Court calendars across the country—and in Washington—are filled with cases business leaders need to keep an eye on. But certain recent securities litigation cases demand special attention from directors, at least according to Jared Gerber, a partner with Cleary Gottlieb Steen & Hamilton, whose practice focuses on securities litigation and other actions filed by shareholders. Corporate Board Member recently spoke with Gerber about the impact of these cases. This is part 1 of a 3 part series. Click here for parts 2 and 3.
On June 26, a Supreme Court ruling clarified the duration of potential liability of corporate officers and directors under the securities laws. In CalPERS v. ANZ Securities, the Court held that what’s known as the state of repose—a hard date by which a legal action can be filed—established by Section 13 of the Securities Act of 1933 is not subject to pauses or delays in class action suits, or tolling. In reaching this ruling, the Court reiterated that statutes of limitations and statutes of repose have distinct purposes and effects. Statutes of limitations are intended “to encourage plaintiffs ‘to pursue diligent prosecution of known claims,’” but repose statutes “are enacted to give more explicit and certain protection to defendants.”
In the last decade, says Gerber, there’s been an increase in the number of opt-out actions—in which a single investor files his or her own suit separately—from securities class actions. The strategy for these investors has been to wait until the class action is resolved—meaning the defendants would assume the matter was settled—to bring a separate action and try to extract more money than the class-action payout. Before this case, investors could do so because the statutes of repose on their claims would be tolled, or stopped, during the class action, even though the statutes of repose were meant to provide a short period for all actions to be filed. This decision means those who opt out can’t rely on the class action to suspend the statutes of repose and instead must bring their action within the three-year repose period.
“This decision has a benefit for board members of making sure any lawsuit filed over an offering or securities issue happens within a limited time, and the threat of additional suits doesn’t carry on endlessly,” Gerber says.
“This decision has a benefit for board members of making sure any lawsuit filed over an offering or securities issue happens within a limited time, and the threat of additional suits doesn’t carry on endlessly.”
And in another case related to class actions, on June 27 the Supreme Court agreed to hear Cyan Inc. v. Beaver County Employees Retirement Fund, which deals with the effect of amendments made by the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to the Securities Act’s removal and jurisdictional provisions.
“The issue of whether SLUSA made federal courts the exclusive venue for class action litigation under the Securities Act is particularly important because state courts do not strictly apply the procedural protections of the Private Securities Litigation Reform Act of 1995 that apply in federal courts,” Gerber explains, which could “deprive companies and directors of [these protections] that were meant to guard against abusive litigation.” Trulia Inc. Stockholder Litigation made it clear that the court would no longer approve disclosure-only settlements, unless those disclosures were deemed “plainly material.” During 2016, Gerber says, only 73% of all public deals valued over $100 million faced litigation, the lowest rate since 2009.
In response to that opinion, Gerber notes, “we are seeing a transition where these cases are being filed in other states and increasingly in federal court” to test whether similar rulings will be adopted. Some state courts have indicated they will adopt Trulia’s enhanced scrutiny of such settlements, but Gerber says the overall response has been mixed. Meanwhile, exclusive forum bylaws, which require challenges to mergers and acquisitions to be brought in a designated forum, have been increasingly adopted by corporations, hampering some plaintiff’s attempts to file suit in alternative forums.
And federal courts ultimately may not be more receptive to these types of claims, Gerber says, though time will tell. The number of securities class actions alleging federal disclosure violations skyrocketed in 2016 and that trend has continued in the first half of 2017. Exclusive forum bylaws don’t bar plaintiff filings in federal court because the claims are based on federal law.