I’ve previously written about the increasingly unruly market for corporate law, in which many cases involving the governance Delaware corporations are being brought outside of Delaware. Now Jennifer Johnson writes about Securities Class Actions in State Court. Here’s the abstract:
Over the past two decades, Congress has gradually usurped the power of state regulators to enforce state securities laws and the power of state courts to adjudicate securities disputes. This Paper evaluates the impact of Congressional preemption and preclusion upon state court securities class actions. Utilizing a proprietary database, the Paper presents and analyzes a comprehensive dataset of 1500 class actions filed in state courts from 1996-2010. The Paper first examines the permissible space for state securities class actions in light of Congressional preclusion and preemption embodied in the 1998 Securities Litigation Uniform Standards Act (SLUSA) and Class Action Fairness Act of 2005 (CAFA). The Paper then presents the state class action filing data detailing the numbers, classifications, and jurisdictions of state class action cases that now occupy the state forums. First, as expected, the data indicates that there are few traditional stock-drop securities class actions litigated in state court today. Second, in spite of the debate over the impact of SLUSA and CAFA on 1933 Act claims, very few plaintiffs attempt to litigate these matters in state court. Finally, the number of state court class actions involving merger and acquisition (M&A) transactions is skyrocketing and now surpasses such claims filed in federal court. Moreover, various class counsel file their M & A complaints in multiple jurisdictions. The increasingly large number of multi-forum M&A class action suits burden the defendants and their counsel, the judiciary and even plaintiffs’ lawyers themselves. The paper concludes that absent effective state co-ordination, further Congressional preemption is possible, if not likely.
The basic problem is that SLUSA’s “Delaware carve-out” exempting Delaware corporate cases from preemption under SLUSA doesn’t clearly require the cases to be heard in Delaware, despite the legislative history indicating that Congress’s respect for Delaware courts was a justification for the carve out.
As Jennifer indicates, this is, indeed, a regulatory coordination problem. As Erin O’Hara O’Connor and are explaining in a forthcoming paper, this may justify giving SLUSA broad preemptive effect — i.e., a narrow reading of Delaware carve-out exemption from preemption. The catch is that it’s not clear preemption would be justified on regulatory coordination grounds for forum choice, as distinguished from law choice. The coordination problem involves parties’ ability to anticipate what law will be applied. On the other hand, the nature of the legal rules depends to some extent on which court is applying them.
Congress has the last word on this. As Jennifer suggests, Congress might respond by repealing the Delaware carve-out or by requiring actions within the carve-out to be filed in Delaware.
In any event, this situation shows that regulatory coordination is a dynamic problem, aka whack-a-mole. The PSLRA tightens requirements for federal securities class actions, the actions pop up in state courts, Congress enacts SLUSA to stop these, plaintiffs start filing “holder” actions in state courts, the Supreme Court stops those in Dabit (see my paper on this case), but state court M & A cases still manage to sneak in through the Delaware carve-out.
Fortunately this will never end so I’ll keep having stuff to write about.