01 September 2020

California Court Upholds Delaware Corporation’s Exclusive Federal Forum Charter Provision

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The Superior Court of California, County of San Mateo, recently enforced a Delaware corporation’s charter provision mandating that claims brought under the Securities Act of 1933 be filed in a federal court. This marked the first decision outside of Delaware to enforce an exclusive federal forum provision since the Delaware Supreme Court decided in March 2020 that such provisions are valid under Delaware law.

Recently the Superior Court of California, County of San Mateo, enforced an exclusive federal forum charter provision and dismissed a putative securities class action brought under the Securities Act of 1933 because the company’s charter provided that such lawsuits may only be brought in federal court. Wong v. Restoration Robotics, Inc. (Cal. Super. Ct. Sep. 1, 2020). The decision is the first in California to address the enforceability of a Delaware corporation’s exclusive federal forum charter provision since the Delaware Supreme Court held that such provisions are facially valid in Salzberg v. Sciabacucchi (Del. Mar. 18, 2020), which was discussed in our June 2020 issue of Sidley Perspectives.

Restoration Robotics, Inc., a Delaware corporation based in California, faced a class-action lawsuit in state court brought by shareholders against the company and certain of its directors, officers, underwriters and investors following the company’s initial public offering. The defendants moved to dismiss the case based on the federal forum provision in the company’s charter. The Court initially denied the motion in light of a then-current Delaware Chancery Court decision declaring federal forum provisions illegal under Delaware law. After the Delaware Supreme Court’s Salzberg holding in March 2020 reversing that decision, the California Superior Court granted the defendants’ motion to reconsider the earlier ruling in light of the change in law.

The Court determined that the exclusive federal forum provision was “most akin to a contractual forum selection clause” and examined California law on forum selection clause enforcement. The Court held that upholding the exclusive federal forum provision, which was approved by shareholders, would not be “unjust, unreasonable, or the result of overreaching” because “there is no disruption of the substantive rights of the shareholders to all protections provided by the Securities Act of 1933 — only the procedural aspect of state versus federal forum.” Notably, the Court denied the motion with respect to the underwriter and investor defendants who lacked authority to enforce the exclusive federal forum provision because they were not parties to the charter.

The decision in Wong is significant in that it is the first decision outside of Delaware to enforce an exclusive federal forum provision. If other courts find these provisions enforceable, securities litigation defendants may be able to successfully channel litigation into federal courts and avoid litigating duplicative claims in different jurisdictions. However, as the trial court’s decision is not binding on other courts and may be appealed, the enforceability of exclusive federal forum provisions remains subject to further judicial challenge. On balance, we encourage companies to consider adopting exclusive federal forum provisions, bearing in mind that doing so may cause Glass Lewis to issue a vote recommendation against the company’s governance committee chair.