate of incorporation may include “[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). Please click here to read our discussion of the Delaware Supreme Court’s decision in Salzberg.