Saturday, November 14, 2020
Very quick post this week as I comment on DoorDash’s recently-publicized S-1, and the forum selection clause contained in its current certificate of incorporation:
Unless this corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of this corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of this corporation to this corporation or this corporation’s stockholders, (iii) any action arising pursuant to any provision of the General Corporation Law or this Restated Certificate of Incorporation or the Bylaws of this corporation (as either may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten (10) days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of this corporation shall be deemed to have notice of and consented to the provisions of this Article XIV. Unless this corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.
As I understand it, upon the completion of the offering, DoorDash will move this clause from the charter into the bylaws. Though (as I’ve previously said) I have questions about the charter vs. bylaw issue, the substance of the clause will remain the same.
What’s notable here is how DoorDash could have – but did not – choose to go much further than it did.
As I previously blogged, Boeing has a forum selection bylaw that requires all “derivative” claims to be filed in Delaware Chancery. I strongly suspect that Boeing only intended the clause to apply to traditional fiduciary claims, but after the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi – permitting corporate constitutive documents to limit claims brought under the federal Securities Act – Boeing sought to have its bylaw applied to a derivative claim alleging violations of Section 14 of the Exchange Act. Because state courts do not have jurisdiction over Exchange Act claims, in practical effect, Boeing’s argument meant that the derivative Section 14 claim against it needed to be dismissed. A district court bought that argument, and the case is now on appeal to the Seventh Circuit. Separately, the plaintiffs have filed a declaratory judgment action in Delaware challenging the bylaw as contrary to Delaware law.
Facebook is currently making a similar argument. Facebook, like several companies, was hit with a derivative lawsuit in California federal court challenging its lack of diversity (which Marcia blogged about here). Among other claims, the plaintiff is alleging false proxy statements in violation of Section 14 that induced shareholders to vote in favor of Facebook’s directors and approve its executive pay packages. But because Facebook has a charter provision requiring that “derivative” actions be filed in Chancery, Facebook is moving to have the case dismissed, using Boeing as precedent.
Thus, it is striking to me that DoorDash chose not to push the envelope here, and is explicitly permitting claims to be filed in federal court if Delaware Chancery does not have jurisdiction. This is, by current standards, a remarkable show of restraint.
One thing that does occur to me, though: In general, plaintiffs cannot bring federal claims for damages from a false proxy statement if they cannot show that the proxy statement was an “essential link” in accomplishing the challenged transaction. In practical effect, the proxy statement must have solicited necessary shareholder votes. But DoorDash – and, for that matter, Facebook – have dual-class share structures that give one person a controlling stake. Under those circumstances, the votes of the minority shareholders will rarely be necessary to legally effect a transaction. Thus, DoorDash may feel that allowing Section 14 claims (derivative or direct) to be filed in federal court presents a fairly minimal risk of liability, when weighed against the headaches associated with trying to bar them.