Insights

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.

 

Was this helpful?
Yes0
No0
See all articles by Priya Cherian Huskins, Esq.

All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, D&O

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn

Priya Cherian Huskins

Senior Vice President, D&O

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn