Champagne for the Plaintiffs’ Bar; Dirge Music for the Rest of Us: IPOs, 1933 Act Litigation and the Cyan Decision

March 20, 2018

Management Liability/D&O

This morning the Supreme Court of the United States unanimously held that federal class action lawsuits brought under the Securities Act of 1933 can be brought in state court.

This Ruling Means That ’33 Act Cases Can Be Brought in All 50 States

The Supreme Court’s decision in Cyan v. Beaver County Employees Retirement Fund surely has the plaintiffs’ bar popping champagne. Insurance carriers are likely preparing to raise self-insured retentions (think: deductibles) and premium rates for D&O liability insurance for IPO companies. 



As a reminder, to date, the Second Circuit (which includes New York) put ’33 Act cases in federal court, while the Ninth Circuit (which includes California) allowed ’33 Act cases in state court. This circuit split has been decided in favor of the Ninth Circuit’s interpretation.

As I’ve written in the past, the problem our IPO clients face is that state courts have a lower standard to bring a claim that would survive the state court equivalent of a motion to dismiss (ex. a demurrer in California), and discovery is not stayed.

These two factors contribute to why we see such a high-frequency rate of lawsuits against IPO companies, as well as larger defense costs and settlement amounts for ’33 Act cases brought in state versus federal court.

IPO Companies: Get Ready

Companies that have recently gone public: buckle up. This is especially true for companies that are headquartered outside of California since California-based companies have already been living with this reality for several years.

While there have been some non-California-headquartered companies that were sued in California state courts over their S-1 filings, most of the suits brought against IPO companies in California state court have a clear California nexus.

With the ruling in Cyan, other state courts will be opening their doors for IPO-suits.

Pre-IPO Companies: Forewarned is Forearmed

Companies that are on a path to an IPO may have an opportunity to keep ’33 Act cases in federal court if they deploy the “Grundfest Solution,” which is to say adopt federal choice of forum provisions in their bylaws or certificates of incorporation.

The issues raised and decided in the Cyan case do not impact the thinking behind the Grundfest Solution, so the Grundfest Solution should still be a viable path.

Of course, nothing that is innovative is without challenges, and the Grundfest Solution is currently being challenged by shareholders in court. You’ll want to talk to your trusted outside counsel for more on the pros and cons of adopting this approach.


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