NEWSLETTER FROM THE M& A LITIGATION PRACTICE | 1 POLSINELLI.COM

JULY 2020 | VOL. 2

The Polsinelli PulseMITIGATING LITIGATION RISK AT THE DEAL TABLE AND BEYOND

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COVID-19 and Material Adverse Effect Clauses in Acquisition Agreements

IntroductionIn just two days, you will finally close the long-awaited sale of your widget manufacturing company. All of the closing conditions have been met and required approvals obtained; however, the COVID-19 pandemic has now spread across the United States. You have had to shut down several facilities and layoff hard-working employees, resulting in a sizable earnings drop.

As you open a letter from the buyer’s counsel, you have a feeling of dread. Sure enough, the buyer has determined the effects of the pandemic on your business are too significant to continue and they are terminating the purchase agreement, on the grounds that COVID-19 is a “Material Adverse Effect.” You hastily call up your lawyers and ask how to proceed. They review the agreement and confirm that the negotiated provision lacks any exceptions that would directly cover COVID-19. You immediately call up your litigation team and tell them to prepare for a lawsuit.

In the wake of COVID-19, parties to active M&A transactions are facing countless new challenges and, in many cases, have had to delay or suspend deals. One topic of particular interest for deals that have signed but not yet closed is whether COVID-19 constitutes a “Material Adverse Effect” or “Material Adverse Change” (an MAE) with respect to the target company under the applicable merger or acquisition agreement. In general, an MAE clause would allow the buyer to terminate, not perform certain obligations, and/or be entitled to indemnification from the seller if, between signing and closing, the target company experiences a durationally-significant and company-specific decline in its business that substantially threatens its overall earnings potential.

Anatomy of MAE Clauses and COVID-19 Carve-OutsA standard MAE provision includes three components. First, an MAE is typically defined as an event or circumstance that has had, or would be reasonably

Todd H. BartelsShareholder

Zeshawn QadirAssociate

One topic of particular interest for deals that have signed but not yet closed is whether COVID-19 constitutes a “Material Adverse Effect” or “Material Adverse Change” ... with respect to the target company under the applicable merger or acquisition agreement.

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expected to have, a material adverse effect on the business, financial condition or results of operations of the target company and its subsidiaries (taken as a whole).

Second, MAE clauses usually carve-out certain occurrences to protect the seller from liability associated with systemic risks (i.e., risks not particular to the target company), such as conditions generally impacting the target’s market or industry, natural disasters or other “acts of God,” and geopolitical conditions. Carve-outs referencing pandemics, epidemics or similar public health emergencies that would encompass COVID-19 were not common before the outbreak, but are now appearing more frequently.

Third, some or all carve-outs to MAE clauses are usually subject to a disproportionate impact exception, which returns the risk to the seller to the extent that an event falling within one of the carve-outs disproportionately adversely affects the target as compared to other industry participants or peers.

General Legal StandardsCourts often analyze whether an MAE has occurred under an agreement in terms of whether it allocates the risks of an adverse event to the buyer or the seller. But before determining how the risk of an adverse event is allocated, an initial question must be answered which is whether or not the adverse event is “material.” If the adverse event affecting the target company is not material, the MAE clause will not be able to be successfully invoked by the buyer to cancel the transaction. Often, MAE clauses do not define materiality but instead rely on the body of caselaw on the subject. So, what constitutes materiality?

One measure that courts often employ to evaluate the materiality of an adverse event is to compare the company’s performance prior to closing against the results of the same quarter of the prior year; however, this is only one, among many considerations, and Delaware, New York, and other courts have made clear that a prime consideration is whether the adverse event has affected the long-term earning power of the target. As noted by the Delaware Chancery Court in a recent opinion in Akorn v. Fresenius Kabi AG, while quarterly earnings may be a consideration, a “short-term hiccup” does not suffice; “rather the Material Adverse Effect should be material when viewed from the long-term perspective of a reasonable acquirer.”

Assuming that the adverse event is material to the target company, the issue becomes whether the agreement allocated the risk of the adverse event to the buyer or the seller.

Such risks can be broken into four categories of risk generally:

� Systemic risks, including force majeure events or “acts of God,” that are beyond the control of any party

� Indicator risks such as credit rating downgrades and failure to meet earnings projections

� Agreement risks that include any risks from public announcement of the transaction or fulfilling the agreement’s terms

� Business risks that are specific to the target company as opposed to the industry in which it operates

As noted by the Delaware Chancery Court in Akorn, “[g]enerally speaking, the seller retains the business risk. The buyer assumes the other risk.” Stated differently, under a typical MAE clause, the buyer will only be able to successfully invoke an adverse event to cancel a transaction when it is specific to the particular target company as opposed to the industry in which it operates. The typical case involves a buyer attempting to cancel a transaction because the target company has had a drastic decrease in earnings prior to closing from a cause that did not affect other companies in its industry and was not the result of a general market downturn.

Does COVID-19 Constitute an MAE under the General Standards?In the context of COVID-19, a buyer invoking an MAE clause to cancel a transaction will first have to establish that the pandemic’s effect on the target company was “material” by not only showing that the company’s short-term earnings have drastically declined but that the pandemic has seriously affected the target company’s long-term earnings power. At this stage of the pandemic, it may be difficult to assess its long-term impact and such determinations will be heavily dependent on the particular circumstances of the target company at issue.

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Table of ContentsCOVID-19 and Material Adverse Effect Clauses in Acquisition Agreements 1

Anticipating the Impact of COVID-19 on the Representations and Warranties Insurance Market 4

Employee-Specific Arbitration Agreements: Could They Backfire for Buyers? 6

Delaware Supreme Court Upholds Exclusive Federal Forum Selection Provisions 7

COVID-19: What Your Business Needs To Know

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Assuming the buyer meets its burden of establishing that the adverse event is “material,” the buyer will then need to show that the parties’ agreement allocated the risk of the pandemic to the seller. As stated, the typical MAE clause only allocates company-specific business risks to the seller and the buyer retains the other risks, including force majeure events. Often force majeure clauses are drafted to specifically include “pandemics” and in such cases a buyer’s burden to establish an MAE will be difficult. Even in the absence of a force majeure clause expressly referencing pandemics, the seller may have strong arguments that a pandemic constitutes an unforeseeable act of God.

That said, even if the COVID-19 pandemic falls within a force majeure clause that allocates risk to the buyer, if the pandemic has had a disproportionate impact on the target company as compared to other industry participants or peers, the risk can shift back to the seller under the typical clause such that the buyer may successfully invoke an MAE to cancel the transaction. In short, under the traditional MAE analysis, the determination of whether the COVID-19 pandemic is an MAE to a particular target company would likely come down to whether (1) the pandemic has materially affected the long-term earning capacity of the company, and (2) whether the pandemic has had a disproportionate impact on the company compared to others in its industry. But given the fluid situation that COVID-19 presents, it is not certain exactly how the courts will resolve such disputes as strong arguments may exist for both buyers and sellers depending on the circumstances of the case.

Negotiating MAE Provisions in a Post-COVID WorldThe following are a few practical approaches buyers, sellers and transactional lawyers negotiating a merger or acquisition agreement may wish to consider to limit the risk and uncertainty of MAE claims related to the COVID-19 pandemic.

Buyers: Sellers:

� MAE Carve-Outs: Negotiate for scaled back or eliminated carve-outs from the definition of MAE related to the effects of COVID-19, or include express disproportionate impact exceptions to such carve-outs to shift risk to the seller for adverse company-specific effects.

� Financial and Market-Outs: Consider including in the definition of MAE financial performance triggers related to quantifiable target-specific or macro-economic measures (e.g. a termination right upon EBITDA or a market index falling below a stated threshold).

� Quantified Threshold: Buyers with sufficient leverage might consider negotiating for a specified dollar threshold that constitutes an MAE for additional clarity and certainty.

� Synergies and Durational Significance: As courts will generally not consider post-closing synergies in evaluating whether an MAE has occurred and their interpretation of “durationally-significant” is unclear and highly context-dependent, consider negotiating for express references to synergies or limits on durational significance in the definition of MAE.

� MAE Definition: Limit the definition of MAE to only cover the target company and any subsidiaries being sold, and resist inclusion of future prospects and financial performance.

� COVID-19 and Related Carve-Outs: Add express exclusions to the definition of MAE for COVID-19 and other pandemics, epidemics, diseases and health emergencies, with the rationale that these are systemic risks and should be allocated to the buyer.

� Narrow Disproportionate Impact Exceptions: As disproportionate impact exceptions shift risk of an MAE to the seller, narrow the scope of these by expressly providing that only incremental material and disproportionate impacts on the target may be considered in evaluating an MAE and identify an appropriate comparison group (e.g. industry, market, geography, size, etc.)

� Reverse Termination Fees: Consider whether it makes sense to include a reverse termination fee (payable by the buyer if the deal falls through) to provide a negotiated out in the event the target’s future prospects are subject to a high level of uncertainty due to COVID-19.

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At this stage of the pandemic, it may be difficult to assess its long-term impact and such determinations will be heavily dependent on the particular circumstances of the target company at issue.

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Anticipating the Impact of COVID-19 on the Representations and Warranties Insurance Market

The mergers and acquisitions market sustained an immediate impact from the rapid spread of the novel coronavirus (COVID-19), including swift changes from the representations and warranties (R&W) insurance industry in an effort to adjust underwriting policies to the new risks presented by the pandemic. The impact on R&W insurance is continuing to change on a daily basis, but there have been significant developments and key market considerations that should be weighed as merger and acquisition (M&A) transactions consider the use of R&W insurance.

R&W insurers initially developed a handful of responses to COVID-19 including, but not limited to, specific exclusions related to the impact of COVID-19 and heightened diligence of a target’s business. As we enter into the summer months, those responses appear to be evolving in order to adapt to the reactions of clients and deal counsel. Initially, the reactions of certain R&W insurers disproportionately placed the risk on the policyholders, but as COVID-19 has progressed we have seen that R&W insurers are attempting to balance the risk posed by COVID-19 and are more willing to share in at least a portion of that risk with policyholders.

I. The Balance of COVID-19 ExclusionsOne of the most immediate and greatest impacts on the R&W insurance market has been the development of underwriting protocols that require exclusions for COVID-19 related exposures from the policy. While there is a reasonably wide disparity with respect to the application of these exclusions by insurance carriers, the use of some form of exclusion is the new normal facing clients and deal counsel. At the outset of COVID-19, the COVID-19 related exclusions in R&W policies were being applied broadly and, in some cases, were so broad that they threatened to undermine the purpose of the policy itself. However, as time has progressed and more deals are seeking R&W insurance following the COVID-19 outbreak, these exclusions are becoming more focused on the specific risks posed by the target in relation to COVID-19 rather than utilizing a broad-based approach. Craig P. Warnke, Managing Director of the Transactional Risk Practice at Marsh USA, Inc., recently noted that when COVID-19 first began, insurance underwriters were excluding any risk presented by COVID-19 from policies, but insurers are now becoming more thoughtful about the application of COVID-19 related exclusions and tailoring the exclusions to the actual risk presented by each target on a case-by-case basis.

While there is only a small sample size of transactions entered into in the post-COVID-19 landscape, we have seen that the majority of COVID-19 exclusions no longer seek to allocate all risk to the policyholders and, instead, seek to balance the risk by focusing on the vulnerabilities of the specific target. In certain circumstances, the COVID-19 exclusions have even been limited to failures by the target company to protect employees or customers, rather than a

broad exclusion relating to the general impact by COVID-19 on all aspects of the target’s business. In fact, in some circumstances, the underwriters have agreed to forgo COVID-19 exclusions altogether. For example, William M. Monat, the Transactional Risk Leader for Willis Towers Watson’s Mergers & Acquisitions Group, described a recent transaction in which the underwriter was able to gain comfort through the diligence process that the target’s supply chain and operations were not subject to enhanced risk due to COVID-19 and that the target’s sales had actually increased as a result of COVID-19, so the underwriter was able to offer R&W insurance without any COVID-19 exclusion.

Overall, while the majority of R&W insurance carriers will include some form of policy exclusion related to COVID-19, carriers are generally no longer insistent that policyholders bear all COVID-19 risks. Instead, there is anecdotal evidence that insurance carriers are striving to balance the risks of these exclusions between the policyholders and insurers.

II. Due Diligence Expectations for ClientsThe COVID-19 related exclusions from coverage previously discussed are informed through a customary diligence process conducted by the insurer on the target as a whole. Insurers have always identified heightened focus areas of due diligence based on the target’s business, and most recently those heightened areas consistently include the impact of COVID-19. Specific diligence questions related to COVID-19 are being added to underwriting protocols, including, but not limited to, requests for recent financials and projections, the collection of accounts receivable since COVID-19, functionality of the target company’s facilities, the target’s efforts to protect

Michael DolanShareholder

Craig A. Boyd, Jr.Associate

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employees and the direct impact on those employees, disruptions to customer or supplier relationships, business continuity plans, and insurance claims or coverage changes. Since the beginning of COVID-19, insurers continue to include general diligence questions regarding the effects of COVID-19 on the target, but targets should also expect focused questions that dig into areas where the target may be vulnerable. The heightened diligence by insurers will also be focused on defined terms in the definitive agreement such as “Material Adverse Effect” and whether the target will be able to properly make certain bring-down representations at the closing in two-step transactions. Targets should expect certain diligence requests related to the impact of COVID-19 on the target’s business in between signing and closing to ensure that pre-signing diligence remains current.

III. Anticipating the Impact of COVID-19 on Future R&W Insurance OfferingsAs expected, since the beginning of the COVID-19 pandemic, insurers saw a substantial decrease in the number of deals submitted. As we began the month of June, insurers reported a slight increase in the total number of deal submissions, but submissions remain small in terms of overall transaction value when compared to pre-COVID-19 expectations.

1 In transactions involving buy-side R&W insurance, there is typically either limited seller indemnity (often capped at or around 0.5% of the purchase price) or no seller indemnity. Instead, sellers expect buyers to look to a buy-side R&W insurance policy as a substitute for a buyer’s traditional indemnification rights. However, most R&W insurance policies only provide coverage to the buyer for coverage limits ranging from 5% to 20% of the purchase price. Traditionally, without R&W insurance, a buyer would negotiate higher indemnification caps for losses arising from a breach of a fundamental or tax representation or warranty. When a buyer purchases excess R&W insurance for losses arising from a breach of a fundamental or tax representation or warranty, the buyer first looks to its primary R&W insurance policy up to the coverage limit. If the buyer incurs losses in excess of the primary R&W insurance policy’s coverage limit, and such losses arise from a breach of a fundamental or tax risk, the buyer would then look to the excess R&W insurance policy.

Prior to COVID-19, there was a substantial trend towards “walkaway” deals without any form of seller indemnity obligations. Some commentators have speculated if seller-friendly clauses such as these will become less prevalent in the post-COVID-19 market, which many expect to be buyer-favorable, at least initially. However, as Scott Wolf of Willis Towers Watson’s Mergers & Acquisition Group notes, one driver behind this trend toward “walkaway” deals is the increased availability and awareness of excess R&W insurance covering buyers for losses from a breach of a fundamental and/or tax representation or warranty.1

COVID-19 is unlikely to alter the risk of a breach of fundamental representations, which means that the costs of this excess R&W insurance are not expected to be materially impacted by the pandemic. As such, we anticipate that certain sellers, particularly financial sellers, will continue to resist agreeing to indemnify the buyer for losses in excess of the R&W policy’s coverage limit, and instead suggest the buyer purchase excess R&W insurance. However, other factors such as loss experience may impact the rates of the R&W insurance market, which could cause buyers to push back on obtaining excess R&W insurance. While it is too early to determine the impact on the overall market, one major R&W insurer recently announced a 20% rate increase due to

loss experience. Overall, we anticipate that the trend towards “walkaway” deals will continue apace despite the presence of COVID-19.

Lastly, with an expected meaningful increase in restructuring activity and distressed M&A, we anticipate a significant increase in the demand for R&W insurance as a way for buyers to recover damages in situations where it is anticipated that the seller will not be creditworthy post-closing.

IV. Take-Aways� The use of COVID-19 related exclusions is the new norm for R&W insurance; however, underwriters are beginning to focus on the actual vulnerabilities of the target and tailor the exclusions more narrowly as a result, which more appropriately balances the risk between policyholders and insurers.

� Clients and deal counsel need to ensure that COVID-19 related exclusions do not overlap coverage areas that are merely incidental to the risks posed by COVID-19 and would otherwise be covered under a typical R&W policy.

� Targets should expect heightened due diligence related to the impact of COVID-19, as well as follow up diligence to ensure representations and warranties remain accurate between signing and closing.

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Employee-Specific Arbitration Agreements: Could They Backfire for Buyers?

For prospective buyers, the due diligence process necessarily includes a review of employment-related liabilities that could flow through the deal. In recent years, businesses have trended towards requiring employees to submit employment disputes to arbitration, waiving rights to class or collective actions. Many companies benefit from forcing employees to arbitrate claims. This process typically avoids the costs and publicity of (public) litigation. That sense of security, however, may be threatened due to a recent strategy implemented by workers to file thousands of individual demands for arbitration, requiring the employer to pay an exorbitant amount of arbitration fees well before an arbitrator or judge renders a decision on the merits of the employees’ claims.

Couriers working for Postmates have recently utilized this tactic. Postmates delivers food from restaurants, groceries and other goods to consumers on its web-based platform. The company hires couriers to make the deliveries and classifies them as independent contractors. The company required its couriers to sign individual arbitration agreements when they were hired. Now, the company will likely incur

millions of dollars in arbitration fees in accordance with the American Arbitration Association’s (AAA) standard schedule of filing fees. In July 2018, the couriers filed a complaint that included claims under California’s Private Attorney General Act (PAGA) and a class action in state court, alleging that Postmates misclassified couriers as independent contractors. Rimler et al. v. Postmates Inc., case number CGC-18-567868 (Cal. App. 4th Supp. 2018). In accordance with its individual arbitration agreements, Postmates successfully moved to compel arbitration in the PAGA case and the class action. Id. After the case was sent to arbitration, thousands of employees in the class filed individual demands for arbitration.

In April and May 2019, 5,000 additional Postmates couriers filed demands for arbitration with the AAA, alleging that they should be considered Postmates’ employees and paid the minimum wage and overtime under federal and state wage laws. The couriers paid approximately $100,000 for their portion of the arbitration fees. Under AAA’s standard fees schedule, Postmates owed approximately $1,900 per claimant to initiate individual arbitrations. In total, the company owed AAA nearly $9.36 million, which a federal district court ultimately compelled it to pay.

In another tranche of misclassification cases, the number of individual arbitration demands increased to 10,356. AAA required Postmates to pay nearly $4.7 million by April 15, 2020, (in addition

to the $9.7 million mentioned above) to initiate the arbitration process for those cases. Nor is this a phenomenon specific to one company. For example, recently, DoorDash and Uber have been forced to arbitrate thousands of individual claims and pay millions of dollars in fees as a result of their mandatory arbitration agreements with their respective workers.

The lesson — a sophisticated plaintiffs’ bar has found a way to combat the proliferation of mandatory arbitration agreements. In negotiating merger transactions, prospective buyers should be aware of the potential costs that arise from these agreements and should conduct due diligence appropriately. Prospective buyers need to consider how individual arbitration agreements could impact operations. For companies acquiring large workforces, the cost of filing individual arbitrations could substantially outweigh the cost of defending a class or collective action. In that case, prospective buyers may consider structuring the deal in a way that allows them to avoid responsibility for the costs arising from mandatory arbitration agreements. On the other hand, there may be cases in which the prospective buyer would rather incur the costs of arbitrating individual claims to avoid the publicity of litigation and protect future goodwill. In either case, buyers need to consider the potential impact of extant arbitration agreements on their business strategies and profitability.

Tony W. Torain, IIShareholder

In negotiating merger transactions, prospective buyers should be aware of the potential costs that arise from these agreements and should conduct due diligence appropriately.

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Delaware Supreme Court Upholds Exclusive Federal Forum Selection Provisions

The Delaware Supreme Court recently held that Delaware corporations may validly adopt forum selection provisions requiring that all actions arising under the Securities Act of 1933 be filed exclusively in federal court. Salzberg v. Sciabaucchi, Case No. 346, 2020 WL 1280785 (Del. Mar. 18, 2020). The decision enables Delaware corporations to more effectively manage litigation filed in multiple forums, a problem created following the United States Supreme Court’s 2018 decision in Cyan, Inc. v. Beaver County Employee’s Retirement Fund, 138 S.Ct. 106 (2018), which held that federal and state courts have concurrent jurisdiction over Securities Act claims.

BackgroundIn 2017, three companies, Blue Apron Holdings, Inc., Roku, Inc. and StitchFix, Inc., each adopted its own variation of a federal forum provision (FFP), attempting to force shareholders to file Securities Act claims arising out of each corporation’s anticipated initial public offering in federal court. The FFPs included language in a form similar to the following:

Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of the Company shall be deemed to have notice of and consented to this provision.

A shareholder of each corporations brought suit seeking a declaratory judgment that the FFPs are invalid under Delaware law. Delaware’s Court of Chancery agreed. It held that the provisions are ineffective because they attempt to bind the plaintiffs to a particular forum when the underlying claim did not involve rights or relationships established under Delaware law.

Delaware Supreme Court’s AnalysisThe Delaware Supreme Court (Court) disagreed. It held that the FFPs are valid and consistent with both Delaware law as well as state and federal policy.

First, the Court found that the FFPs fell within §102 of the Delaware General Corporation Law, which broadly authorizes the adoption of charter provisions for “the management of the business and for the conduct of the affairs of the corporation” and for “creating, defining, limiting, and regulating the powers of the corporation, the directions, and the stockholders, or any class of the stockholders.” According to the Court, the FFPs are consistent with the scope of the corporate law insofar as they regulate the forum in which an “intra-corporate” litigation, such as a Securities Act claim arising from a disclosure in connection with an IPO or secondary offering, can be brought.

Second, the Court held that §115 of the Delaware General Corporation Law, which permits Delaware corporations to include in their organizational documents exclusive Delaware forum selection provisions for the regulation of “internal corporate claims,” does not prevent Delaware corporations from adopting FFPs such as those at issue. Section 115 was intended to address Delaware corporate law, not federal claims. Because the FFPs are limited to federal Securities Act actions, they are not prohibited by Delaware law.

Third, the Court also created a range of permissible and impermissible subjects of corporate regulation of affairs from narrow to broad. The opinion included a Venn diagram demonstrating the extent to which corporate regulation might be permitted.

Finally, the Court found that the FFPs did not violate Delaware and federal policies.

ImpactIn the event of a Securities Act violation (e.g., failing to file the registration statement or misrepresentations in statements and prospectuses), a private right of action exists providing a monetary remedy to shareholders who purchase a security directly in a public offering. Claims may be filed in federal or state courts and will remain there for the duration of the litigation because the statute prohibits removal. In the wake of Cyan, companies faced a tidal wave of Securities Act claims in state courts, often forced to litigate duplicative claims in both state and federal courts with no mechanism to coordinate or consolidate cases in multiple states or across jurisdictions. Plaintiffs often filed Securities Act claims in state court to avoid more stringent federal pleading standards as well as the possibility of a discovery stay under the Private Securities Litigation Reform Act of 1995 (PSLRA). Because both federal and state jurisdictions are available, defendants face added complexity and increased costs if parallel federal and state cases are filed over the same matter.

The Delaware Supreme Court also noted this concurrent jurisdiction problem, which often resulted in Delaware corporations managing litigation in multiple jurisdictions, creating the risk of higher costs, managing efficiencies, and as well as potentially inconsistent judgments. The Salzberg decision provides a significant measure of relief (from Cyan) to Delaware corporations and their ability to manage Securities Act litigation. Now, through the adoption

Mark A. OlthoffShareholder

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Mergers and Acquisitions LitigationMembers of Polsinelli’s national business litigation practice work in close collaboration with Polsinelli’s corporate and transactional attorneys representing buyers, sellers, officers and directors, boards and board committees, founders and other stakeholders in disputes arising from merger and acquisition transactions.

These transactions include a broad cross-section of business organizations, including among others, Fortune 500 companies, private equity sponsors, venture capital sponsors, nonprofit organizations, manufacturers, foundations, operators and founders.

ContactNoam B. Fischman Chair, M&A Litigation Working Group nfischman@polsinelli.com 202.626.8360

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of FFPs, corporations can minimize litigation inefficiencies created by the concurrent jurisdiction of federal and state courts over Securities Act claims.

While the Delaware Supreme Court found the forum selection provisions were not prohibited by Delaware or federal laws and policies, it expressed what it described as “powerful concerns” whether the provisions might be enforced by other states. The Court suggested “there are persuasive arguments that could be made to our sister states that a provision in a Delaware corporation’s certificate of incorporation requiring Section 11 claims to be brought in federal court does not offend principles of horizontal sovereignty — just as it does not offend federal policy.” The FFPs may command consideration of the internal

affairs doctrine, pointing to application of Delaware law, and full faith and credit may argue in favor of deference. Also, the FFPs are process oriented (pertaining to where stockholders may file suit) rather than substantive (whether suit may be filed or the remedy) thus do not offend traditional constitutional and jurisdictional principles.

Finally, while the Delaware Supreme Court’s opinion dealt squarely with whether Securities Act claims can validly be required to be filed in federal court under a FFP, it is less clear whether other securities claims can likewise be subject to FFPs. The Court also distinguished matters such as “internal corporate claims” and “intra-corporate affairs” from “external affairs.” Contract and tort claims may well be outside the scope of “internal corporate claims” and “intra-

corporate affairs.” In such instances, because FFPs do not address these claims, courts may resort to a review of contractual venue selection provisions in contract cases. Tort claims likely would be subject to traditional jurisdiction and venue analysis, statutes, and laws.

ConclusionIn light of Salzberg, companies governed by Delaware law should consider adopting FFPs to counteract the concurrent jurisdiction problems exacerbated by Cyan. As FFPs become more ubiquitous and additional cases are inevitably filed challenging them, case law will develop that will (hopefully) follow the lead of Delaware and find FFPs are valid and enforceable wherever the company is incorporated.

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