Delaware Shareholder Suits

It is a generalization, but one I am willing to make, that Delaware courts tend to restrict the rights of shareholders and side with Delaware-formed corporations in allowing companies wide latitude in governing themselves and setting ground-rules of dispute resolution.  Thus, recently, Delaware courts decreed that a corporation can require shareholders to bring cases against directors and officers in Delaware only.

Separately, the US Supreme Court earlier this year declared that claims based on violations of Federal Securities Laws could be brought not only in Federal Courts but also in State Courts, reversing the prior rule that Federal issues should be resolved at the Federal level.

Delaware corporate lawyers, always quick to adjust corporate documentation to the benefit of management, thus began providing in corporate documentation that all stockholder claims against or involving a Delaware entity had to be brought in Delaware.  The recent Delaware Chancery Court case of Blue Apron et al  has voided such provisions; States can restrict the venue for claims relating to internal corporate matters to the courts of that State, but cannot restrict venue for claims based on violation of Federal Law, as such a violation does not relate to a State-controlled issue, specifically the internal governance of a Delaware entity, but rather to the violation of external laws or governmental rules.

Counsel to Delaware entities should periodically have by-laws reviewed to see if they are state of the art, as the art changes annually in Delaware; but Federal courts and courts in other States are going to be able to entertain SEC-type claims when brought to those courts at the discretion of stockholder litigants, and provisions to the contrary will not be able to alter that result.


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