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RISK IN CONTEXT

Delaware Federal Forum Provision Decision a Huge Win for Companies Planning IPOs

Posted by Sarah Downey March 18, 2020

In a heavily anticipated decision, the Delaware Supreme Court this week reversed a lower court’s decision about the validity of federal-forum selection provisions (FFPs). Delaware corporations can now file registration statements to include provisions in their charters requiring that actions arising under the Securities Act of 1933 be filed in federal court — a win for companies that are preparing to go public.

More FFPs Since Cyan

FFPs essentially provide that federal courts are the sole forum for the resolution of any litigation asserting a cause of action arising under the Securities Act of 1933, which allows for private rights of action by shareholders of public companies. An FFP requires that any shareholder asserting a violation of Section 11 of the Securities Act of 1933 file such a claim in federal court. FFPs have become more common since the US Supreme Court’s March 2018 decision in Cyan, Inc., et al. v. Beaver County Employees Retirement Fund, et al that state courts have concurrent subject matter jurisdiction over class actions alleging Section 11 violations.

The Cyan decision has had significant implications for companies going public and their directors and officers liability (D&O) insurance coverage. In the two years since, newly public companies have seen Section 11 claims filed in federal courts, federal and state courts, and multiple state courts all at the same time, leading to skyrocketing defense and settlement costs. D&O insurers have become increasingly hesitant to insure — or competitively price — IPO D&O coverage.

The case before the Delaware Supreme Court, Matthew B. Salzburg et al. v. Matthew Sciabacucchi, involves three companies — Blue Apron Holdings, Inc.; Roku, Inc.; and Stitch Fix, Inc. — that included FFPs in their registration statements in connection with their planned initial public offerings. The Delaware Chancery Court previously held that these companies’ FFPs were invalid, but the state’s Supreme Court reversed the ruling, noting that FFPs enhance the policies underlying the Delaware General Corporation Law: Certainty, predictability, uniformity, and prompt judicial resolution of corporate disputes.

Long-Awaited Change

For two years, corporate America and D&O insurers have struggled to find a way to counter the effects of the Cyan ruling. This week’s decision could represent a breakthrough.

But it’s still unclear exactly what this ruling will ultimately mean. For one thing, it applies only to companies incorporated in Delaware; that means it applies to many companies, but certainly not all. It also remains to be seen whether the ruling will be appealed; if it is, the ban on FFPs could be reinstated.

Given that possibility, risk professionals should discuss the ruling with their insurance advisors and continue to develop D&O programs that can maximize protection for directors and officers. And they should make sure to understand the D&O claims process that will be followed regardless of the forum in which a Section 11 claim is filed.

For now, however, this ruling should be seen as a positive step for Delaware-incorporated companies planning or considering IPOs in the near future.

Sarah Downey