{"id":501,"date":"2020-07-08T22:30:00","date_gmt":"2020-07-08T22:30:00","guid":{"rendered":"https:\/\/abtl.org\/northerncalifornia\/?p=501"},"modified":"2020-07-10T23:05:53","modified_gmt":"2020-07-10T23:05:53","slug":"on-securities-litigation","status":"publish","type":"post","link":"https:\/\/abtl.org\/northerncalifornia\/abtlreport\/on-securities-litigation\/","title":{"rendered":"On Securities Litigation"},"content":{"rendered":"\n

by Marie Bafus<\/h2>\n\n\n\n
\"Marie
Marie Bafus<\/figcaption><\/figure><\/div>\n\n\n\n

Federal courts may adjudicate more claims under the Securities Act of 1933 (\u201cSecurities Act\u201d) following a recent Delaware Supreme Court decision. Earlier this year, the Delaware Supreme Court ruled that corporations may require stockholders to litigate claims under the Securities Act in federal court, holding that such forum provisions in corporate charter documents and bylaws are facially valid. The Court\u2019s decision in Salzberg v. Sciabacucchi<\/em>, — A.3d —, 2020 WL 1280785 (Del. Mar. 18, 2020), reversed an earlier ruling of the Delaware Court of Chancery and opened the door for Delaware corporations to require plaintiffs to bring Securities Act claims in federal court. From the perspective of the defense bar, the decision allows Delaware corporations to mitigate the costs, inefficiencies, and burdens imposed when such claims are filed and litigated in state court.<\/p>\n\n\n\n

Background <\/h3>\n\n\n\n

Over the past several years, the plaintiffs\u2019 bar has\nincreasingly filed Securities Act claims in state rather than federal court.\nPlaintiffs\u2019 lawyers view state court as a more favorable forum for such cases\nbecause many of the key provisions of the Private Securities Litigation Reform\nAct (\u201cPSLRA\u201d) \u2013 including more stringent pleading standards, an automatic stay\nof discovery pending motions to dismiss, and a statutory process for appointing\nlead plaintiffs \u2013 often have been held inapplicable in state court proceedings.\nTo address that trend and minimize the prospect of multiple Securities Act\ncases proceeding simultaneously in different courts, many corporations included\nprovisions in their charter documents or bylaws requiring Securities Act claims\nto be brought exclusively in federal court. The enforceability of those clauses\nassumed greater importance after the U.S. Supreme Court\u2019s March 2018 decision\nin Cyan, Inc. v. Beaver County Employees\u2019 Retirement Fund<\/em>, which\nconfirmed that plaintiffs may file Securities Act claims in either state or\nfederal court. <\/p>\n\n\n\n

Delaware law expressly permits corporations to use their\ncharter documents and bylaws to require internal corporate claims \u2013 e.g.<\/em>,\nderivative suits and claims involving alleged breaches of fiduciary duty, the\nrights of stockholders, or application of the Delaware General Corporation Law\n\u2013 to be brought exclusively in the Court of Chancery. But in December 2018,\nVice Chancellor J. Travis Laster of the Court of Chancery found that federal\nforum provisions (FFPs) \u2013 those requiring Securities Act claims to be brought\nin federal court \u2013 are unenforceable under Delaware law. In Sciabacucchi v.\nSalzberg<\/em>, V.C. Laster held that while charter documents and bylaws may\nproperly specify that claims involving the \u201cinternal affairs\u201d of Delaware\ncorporations be litigated in Delaware, they may not regulate matters involving\nfederal law or other \u201cexternal issues.\u201d <\/p>\n\n\n\n

The Delaware Supreme Court Decision <\/h3>\n\n\n\n

Reversing V.C. Laster\u2019s decision, the Delaware Supreme Court\nheld that FFPs: (1) are, on their face, within the permissible scope of bylaws\nand charter provisions because (in the words of the relevant statute) they\naddress \u201cthe management of the business\u201d and \u201cconduct of the affairs of the\ncorporation\u201d; (2) provide corporations with \u201cefficiencies in managing the\nprocedural aspects of securities litigation\u201d post-Cyan; and (3) do not violate\nDelaware law or policy. The Delaware Supreme Court rejected the lower court\u2019s\nfinding that, as a matter of Delaware law, mandatory forum provisions are\napplicable only to matters involving a corporation\u2019s \u201cinternal affairs\u201d;\ninstead, the scope of the relevant statute is broad enough to extend to certain\nother matters, including Securities Act claims. The decision stressed that\nprovisions designed to regulate where stockholders may bring claims based on\ntheir purchase of shares in a company (such as Securities Act claims) fall\nwithin an area of \u201cintra-corporate\u201d matters, and thus are not purely \u201cexternal\u201d\nmatters (such as tort or commercial contract claims). Finally, the decision\nconcluded that FFPs do not violate federal policy or principles of \u201chorizontal\nsovereignty\u201d vis-\u00e0-vis other states. <\/p>\n\n\n\n

What this Means for Federal Courts and the Plaintiffs\u2019 Bar<\/h3>\n\n\n\n

As more Delaware corporations adopt FFPs, federal courts can\nexpect to adjudicate more Securities Act claims than they have in the recent\npast. And, as more Securities Act claims end up in federal court, plaintiffs\nwill face the additional hurdles imposed on such litigation by the PSLRA. <\/p>\n\n\n\n

To the extent plaintiffs determine to bring a Securities Act\nclaim in state court despite an FFP, the Delaware Supreme Court left open the\npossibility that \u2013 although such provisions are facially valid \u2013 they may be\ninvalid \u201cas applied\u201d \u2013 in other words, plaintiffs can argue that a particular\nFFP is not enforceable in a particular set of circumstances.<\/p>\n\n\n\n

What Companies Can Do <\/h3>\n\n\n\n
  • Delaware corporations without FFPs should consider adopting such a provision promptly. The easiest way to do so is by means of a bylaw amendment, which may be accomplished via board action and does not require a stockholder vote. And, although the Delaware Supreme Court\u2019s decision is based on \u2013 and limited to \u2013 Delaware law, it may provide persuasive authority for companies incorporated in other states that may want to adopt FFPs.
    <\/li>
  • Delaware corporations that adopted FFPs before the Court of Chancery\u2019s decision in Sciabacucchi but determined not to enforce them pending appellate review in that case, should view the Delaware Supreme Court\u2019s decision as a \u201cgreen light\u201d to seek enforcement of FFPs going forward. To the extent such companies included risk factors or other disclosures (including on Form 8-K) regarding the non-enforcement of FFPs, such risk factors and disclosures may need to be updated.
    <\/li>
  • For companies currently defending Securities Act claims in state court, if they had pre-existing FFPs but deferred enforcing them in the wake of Sciabacucchi, they may want to consider whether to seek enforcement now. The success of that strategy will depend on various factors, including the law of the state where the action is pending, the stage of litigation, and whether there are parallel actions in federal court. The ability of a corporation to enact a provision now that would apply retroactively to a pending suit is not yet clear. <\/li><\/ul>\n\n\n\n
    \n\n\n\n

    Marie Bafus is a senior securities litigation associate\nat Fenwick & West LLP where she represents companies, officers, and\ndirectors in shareholder class actions and derivative litigation.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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