State Section 11 Litigation in the Post-Cyan Environment (Despite Sciabacucchi)

Abstract

In Cyan, Inc. v. Beaver County Employees Retirement Fund, the U.S. Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preserved state courts’ jurisdiction to adjudicate cases brought under the Securities Act of 1933, with defendants having no right to remove a case to federal court. The result of this decision has been a dramatic increase in section 11 cases litigated in state court, often with a parallel case brought in federal court against the same defendants based on the same alleged misstatements. Just weeks ago, in Salzberg v. Sciabacucchi, the Delaware Supreme Court mitigated the impact of Cyan by upholding the facial validity of charter provisions requiring section 11 cases to be brought in federal court. That case provides some relief for Delaware corporations that have recently issued securities, or that plan to do so, if they have federal-forum charter provisions in place. The reach of Sciabacucchi, and the extent to which section 11 cases continue to be litigated in state court, will depend on a number of factors, most importantly the extent to which states in which these cases are litigated treat federal-form provisions as valid. Federal legislation, therefore, remains the most effective means of stemming the inefficiencies that this article documents empirically.

Keywords: Securities class actions, Section 11, IPOs

JEL Classification: K20, K22, K40, K41