Over the past three years, directors and officers of public companies trading in the United States have been named in more in securities claims filings than any prior three-year period in history. The plaintiff-friendly 2018 Supreme Court decision, Cyan, Inc. v Beaver County Employees Retirement Fund, has contributed to an increase in the likelihood of a securities claim alleging violations of the Securities Act of 1933. In this decision, the Supreme Court held that class actions asserting claims under the 1933 Act were subject to concurrent state court jurisdiction. Thus, lawsuits brought under the 1933 Securities Act may be brought in federal and/or state court(s), including multiple state courts simultaneously, and not subject to removal if brought in state court.
In March of 2020 in the case of Sciabacucchi v Salzberg, the Delaware Supreme Court reversed a prior lower court decision and upheld the federal forum provision that allows Delaware-incorporated companies to add an exclusive forum provision in their charter or bylaws. Should a company implement such a provision, it would effectively limit the jurisdiction of such Claims exclusively to the federal court in Delaware. Since this potentially reduces the exposure for directors and officers, as well as insurers providing insurance to directors and officers, McGriff is making our clients aware of this development so that you can discuss with your outside counsel and explore potentially adding federal forum provisions to your charter.
Prior to 2018, Section 11/1933 Act securities suits were historically filed in state courts that were perceived to be plaintiff friendly. Coupled with the overall rise in securities claims, there were also an increasing number of duplicative suits being filed in federal and state courts. This resulted in corporations spending significant amounts of money defending themselves, their boards, and their officers on multiple fronts with no guaranteed results. In other words, each case created the possibility of having differing and inconsistent rulings, and a judgment or settlement of one case might not be dispositive of all related cases.
Defense counsel sought to remove the state-filed actions to federal court in an effort to end the perceived forum shopping, escalating litigation costs and possibility of inconsistent rulings. They argued that under the Private Securities Litigation Reform Act of 1995 (PSLRA) and the Securities Litigation Uniform Standards Act (SLUSA), Congress’ intent was for all securities litigation to be brought in federal court. Federal Circuits differed in their handling of this question, leading to the Supreme Court of the United States (SCOTUS) considering and ruling on the issue in 2018 in Cyan, Inc. v Beaver County Employees Retirement Fund. SCOTUS held that class actions asserting claims under the 1933 Act were subject to concurrent jurisdiction; therefore, lawsuits brought under the 1933 Securities Act may be brought in federal and/or state court and if brought in state court are not subject to removal.
Following the ruling in Cyan, many Delaware corporations adopted forum selection clauses designating the federal court as the exclusive forum for matters involving violations of the Securities Act of 1933. The plaintiffs’ bar challenged these charter or bylaw provisions in three cases that were consolidated by the DE Chancery Court on this issue alone under the case name Sciabacucchi v Salzberg. In 2018 the Delaware Court of Chancery ruled in favor of the plaintiff in an opinion by Vice Chancellor Travis Laster. That matter was taken on appeal to the Delaware Supreme Court, which in March 2020 reversed the lower court decision and upheld the federal forum provision (FFP.)
More specifically, the Court ruled that [Delaware General Corporation Law,] Section 102(b)(1) authorizes two broad types of provisions:
A Federal Forum Provision could easily fall within either of these broad categories and, thus, is facially valid.
The Delaware Supreme Court decision then went on to note the practical effect of its decision as well. To wit:
When parallel state and federal actions are filed, no procedural mechanism is available to consolidate or coordinate multiple suits in state and federal court. The costs and inefficiencies of multiple cases being litigated simultaneously in both state and federal courts are obvious. The possibility of inconsistent judgments and rulings on other matters, such as stays of discovery, also exists. By directing 1933 Act claims to federal courts when coordination and consolidation are possible, FFPs classically fit the definition of a provision “for the management of the business and for the conduct of the affairs of the corporation.” (*footnotes/citations omitted)
It is further worth noting that one of the concerns of the lower court might have been a concern over whether the next step could be to mandate arbitration of all disputes. In speaking to this issue, the Court in dicta at fn. 169 stated that it might not look so favorably upon such provisions as they would violate DGCL Section 115.
Delaware-incorporated public corporations are encouraged to review their charter and corporate bylaws, seeking advice of counsel to determine whether it is in the best interests of the Company, its officers and directors to implement forum selection clauses in their charters. Noting the history of other states following Delaware’s lead in the past, such consideration may also be warranted for non-Delaware incorporated public entities.
To learn more about how this ruling might further benefit your company, we recommend you discuss with your outside counsel potentially adding a federal forum provisions to your charter.
Authored by:
Kieran P. Hughes
Executive Risk Advisors
Senior Vice President, Senior Claims Counsel
404-497-7515
kieran.hughes@McGriff.com
To learn more about McGriff Executive Risk Advisors, please contact:
David Sellars
Executive Risk Advisors
Executive Vice President, Co-Division Leader
404-497-7582
dsellars@McGriff.com
Dusty Cahill
Executive Risk Advisors
Executive Vice President, Co-Division Leader
404-497-7537
dcahill@McGriff.com
