On March 9, 2023, a panel of the Utah Court of Appeals affirmed a 2021 trial court decision dismissing a putative securities class action against a technology company (the “Company”), certain of its officers and directors and its underwriters for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”). Volonte v. Domo, Inc.
, No. 20210399-CA (Mar. 9, 2023). The unanimous decision affirmed the dismissal on the basis of a federal forum provision (“FFP”) in the Company’s bylaws; such provisions require that claims under the Securities Act of 1933 be filed in federal court as opposed to state court. Among other points, the decision emphasized the underwriters’ right to invoke the FFP and held that the matter was governed by Delaware, not Utah, law.
The Company is a technology company based in Utah that went public through an initial public offering (“IPO”) in 2018. In November 2019, a shareholder of the Company filed a putative class action complaint in Utah state court alleging that the offering documents for the Company’s IPO failed to disclose that the Company was experiencing “headwinds” that restricted its ability to attract “enterprise customers” that generate $1 billion in revenue. In April 2021, the trial court dismissed the action on the basis that venue was improper in Utah state court because of an FFP in the Company’s bylaws requiring all securities claims to be filed in federal court. Plaintiff appealed to the Utah Court of Appeals.
First, plaintiff argued that the FFP was not binding because he did not have notice of, and did not assent to, the provision. The Court rejected this argument, concluding that bylaws constitute a valid contract between the corporation and its shareholders, and that knowledge and acceptance of the bylaws is imputed to all shareholders. The Court also rejected plaintiff’s argument that the FFP was “buried” in the bylaws, finding that plaintiff failed to identify a workable standard for assessing this and cited no caselaw invalidating an individual bylaw because the bylaws as a whole were lengthy.
Second, plaintiff argued that the FFP was unenforceable because the Company stated in an 8-K that it would not enforce the FFP unless and until the Delaware Supreme Court reversed a Court of Chancery decision finding that FFPs were per se
invalid. The Court rejected this argument (as well as plaintiff’s arguments of promissory and equitable estoppel), finding that the language of the 8-K was “decidedly conditional on its face.” (As previously reported
, in March 2020, the Supreme Court of Delaware reversed a decision of the Delaware Court of Chancery and affirmatively endorsed the enforceability of FFPs in a Delaware corporation’s certificate of incorporation. Salzberg v. Sciabacucchi
, No. 346, 2019 (Del. Mar. 18, 2020).)
Third, plaintiff argued that the Securities Act’s removal bar and anti-waiver provision prohibited dismissal of his claims. The Court, however, concluded that these Securities Act provisions were inapplicable because defendants sought to dismiss the claims, not remove them, and the anti-waiver provision only applies to waiver of substantive rights, not procedural rights (such as the issue of the forum in which claims can be filed).
Fourth, plaintiff argued that defendants should not be permitted to enforce the FFP on the basis of the forum non conveniens doctrine. The Court rejected this argument, concluding that forum non conveniens simply did not apply to allow a plaintiff to avoid enforcement of a valid forum selection clause, and plaintiff failed to show that there was not another forum available to him.
Finally, with regard to whether the FFP was enforceable as to the underwriters specifically, the Court concluded that the matter was governed by Delaware (not Utah) law, and under Delaware law a non-signatory defendant is permitted to enforce a contractual forum selection clause against a signatory plaintiff where the plaintiff’s claims against the non-signatory are closely related to contractual obligations. Accordingly, the Court affirmed the trial court’s decision that the underwriters could enforce the FFP.