Corporate Governance

Shearman & Sterling LLP Federal Forum-Selection Provisions in the Wake of Cyan and Salzberg | 43 RISKS OF PROLIFERATION OF STATE COURT SECURITIES ACT LITIGATION FEDERAL FORUM-SELECTION PROVISIONS MAY MITIGATE THESE RISKS 5 Id. at 115. 6 Id. at 111–12. The provision for the third corporation varied modestly. 7 Id. at 114. The proliferation of Securities Act cases filed in state courts throughout the United States raises the prospect of duplicative lawsuits involving the same claims in state and federal court, which increases litigation cost, complexity and risk. As the Delaware Supreme Court explained in Salzberg, "the costs and inefficiencies of multiple cases being litigated simultaneously in both state and federal courts are obvious." 5 Even in the absence of parallel, duplicative federal litigation, Securities Act claims in state court present additional risk as compared to identical federal litigation. Significantly, the pleading standard in certain states is sometimes argued to be A provision in a company's certificate of incorporation or bylaws providing that the U.S. federal district courts are the exclusive forum for Securities Act claims may preclude the prosecution of these claims in state courts. For example, provisions in the certificates of incorporation for three corporations were at issue in Salzberg. Two provided: less demanding than the standard applicable in federal courts. Federal courts generally require a complaint to allege facts sufficient to show that the claim is plausible on its face and do not rely on conclusory allegations. By contrast, certain states may apply a more lenient pleading standard. As a result, claims may be more likely to survive a motion to dismiss in certain state courts than in federal courts, thereby extending the litigation and potentially increasing settlement costs, and the disincentives to file weaker claims may be lower than they would be in federal courts. Additionally, certain procedural protections available to defendants in federal court may not be applied by certain state courts. Most notably, under the PSLRA, there is an automatic stay of discovery while a motion to dismiss is pending, which is applied universally in federal court. While some state courts have recognized the applicability of the PSLRA discovery stay, this issue is sometimes contested by plaintiffs in state courts. Unless the company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of [the company] shall be deemed to have notice of and consented to [this provision]. 6 In Salzberg, the Delaware Supreme Court held that this provision in the certificates of incorporation of Delaware corporations is facially valid, stating that federal forum- selection provisions "can provide a corporation with certain efficiencies in managing the procedural aspects of securities litigation." 7 If enforced, such an FFP would necessarily divert Securities Act claims exclusively to federal courts, where there would be no ambiguity about the applicability of federal procedural protections. There would also be no risk of duplicative parallel federal and state cases asserting the same Securities Act claims or a multiplicity of such cases in state courts around the country.

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