On March 18, 2020, the Delaware Supreme Court issued its long-awaited decision in the case of Salzberg v. Sciabacucchi (a copy of the decision can be found here). The unanimous decision ruled that federal forum provisions (provisions in Delaware corporations’ charters requiring actions arising under the federal Securities Act of 1933 to be filed in a federal court) are facially valid under Delaware law. Such provisions have been adopted by some pre-IPO companies as a means to curtail the growing trend of 1933 Act cases being filed in state courts (a trend exacerbated by the U.S. Supreme Court’s 2018 Cyan decision), although their enforceability and effectiveness remained in doubt until this decision.
As has been widely publicized, in the wake of the Cyan decision the scourge of state-court (and multi-forum) securities litigation has worsened, helping to drive an unprecedented shift in the D&O insurance landscape over the last two years. Although there are broader dynamics behind the current hardening market (e.g. heightened levels of securities class action litigation across the board and resultant D&O insurer losses), the Cyan decision (and the associated exposure to state-court litigation) led to companies going public seeing massive increases in premium and retention amounts. While a number of important questions remain (e.g. whether there will be further litigation on these provisions, to what extent – and when – D&O insurers will adjust their underwriting, etc.), it certainly seems that at a minimum the Salzberg decision is a strong step in the right direction. Indeed, by greenlighting the use of federal forum provisions (which provide clarity and comfort around a company’s potential securities litigation exposure), the Delaware Supreme Court has hopefully started the D&O market moving back in the right direction, potentially saving companies millions of dollars in premium and retention.
Given the potential impact of the decision on post-Cyan litigation exposure (and the opportunity for a shift in D&O terms as a result), we suggest that you confer with your outside counsel regarding how your company can possibly implement and benefit from a similar federal forum provision. We are, of course, happy to answer any questions that you may have in the interim.