The liability environment for directors and officers is always in a state of change, but 2019 was a particularly eventful year in the D&O liability arena, with important consequences for the D&O insurance marketplace. The past year’s many developments have significant implications for what may lie ahead in 2020 – and possibly for years to come, as well. I have set out below the Top Ten D&O Stories of 2019, with a focus on the future implications.
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Cyan Compels Remand of Previously Removed State Court Securities Suits
In prior posts, I have detailed the havoc that the U.S. Supreme Court’s March 2018 decision in the Cyan case has wrought, as Securities Act liability class action defendants find themselves facing multiple parallel suits in both federal and state court. A recent ruling in a consolidated federal court action involving the failed Miller Energy Company underscores the procedural disarray that Cyan continues to cause; in this case, the federal court, in reliance on Cyan, has remanded to state court two actions that pre-Cyan had been removed to federal court and consolidated with a third federal court action. As discussed below, this decision demonstrates yet another way in which Cyan produces outcomes contrary to procedural simplicity and judicial efficiency. Eastern District of Tennessee Judge Thomas Varlan’s December 6, 2019 decision in the case can be found here.
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Multiplied and Parallel Litigation: The Mess that Cyan has Wrought
As observers have discussed the kinds of problems that the U.S. Supreme Court’s Cyan decision can create, specific concerns have included the possibility of parallel state and federal court litigation, and even the possibility of parallel litigation in multiple states. In the course of the discussion of these issues, these litigation risks might have seemed merely theoretical. However, a series of lawsuits filed against a recent IPO company show that these kinds of multiple and parallel litigation risks are far from merely theoretical. The raft of jurisdictionally complicated litigation the company now faces shows the extent of the problems that Cyan creates. The company’s situation also underscores the dramatic need for Congress to address revise the securities laws in order to prevent these kinds of situations.
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Connecticut State Court Knocks Out Post-Cyan Securities Act Liability Action
In the wake of the U.S. Supreme Court’s March 2018 Cyan decision, in which the Court affirmed that state court’s retain concurrent jurisdiction for liability action under the ’33 Act, plaintiffs’ lawyers have initiated a number of Section 11 actions in the courts of a number of states. This new wave of state court Securities Act lawsuits is now making its way through the courts. As the cases have progressed, in some instances the state courts have granted the defendants’ motions to dismiss. The latest example of a state court granting a defendants’ motion has now occurred in the Connecticut state court claim alleging ’33 Act violations in connection with Pitney-Bowes September 2017 debt note IPO. The Connecticut court’s October 24, 2019 order granting the defendants’ motion to strike, a copy of which can be found here, raises a number of interesting issues.
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A Critique of the Delaware Chancery Court Decision on Federal Forum Provisions
After the U.S. Supreme Court’s March 2018 decision in the Cyan case that state courts retain concurrent jurisdiction for ’33 Act liability actions, one idea that circulated was that companies could avoid securities class action lawsuits in state court by adopting a charter provision designating a federal forum for these kinds of suits. Unfortunately, in December 2018, Delaware Chancery Court Vice Chancellor Travis Laster held in Sciabacucchi v. Salzburg that under Delaware law federal forum provisions are invalid and ineffective, as discussed here. The Sciabacucchi decision, which is now on appeal, is the subject of a comprehensive critique in a recent article by Stanford Law Professor Joseph Grundfest, entitled “The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi” (here). Professor Grundfest argues that Sciabacucchi was wrongly decided and that a under a “straightforward” application of applicable Delaware statutory law, federal forum provisions are valid and permitted.
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Guest Post: Time To Resolve Post-Cyan Securities Class Action Confusion
In numerous prior posts on this site (for example, here), I have written about the problems caused by the U.S. Supreme Court’s March 2018 decision in Cyan, Inc. v. Beaver County Employees Retirement Fund. In the following guest post, Nessim Mezrahi, cofounder and CEO of SAR, a securities class action data analytics and software company, issues a call for reform to address the “confusion” that Cyan has caused. A version of this article previously appeared on Law 360. I would like to thank Nessim for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to publish a guest post. Here is Nessim’s article.
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New York State Court Dismisses Post-Cyan State Court Securities Suit
As a result of the U.S. Supreme Court’s March 2018 Cyan decision, in which the Court ruled that state courts retain concurrent jurisdiction over ’33 Act liability actions, companies issuing shares now face the risk of having to face parallel securities litigation in state and federal court. Among the many problems this risk poses is the possibility that, due to the differing pleading standards between state and federal court, Securities Act liability suits that would be dismissed in federal court might survive a dismissal motion in state court. New York is among the states where many post-Cyan securities suits are being filed and where differences in pleading standards might lead to a fewer state court lawsuit dismissals relative to the dismissal rate in state court. However, notwithstanding these concerns, a New York state court judge recently entered an order dismissing a post-Cyan securities suit, raising the possibility that defendants may be able to dismiss securities suits filed in New York state court after all.
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Guest Post: Is it Really that Bad? Follow-On Offerings and Section 11 Suits in State Court
In a recent post, I took a look at the rise in the number of state court securities class action lawsuits that have been filed in the wake of the U.S. Supreme Court’s decision in the Cyan case. In the following guest post, Priya Cherian Huskins of Woodruff Sawyer & Co. takes a deeper look at the state court securities class action data to assess the extent of the threat of state court securities class action litigation relating to follow-on offerings. A version of this article was previously published in Woodruff-Sawyer’s D&O Notebook. I would like to thank Priya for her willingness to allow me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Priya’s article.
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Chubb Sounds Securities Litigation Alarm, Calls for Reform
Regular readers of this blog know that the statistics surrounding U.S. securities litigation in recent years are nothing short of alarming, including, for example, both record numbers of lawsuits and record percentages of listed companies sued. Severity trends are concerning as well. All of these trends are exacerbated by the impact of the U.S. Supreme Court’s 2018 Cyan decision, which opens companies conducting securities offerings to multiple, conflicting lawsuits in state and federal court. Given these trends, it is hardly surprising that there have been renewed calls from business groups for securities class action litigation reform. Now, Chubb, a leading global insurer, has added its voice to the calls for reform. In an interesting June 11, 2019 paper entitled “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation” (here), the company details the extent of the current securities litigation mess and sets forth a number of proposals for securities litigation reform.
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More About State Court Secondary Offering-Related Securities Class Action Suits
In a recent post, I commented on the settlement of a state court securities class action lawsuit relating to the defendant company’s secondary offering, suggesting in the post among other things that the state court suit was noteworthy because it was the first state court secondary offering-related securities suit of which I was aware. In response to the post, I received a helpful and informative email from my friends at Stanford Securities Litigation Analytics, who pointed out that over time there actually have been quite a number of state court secondary offering-related securities suits. Following their direction, I was able to research this issue further myself using their site’s analytic tools and confirm a number of their observations to me about these kinds of lawsuits. Turns out, as they informed me, there have in fact been a number of state court secondary offering-related securities lawsuits, both pre- and post-Cyan, as set out below. This information could have significant implications both for companies conducting secondary offerings and for their D&O insurers.
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