Two years after the U.S. Supreme Court ruled that state courts have concurrent jurisdiction over securities class actions brought under the Securities Act of 1933 (the 1933 Act), and that such actions are not removable to federal court, Delaware corporations are increasingly addressing the "Cyan problem"—the risk to companies conducting IPOs or follow-on offerings of facing parallel, multi-jurisdictional 1933 Act class action filings—by adopting in the certificate of incorporation a provision designating federal courts as the exclusive forum for resolution of claims under the 1933 Act. The ability of a corporation to exercise control over the venue for 1933 Act litigation serves to reduce the threat of duplicative and multi-forum securities litigation, and steer 1933 Act litigation into federal courts more accustomed to addressing federal securities laws. In two recent decisions, California Superior Courts issued the first rulings applying federal forum provisions to dismiss state court class actions asserting claims under the 1933 Act, rejecting challenges that such provisions are unenforceable under California law. State court enforcement of exclusive federal forum provisions for 1933 Act claims is the final step to issuers and other participants in securities offerings subject to the Act curbing duplicative state court litigation, and these California decisions provide important guidance toward that objective.

Background

The 1933 Act is primarily concerned with new offerings of securities. When Congress enacted the 1933 Act, it (1) created a private right of action for purchasers of registered securities to sue for false or misleading information contained in registration statements and (2) granted federal and state courts concurrent jurisdiction over 1933 Act claims by private plaintiffs and barred defendants from removing such suits filed in state court to federal court. After Congress enacted the Securities Litigation Uniform Standards Act (SLUSA) in 1998, federal courts split on whether SLUSA permits removal of state court class action claims under the 1933 Act, until the U.S. Supreme Court held in Cyan v. Beaver County Empl. Ret. Fund, 138 S. Ct. 1061 (2018), that SLUSA does not. After Cyan, the number of 1933 Act non-removable class actions filed in state court dramatically increased, along with a growing phenomenon of parallel, substantially identical 1933 Act claims filed in federal court which cannot be consolidated or sometimes even coordinated with the state court action. In an effort to curb both state court and inefficient multi-jurisdictional 1933 Act class action filings, and to reduce the risk of inconsistent state court rulings on federal securities law issues, some Delaware corporations adopted forum selection provisions in their certificates of incorporation requiring that stockholder plaintiffs bring 1933 Act claims exclusively in federal courts. In Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the Delaware Supreme Court held that a federal forum selection provision contained in the certificate of incorporation of a Delaware corporation is facially valid and enforceable under the Delaware General Corporation Law. Although Salzberg settled that federal forum provisions are valid as a matter of Delaware law, they are subject to "as applied" challenges if a company invokes the provision in state court to seek dismissal of 1933 Act claims. "As applied" challenges typically assert that application of a specific forum selection provision would be unreasonable under the circumstances or would contravene the public policy of the state in which the action is brought.