Restoration Robotics Decision a Positive Step for the IPO Market
Earlier this month, a California state court dismissed a Section 11 case for lack of jurisdiction due to the inclusion of federal forum provisions (FFPs) in the company’s articles of incorporation. The decision in Wong v. Restoration Robotics, et al. will help to limit Section 11 exposure for companies contemplating going public, and is definitely welcome news for them. But we shouldn’t expect to see an immediate impact on D&O pricing.
What is a Federal Forum Provision?
An FFP essentially provides 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. Section 11 of the act imposes strict liability on companies for misstatements and omissions in registration statements associated with initial and secondary public offerings.
FFPs require that any shareholders asserting violations of Section 11 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. In that ruling, the Supreme Court held that state courts have concurrent subject matter jurisdiction over class actions alleging Section 11 violations.
Since the Cyan decision, 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. That’s often led to skyrocketing defense and settlement costs. And as a result, directors and officers liability (D&O) insurers have become increasingly reluctant to insure — or competitively price — coverage for companies planning IPOs.
FFPs Enforceable in California
Restoration Robotics involved a company that was incorporated in Delaware and included an FFP in its articles of incorporation, which required that any Section 11 cases filed by investors be filed in federal court. The issue before the judge in San Mateo, California, was whether this FFP was valid and enforceable under California law.
In reliance on the FFP, and after a lengthy discussion and review of the Delaware Supreme Court’s previous decision in Matthew B. Salzburg et al. v. Matthew Sciabacucchi — considered a victory for soon-to-be-pubic companies — the California judge declined jurisdiction over the case for the company and its directors and officers. The judge noted in his ruling that the company took steps to narrowly tailor its FFP, which was incorporated in its articles of incorporation, approved via a shareholder vote, and effective before the filing of Section 11 litigation in California state court.
Likely Minimal Impact on D&O Pricing for IPOs
While this case is undoubtedly a “win” for companies that are thinking about going public, it is prudent to temper expectations so that companies can budget and plan appropriately for what will likely still be substantial D&O costs as part of the IPO process.
If you’re planning a public offering, it’s important to discuss the ruling with your insurance advisors and outside legal counsel. But until courts in other states issue decisions that similarly approve the use of FFPs and set forth a roadmap on how to properly draft and incorporate FFPs so they can withstand judicial review, the impact on the D&O market is unclear.
So for now, and on its own, the Restoration Robotics decision will likely not result in more favorable D&O pricing for organizations planning IPOs, amid what remains a difficult market for both public and private companies. It’s thus critical that you continue to properly budget for D&O insurance so you can build a program that will adequately protect your company in the event of a Section 11 claim and other forms of shareholder litigation.
For now, however, this ruling should be seen as a small step in the right direction for Delaware-incorporated companies planning or considering IPOs in the near future.