Securities Exchange Act of 1934

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On April 10, 2021, the United States District Court for the Southern District of Florida dismissed a securities class action complaint against Norwegian Cruise Lines (“NCL”) relating to the company’s disclosures made as the coronavirus pandemic was starting to unfold in the United States. In Douglas v. Norwegian Cruise Lines, et al., the court found the plaintiff failed to plead actionable misstatements or omissions and scienter for a claim of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.

Thanks to the court’s thorough analysis, this decision serves as a useful overview to those wishing to cruise through the sea of corporate puffery, forward-looking statements, and scienter in the federal securities laws.

This week, another shareholder derivative suit was dismissed based on a forum selection clause contained in the company’s bylaws. In November 2020, a shareholder filed a derivative action alleging that directors and officers of The Gap, Inc., an apparel company, had failed to create meaningful diversity on the Board of Directors on within the company’s leadership roles. The plaintiff also alleged that Gap made false statements about the diversity of the company’s workforce, as well as its efforts to increase diversity among its employees.

The U.S. Court of Appeals for the Second Circuit reaffirmed yesterday that the federal securities laws do not apply to “predominantly foreign” securities transactions even if those transactions might have taken place in the United States.  The ruling in Cavello Bay Reinsurance Ltd. v. Shubin Stein (No. 20-1371) reinforces the Second Circuit’s prior decisions concerning the scope of the transaction-based test that the U.S. Supreme Court announced in Morrison v. National Australia Bank in an effort to curb the extraterritorial application of the federal securities laws.

The massive data breach of the United States Commerce and Treasury Departments that has roiled the federal government has resulted in federal securities litigation. On January 4, 2021, Plaintiff-Shareholder Timothy Bremer filed a class action complaint against SolarWinds and SolarWinds’ corporate executives in the United States District Court for the Western District of Texas. SolarWinds provides information technology and infrastructure management software products to entities around the globe, including to various U.S. government vendors in the executive branch, military, and intelligence services. According to the complaint, Russian hackers gained access to government email traffic by deceptively interfering with software updates released by SolarWinds. The complaint alleges that SolarWinds violated federal securities law by making false and/or misleading statements and failing to disclose material facts regarding SolarWinds’ cybersecurity practices and protocols, which artificially inflated the market price of SolarWinds’ shares. When news of the hack became public, the value of Solarwinds’ securities dropped, thereby producing an economic loss for investors within the class period of February 24, 2020 through December 15, 2020. The complaint asserts claims for violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 against SolarWinds and its corporate executives, and for violations of Section 20(a) of the Exchange Act against the corporate executives.

The Delaware Supreme Court ruled today that Delaware corporations can adopt charter provisions requiring that actions under the federal Securities Act of 1933 be filed in a federal court. The decision in Salzberg v. Sciabacucchi gives Delaware corporations a way to avoid state-court or multi-forum litigation of Securities Act claims by channeling all such cases into the federal system, where they can be managed more effectively – and where they are subject to the more structured and stringent procedural standards mandated by federal law.

Delaware corporations might want to consider adopting federal-forum charter provisions to address the treatment of potential Securities Act claims.

The Supreme Court ruled today that judicially created principles that toll statutes of limitations for class members in timely filed class actions apply only to subsequently filed individual actions, not to follow-on class actions filed outside the limitations period. The decision in China Agritech, Inc. v. Resh (No. 17-432) thus eliminates the specter of a potentially infinite series of class actions in which each class representative claims that limitations periods were tolled by the pendency of the prior class actions.

China Agritech was a securities class action under the Securities Exchange Act of 1934, which has a five-year statute of repose that sets an untollable outer limit on the filing of claims. But many other causes of action are not governed by statutes of repose. The China Agritech decision should have particular impact on those types of cases.