Since the Cyan decision in 2018, plaintiffs have gone hog-wild over state court Section 11 suits. The victory last week in the Delaware Supreme Court in the Sciabacucchi case (pronounced “Sha Ba Cookie”) provides a hopeful path forward for the issuer community. Here are some thoughts on how the decision may impact the D&O insurance world.

What is This All About?

Shareholder claims involving a public offering (of equity or debt) can be brought pursuant to Section 11 of the Securities Act of 1933. A U.S. Supreme Court decision in 2018 confirmed that Section 11 claims may be brought in Federal or state court. Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018). State court is generally a favorable forum for plaintiffs. Historically, state judges have been reluctant to toss out meritless Section 11 claims that would not have survived scrutiny in Federal court.

In response to Cyan, many companies began to include a Federal Forum Provision (“FFP”) in their Articles of Incorporation. The Provision specified that a shareholder could only bring a Section 11 claim in Federal court. (Professor Joseph Grundfest of Stanford Law School was the principal proponent of such provisions. If you are interested in more detail about them, look at his article.)

No such provision is required for after-market shareholder class actions, brought under Section 10(b) of the Securities Exchange Act of 1934. By statute, those claims can only be brought in Federal court.

Plaintiffs sued in the Delaware Court of Chancery to invalidate the Provisions. Plaintiffs prevailed in the trial court, but lost on appeal. The decision—in which my firm, Wilson Sonsini, represented the prevailing parties—is here.

(more…)