(Reuters) - Two of the most hotly anticipated IPOs of the year are expected to take place later this month, when the ride-hailing company Uber and the vegan burger company Beyond Meat offer shares to the public. Both companies are counting on a controversial - and, quite possibly, invalid - tactic to choose the court in which their future shareholders can sue if the IPOs flop.
IPO disclosures fall under the Securities Act of 1933. In 2018’s Cyan v. Beaver County Employees Retirement Fund (138 S.Ct. 1061), the U.S. Supreme Court held that shareholders can file class actions claiming Securities Act violations in either state or federal court.
Uber and Beyond Meat want to cut off the state-court option. (In general, corporations prefer not to litigate in more than one jurisdiction and prefer federal court, where judges may be more familiar with securities class action procedures.) In their filings with the Securities and Exchange Commission in April, both companies said their certificates of incorporation in Delaware will include clauses that require shareholders to bring Securities Act claims exclusively in federal court.
But here’s the thing: The latest word on such provisions under Delaware law is that they are invalid.
In December, as I reported, Vice-Chancellor Travis Laster of Delaware Chancery Court struck down Securities Act forum selection clauses in the corporate charters of three companies that went public in 2017, Blue Apron, Stitch Fix and Roku. The judge held that Delaware corporate law does not permit companies to steer investors to a particular forum for so-called “external” claims implicating issues beyond directors’ duties to shareholders.
The companies’ lawyers at Wilson Sonsini Goodrich & Rosati and Wilmer Cutler Pickering Hale & Dorr filed an appeal to the Delaware Supreme Court, but plaintiffs’ lawyers from Block & Leviton argued the appeal was premature because of their pending application for attorneys’ fees in Chancery Court. The Delaware justices agreed. In a Feb. 8 order (2019 WL 549039), they dismissed the appeal, holding that the Supreme Court does not have jurisdiction until Vice-Chancellor Laster rules on attorneys’ fees.
The fee issue is now fully briefed and argued in Chancery Court. (Plaintiffs’ lawyers have requested $3 million; the defendants said they should be awarded no more than $365,000.) But according to Joel Fleming of Block & Leviton, one of the lead plaintiffs’ lawyers in the Blue Apron litigation, it’s likely to be at least six months until the Delaware Supreme Court hears and decides whether forum selection clauses for Securities Act claims are valid.
The issue, in other words, won’t be resolved until after public markets have had a chance to digest IPO disclosures by Uber and Beyond Meat.
Neither company, of course, may end up facing shareholder class actions over its IPO. Only about 25 percent of companies that go public face investor claims of Securities Act violations and I’m not suggesting that Uber or Beyond Meat will be in that minority. I’m just pointing out that these companies, in the face of uncertainty about restricting shareholders’ litigation rights, opted to include forum selection clauses.
“It is, to say the least, an aggressive position to include in your certificate of incorporation a provision that the Delaware Court of Chancery has said is invalid,” said shareholders’ lawyer Fleming, who predicted a heated fight over jurisdiction if Uber or Beyond Meat ends up facing state-court class actions claiming Securities Act violations.
I reached out to Uber and Beyond Meat as well as lawyers representing the companies and their underwriters in the IPOs. Alan Denenberg of Davis Polk & Wardwell, who represents Uber underwriters, declined to comment. No one else responded to my queries on the Securities Act forum selection clauses.
Fleming pointed out that after Vice-Chancellor Laster’s decision in the Blue Apron case, several companies that had adopted similar forum selection clauses issued SEC filings that said they would not enforce the provisions unless the Delaware Supreme Court reversed the Chancery ruling.
Slack, which filed an IPO registration statement at the SEC last week, said no provision in its bylaws will preclude shareholders from bringing Securities Act claims in state court.
In 2018, according to Cornerstone Research, investors exercised their right to state-court jurisdiction in 30 suits over allegedly misleading IPO disclosures. Just last month, when shares of the ride-hailing company Lyft stumbled soon after Lyft’s IPO, shareholders brought Securities Act claims in state court in California. Lyft did not include a forum selection clause in its corporate charter or articles of incorporation.
Uber did acknowledge uncertainty about Securities Act forum selection in its IPO registration filing, which noted the Chancery Court holding and said enforcement of its provision is “subject to and contingent upon a final adjudication in the State of Delaware.” Its filing does not reveal how Uber intends to respond if it is sued in state court before the Delaware Supreme Court has ruled in the Blue Apron case.
Beyond Meat’s registration statement said just that if a court were to find its forum selection clause unenforceable, “we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.” It did not mention Vice-Chancellor Laster’s ruling in Blue Apron or the likelihood that the Delaware Supreme Court will take up the issue in the next several months.