On March 20, 2018, a unanimous United States Supreme Court, in Cyan, Inc. v. Beaver Cty. Employees Ret. Fund, No. 15-1439, 2018 WL 1384564, answered two questions concerning investors' ability to pursue alleged violations of the Securities Act of 1933 (1933 Act) in state and federal courts. First, the Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) "did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations," confirming concurrent state and federal court jurisdiction over such class actions. Second, the Court held that SLUSA does not authorize defendants to remove such actions from state to federal court. Now, when investors challenge certain initial public offerings (IPOs) or other registered offerings, plaintiffs can go directly to any state court where the company is subject to jurisdiction. Despite the possibility of opening up more forums to plaintiffs, parties defending 1933 Act claims still have certain safeguards.
The Supreme Court held in Cyan that SLUSA "completely disallows" certain state law claims, but it does not preclude state courts from adjudicating class actions involving only 1933 Act claims. Before Cyan and after the passage of SLUSA, courts throughout the country had split on whether state courts retained concurrent jurisdiction over class actions alleging only 1933 Act claims. As a result of the split, plaintiffs have already filed many 1933 Act claims in states, like California, where the courts have held such claims can exist in state court. Besides Cyan's opening up more forums to plaintiffs, state courts also benefit plaintiffs by giving them a historically higher chance of getting past a motion to dismiss, and plaintiffs can avoid many of the protections Congress set in place with the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA).
In Cyan, the Supreme Court observed that some of the substantive PSLRA laws, such as the safe-harbor for forward-looking statements, still apply equally in state courts. However, certain categories of forward-looking statements, including those made in IPOs, are not protected by the PSLRA. See 15 U.S.C. § 77z-2(b)(2)(A-F). Defendants will also argue that PSLRA's stay of discovery while a motion to dismiss is pending, 15 U.S.C. § 77z-1(b)(1), applies equally in state court. However, the Supreme Court recognized that many of the procedural protections of the PSLRA - which include lead plaintiff appointment procedures, certification requirements of plaintiffs, and limits placed on plaintiffs' attorneys and their fees - only apply in suits brought in federal court. Without such procedural protections in place in state courts, the plaintiffs' bar will have easier hurdles in filing duplicative class actions.
To avoid state court jurisdiction, some Delaware companies that have recently completed IPOs have adopted a clause in their certificates of incorporation that requires shareholders to bring 1933 Act claims only in federal court. Although courts have yet to approve such a clause, it is worth noting that a declaratory judgment action challenging this type of provision is currently pending in the Delaware Court of Chancery. See Sciabacucchi v. Salzberg, No. 2018-0931 (Del. Ch. Dec. 29, 2017). In that case, the company included a "Federal Forum Provision" in its certificate of incorporation that included a provision stating:
Unless the Company 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 of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of the Corporation shall be deemed to have notice of and consented to the provisions of this Amended and Restated Certificate of Incorporation.
Depending on what transpires in this case, Delaware companies undergoing an IPO might soon find out if such a provision can be adopted that possibly preempts federal securities laws that, after Cyan, conclusively grant state and federal courts concurrent jurisdiction over 1933 Act claims. Whether public companies could adopt a similar provision without negative shareholder reaction remains to be seen. Otherwise, the possible proliferation of state court cases alleging certain 1933 Act claims will only end if Congress adopts more legislation to grant federal courts removal jurisdiction over such claims.