On March 20, 2018 the United States Supreme Court issued a unanimous ruling in Cyan, Inc. v. Beaver County Employees Retirement Fund. In short, the ruling confirms that claims alleging violations under the Securities Act of 1933 (the ’33 Act) can continue to be brought in state court, and that such cases brought in state court (solely alleging a violation of the ‘33 Act) cannot be removed to federal court.
The ruling is troubling to a litany of constituents particularly companies filing for (or who have filed within the last 3 years) a public offering of their securities and their D&O insurers. While the past several years have brought a proliferation of state court filings alleging violations of the ’33 Act – chief amongst them in the state of California – Cyan sought to confirm that federal courts are the sole venue to resolve such matters. In addition to providing judges with extensive experience presiding over complex securities cases, federal court procedural rules provide protections generally not found in state courts (e.g. heightened pleading standards for securities class actions and a stay of discovery during the pendency of any motion to dismiss).
Now, not only does it appear likely that these protections will no longer be available (to the extent litigation proceeds in state court, as is likely), but companies may face the increasing likelihood of defending themselves in multiple state and federal jurisdictions. In instances where state court cases had earlier been successfully removed to federal court, companies should expect attempts to remand these back to state court. Finally, anyone who might have been awaiting a ruling in Cyan before proceeding with a state court filing will now be emboldened to move forward. Statistics to date confirm that ’33 Act claims brought in state court are dismissed at a lower rate than comparable in cases in federal court. While inserting federal forum exclusivity provisions in companies’ corporate and offering documents (a solution suggested by some) may mitigate the impact of Cyan, the enforceability and effectiveness of such provisions is unclear as they continue to be the subject of ongoing litigation. We suggest you discuss the merits of this option with your outside counsel.
For companies on an IPO path, be prepared for the increased likelihood of litigation following your filing; this also applies to initial and follow-on public filers still subject to the multi-year liability window in the ’33 Act. While this is unfortunately more of the same for California filers, there are no venues that are off-limits now. This is also likely to further negatively impact the cost and availability of D&O insurance as insurers evaluate the effects of the ruling. ABD will keep you apprised of continuing developments as they unfold around this important ruling.