Two appellate courts recently issued rulings that provide significant guidance to companies seeking to adopt federal or state forum provisions in their bylaws. One decision has implications for state-court class actions following their initial public offering (IPO), and the other decision impacts derivative claims.
A California appellate court affirmed that a corporate charter provision requiring shareholders to file Securities Act of 1933 (Securities Act) lawsuits in federal court is permissible.
Following Cyan Inc v. Beaver County Employees Retirement Fund1, the United States Supreme Court held that “[Securities Litigation Uniform Standards Act of 1998] did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations. Neither did SLUSA authorize removing such suits from state to federal court.” The Supreme Court’s ruling led to a proliferation of Securities Act class actions filed in state courts and dually filed actions in state and federal courts. Corporations responded by adopting federal forum selection provisions designating federal courts as the exclusive forums for Securities Act claims.
The legality of the federal forum provisions (FFPs) was tested in March 2020. The Delaware Supreme Court held that FFPs are facially valid under Delaware law.2 State-court trial judges have previously upheld similar provisions in California, New York, Utah, and New Jersey. However, an open question remained whether other appellate courts in other jurisdictions would similarly permit FFPs.
On April 28, 2022, the California Court of Appeal for the First Judicial District affirmed the Superior Court’s decision in Restoration Robotics, becoming the first state appellate court outside of Delaware to consider (and uphold) the enforceability of FFPs.3 In connection with its IPO process, Restoration Robotics specified in its amended certificate of incorporation that the federal district courts of the United States would be the exclusive forum for the resolution of any complaint under the Securities Act. After Restoration Robotics settled its consolidated federal securities class actions, it sought to rely upon the FFP to bar the plaintiff’s lawsuit in state court – setting up the eventual appeal. The appellate court found that the text of the Securities Act does not prohibit corporations from specifying that suits must be brought in federal court.
In reaching its conclusion, the appellate court rejected the plaintiff’s argument, stating that the FFP was unenforceable under the Securities Act. Although the Securities Act expressly provides for concurrent state and federal jurisdiction — and forbids removal of actions asserting only Securities Act claims to federal court — the Securities Act by its plain language “does not prohibit the enforcement of a forum selection clause concerning [Securities] Act claims that is part of a company’s certificate of incorporation.” The plaintiff also argued that, to the extent Delaware law permits FFP’s, it “violates the Commerce Clause and the Supremacy Clause of the United States Constitution” – which the court rejected. Finally, the court rejected the plaintiff’s arguments that the FFP was unenforceable under California law.
The appellate court’s decision is another positive development for companies that wish to protect against having to defend costly and potentially duplicative Securities Act claims brought in state court and, along with the earlier trial court rulings, has significant implications for the directors’ and officers’ insurance industry. There now appears to be a broad consensus that FFPs are valid and enforceable, which should assist in controlling the cost of defending Securities Act claims.
Discuss with your broker the value of including a forum selection clause in your bylaws and charters from the view of D&O underwriters as part of risk mitigation.
1 Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1078 (2018)
2 Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020)
3 Wong v. Restoration Robotics, Inc., 2022 Cal. App. LEXIS 366* (Cal. App., April 28, 2022)
Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.
