Amending the Delaware Corporate Code by Going to Court: Some Thoughts on Sciabacucchi v. Salzberg

Zachary Gubler is the Marie Selig Professor of Law at Arizona State University Sandra Day O’Connor College of Law. This post is based on his recent paper, forthcoming in the Georgetown Law Journal Online, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill; and Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani.

With the oral arguments now behind us, it’s anybody’s guess how the Delaware Supreme Court will rule in Sciabacucchi v. Salzberg. Personally, I think the Court should reverse the Chancery Court’s decision to invalidate charter provisions making federal court the exclusive forum for ’33 Act litigation. In a recent essay, I highlight two arguments that I think have flown under the radar but strongly favor this outcome. The arguments are related and have to do with how the Chancery Court went about interpreting Section 102(b)(1) of the DGCL, the provision establishing the permissible scope of the corporate charter.

The first argument is that the Chancery Court should never have interpreted the statute in light of the internal affairs doctrine. That doctrine is a choice of law provision, which says that all “internal affairs” of the corporation shall be decided by Delaware law. The Chancery Court took this to mean that whatever the scope of Section 102(b)(1), it must be limited to internal affairs. Thus, they were able to read a statutory provision that permits “any [charter] provision creating, defining, limiting and regulating the powers of . . . stockholders” to be limited to “the powers of . . . stockholders that are exclusive to stockholders and that arise exclusively under Delaware law.”

That italicized language is not in the statute, of course, but that’s how the Chancery Court read the provision, all because of the belief that it must be read in light of the internal affairs doctrine. But that’s not right. A choice of law provision can’t tell us anything about the scope of the contract to which it applies. For example, if a choice of law provision says that all “employment-related matters” in a given contract must be resolved by Nevada law, that doesn’t tell us that the contract only contains employment-related matters. And yet that is precisely the type of inference the Chancery Court is drawing when they read Section 102(b)(1) in light of the internal affairs doctrine. The correct approach would be to simply read the statute independent of the internal affairs doctrine. Then once one has determined Section 102(b)(1)’s scope, the internal affairs doctrine tells us that all matters of “internal affairs” in the charter are governed by Delaware law. And as to any non-internal affairs matters, they wouldn’t be invalid. The applicable law just wouldn’t be determined by the internal affairs doctrine.

How then should Section 102(b)(1) be interpreted, assuming we ignore the internal affairs doctrine? In my view, the best reading of the statutory language is this: the statute permits the charter to deal with the rights of stockholders period, whether those rights arise from Delaware, or some other jurisdiction’s, law or whether those rights are exclusive to stockholders or can be exercised by other stakeholders as well; but not where those rights have nothing to do with the stockholder’s status as such. To be clear, however, I don’t think the legal issue, when properly framed, even requires the best reading of the statute. This is the second argument I make in the essay. Rather than the best reading of the statute, I think the legal issue only requires a plausible reading, and the reading offered above is clearly a plausible reading, even if not the best one.

The reason I think a plausible reading of the statute is all that’s required has to do with the fact that the corporate contract is essentially a type of form contract. When courts enforce form contracts—and they do all the time—the question is how there could be the mutual assent required for a valid contract, especially when the party challenging the validity of the contract didn’t read, or couldn’t have read, the terms prior to acceptance. And the answer has to be that the party assented to be bound by all the terms one could reasonably expect to find in a contract of the type that the one in question purports to be. So, if the contract in question is a consumer contract for the purchase of say a smartphone, then, for example, a provision designating Nevada as the forum for adjudicating legal disputes would be valid as long as it could be said that it is reasonable to expect to find such a clause in a consumer contract of the type in question. Similarly, in the case of the federal forum selection clause at issue in Sciabacucchi, the question is whether it is reasonable to expect such a provision in a corporate contract of the type described in Section 102(b)(1). In other words, is it a reasonable or plausible interpretation of the statute to conclude that the phrase “any provision creating, defining, limiting and regulating the powers of . . . stockholders” includes a provision limiting the power the stockholders have to bring stockholder-related claims in state or federal court? In my view that question has to be answered in the affirmative.

For these reasons, I think the Delaware Supreme Court should reverse the Chancery Court. It may very well be true, as the Chancery Court says in its opinion, that the policy of Delaware is that the corporate contract should only pertain to the rights and powers of the stockholders that are exclusive to stockholders and that arise exclusively under Delaware law. But if so, then the Delaware Legislature should amend the statute accordingly, because that’s not what the statute says. And attempts to conclude otherwise require us to ignore the way courts typically treat choice of law provisions and form contracts.

The complete paper is available for download here.

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