Corporate Governance

CFA White Paper Details Potentially Harmful Impact on Investor Protection of a Recent Delaware Court Decision

The Decision’s Wide-Ranging Potential Impacts Could Effectively End Shareholder Lawsuits

Washington, D.C. — A decision by the Delaware Supreme Court earlier this year could open the door to broad new restrictions on shareholder lawsuits, with harmful implications for both investor protection and market integrity, according to a white paper released today by Consumer Federation of America.

The white paper, Caution: Slippery Slope, How Delaware Supreme Court’s Blue Apron Decision Could Harm Investors and Undermine Market Integrity, examines the broader investor protection implications of the Court’s decision in Salzberg v. Sciabacucchi (commonly referred to as “Blue Apron”). That decision addressed a relatively narrow, though important issue – whether it is permissible under Delaware law for corporations to adopt charter provisions that require shareholder lawsuits under the federal Securities Act of 1933 to be brought exclusively in federal, rather than state, court. The court ruled that such provisions were facially permissible under Delaware law.

“While that decision is itself a loss for investors, since federal courts are generally viewed as less friendly to shareholder claims, the real risk comes from how the court’s logic could be extended to other, related matters,” said CFA Director of Investor Protection Barbara Roper. “Taken to its logical extreme, the court’s ruling that corporations can include in their charters ‘any provision’ related to ‘the management of the business’ and the ‘conduct of the affairs of the corporation’ could result in its being applied much more broadly, including in areas with significant implications for investor protection and market integrity,” she added.

“Ultimately, the Delaware Supreme Court’s Blue Apron decision raises more questions than it answers about how far corporations will be permitted to go in limiting their shareholders’ rights,” Roper said. “While it is too soon to predict how courts will answer those questions, we do know that some Delaware corporations and their attorneys are already looking to capitalize on the decision to further restrict shareholder rights,” she added. “There is at least a plausible risk that the decision could be used to allow corporations to adopt, without shareholder approval,  forced arbitration clauses or loser pays provisions for federal securities law claims, either of which would effectively spell the end of private shareholder lawsuits.”

As CFA detailed in an earlier white paper, A Settled Matter: Mandatory Shareholder Arbitration Is Against the Law and the Public Interest, private shareholder lawsuits not only play an important role in compensating defrauded investors for their losses, they also provide an essential supplement to Securities and Exchange Commission enforcement of federal securities laws by detecting and deterring fraud. Provisions that undermine investors’ ability to bring such claims, including by forcing them to be litigated in private arbitration on an individual basis, therefore threaten the integrity and fairness of our capital markets, the report explains.

The new Blue Apron white paper was released earlier today at an Investor Protection Roundtable co-hosted by CFA, American Association for Justice, and Public Justice to discuss recent developments regarding shareholder rights at the state and federal level. “While we are not predicting how courts ultimately will decide these issues, the potential for harm is too dire for us to just sit back and hope for the best,” Roper said. “We need to be thinking now about the proper policy response. This white paper is intended to help launch that discussion.”

Contact: Barbara Roper, 719-543-9468