By: Blake Sims
If they are not already, renewable energy and electric vehicles may about to be Wall Street’s newest darling. As the world around us “goes green,” growing young companies in the energy and materials sector will be seeking another kind of green: U.S. dollars. The capital needs are indeed breathtaking when considering Goldman Sachs’s projection that renewable generation alone represents a $16 trillion investment opportunity through 2030[i]. In November 2021, electric vehicle startup Rivian’s initial public offering (“IPO”) raised $12 billion, which was the most successful offering in the United States since 2014.[ii] While mergers with Special-Purpose Acquisition Companies (SPACs) have become the sexiest new way to go public[iii], traditional underwritten public offerings remain popular and many companies, like Rivian, will choose the traditional IPO route to “go green.”
When the number of IPOs in the capital markets increases, however, a parallel rise in the number of class actions asserting claims under the Securities Act also occurs.[iv] The Securities Act of 1933 (the “‘33 Act”) governs registration of securities, requiring that investors receive significant information, including financial, concerning securities that are to be offered for public sale.[v] With its central purpose being to prohibit deceit, misrepresentations, and other frauds in securities offerings[vi], the ’33 Act permits securities purchasers to file claims in state or federal court based on allegations of material misstatements or omissions in a public company’s registration statement.[vii]
For companies electing to go public through an underwritten public offering, it is important to realize that not all provisions of the ’33 Act are applied evenhandedly. In the 2022 term, the Supreme Court of the United States was scheduled to hear arguments on an issue regarding an interpretation of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”)[viii], which Congress had passed to amend the ’33 Act.[ix] Section 77z-1(b)(1) of the PSLRA provides that, “In any private action arising under [the ’33 Act], all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss . . .” (emphasis added).[x] So, the question before the Supreme Court was to be whether the PSLRA’s discovery stay provision applies to a private action under the ’33 Act in state and federal court, or solely to a private action in federal court.[xi] The Court granted certiorari to the California Court of Appeal for the First District, which had affirmed the state trial court’s denial of a public company defendant’s discovery stay request in a class action suit where a motion to dismiss was pending.[xii] But the parties to the underlying case settled before argument, thereby causing the Supreme Court of the United States to remove the case from its docket.[xiii] Thus, the question of whether the mandatory discovery stay applies to state courts was never answered.
Why is any of this important for public companies? The short answer is because a mandatory discovery stay restricts plaintiffs with weak claims from being able to fish for evidentiary support through early discovery.[xiv] The mandatory stay protects public companies—along with issuers and underwriters—that have been sued from being subjected to costly early discovery.[xv] So, should the discovery stay not apply in state courts as it does in all federal courts, plaintiffs seeking early discovery will be incentivized to forum shop and file their weak claims in state court.
The issue, again, is plainly a matter of statutory interpretation: does “any private action” encompass those actions filed in state court and federal court, or only federal court? State courts across the board are sharply split on the answer to this question.[xvi] Even state trial courts within the same jurisdiction, primarily in New York and California where a majority of securities related lawsuits are filed, are coming to different conclusions.[xvii] When the question might come before the Supreme Court of the United States again is unclear. In the meantime, state court judges, and eventually the Supreme Court justices themselves, should conclude that the discovery stay does indeed apply to the state courts.
In considering the PSLRA’s discovery stay provision, courts must “begin with the text”[xviii] because “courts must presume that a legislature says in a statute what it means and means in a statute what it says there.”[xix] The words are read “as any ordinary Member of Congress would have read them.”[xx] From this textualist perspective, the statutory language of the PSLRA appears dispositive. There is no ambiguity because the statute plainly states that discovery shall be stayed in, “any private action . . .” (emphasis added).[xxi] Indeed, “[w]hen the statutory language is plain, the sole function of the courts . . . is to enforce it according to its terms.”[xxii] Moreover, the Supreme Court has held that other provisions of the PSLRA using the same language, “in any private action,” do in fact apply to private securities actions brought in state court.[xxiii] So, in utilizing the whole-text and presumption of consistent usage cannons[xxiv], i.e. interpreting the statute consistently throughout, courts should conclude that the PSLRA’s discovery stay provision is clear in its applicability to state court actions.
This textualist conclusion also accords well with purposivist approach. Congress passed the PSLRA to amend the ’33 Act because Congress was concerned that securities plaintiffs might “abuse . . . the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle.”[xxv] Other legislative history states too that the PSLRA meant to prevent plaintiffs from “fil[ing] frivolous lawsuits in order to conduct discovery in the hopes of finding a sustainable claim not alleged in the complaint.”[xxvi] Statutory interpretation, combined with the private interests of companies that are soon to go public, suggests that the PSLRA’s discovery stay provision does in fact apply to state courts.
Despite this, some state courts judges have continued to hold that the discovery stay does not apply in state courts because state law, not federal law, governs state court procedure.[xxvii] While that is generally the case, principles of federalism establish that federal laws, whether procedural or substantive, apply in state court when federal law says so.[xxviii] Application of the Supremacy Clause in the reverse-Erie context has been clear: “if Congress specifies a procedure for a federal claim, then federal procedural law reigns supreme in state courts.”[xxix] Thus, state judges should be applying the discovery stay to their courts.
The securities litigation team from the New York office of Kirkland & Ellis agree that “[i]n a Securities Act case, the state court’s task is to give effect to the PSLRA’s clear, compelling, and controlling command, to stay discovery pending a motion to dismiss, and thus honor the policy goal of reducing the financial burdens of discovery in securities cases.”[xxx] The new generation of companies seeking to “go green” through the traditional IPO process have enough to worry about; plaintiffs with weak claims seeking access to discovery through forum shopping should not be one of those worries.
[i] David Oelman et al., What’s Driving Transition Energy IPOs and SPAC Combinations, Vinson&Elkins (Sep. 2021), https://media.velaw.com/wp-content/uploads/2021/09/13141340/Whats-Driving-Transition-Energy-IPOs-and-SPAC-Combinations_September-2021_F2.pdf [https://perma.cc/CK5P-PNN4].
[ii] Matthew Johnston, Rivian IPO: What Happened and Why It Matters, Investopedia (Nov. 15, 2021), https://www.investopedia.com/rivian-ipo-what-happened-and-why-it-matters-5209505#:~:text=EV%20maker%20Rivian's%20IPO%20was,%22%2C%20closed%20trading%20on%20Nov [https://perma.cc/6754-N3K3].
[iii] John Lambert, SPAC Insights: Why So Many Companies Are Choosing SPACs Over IPOs, KPMG, https://advisory.kpmg.us/content/dam/advisory/en/pdfs/2021/why-choosing-spac-over-ipo.pdf [https://perma.cc/4E5G-AU5K] (last visited Feb. 8, 2021).
[iv] John J. Clark, Jr. et al., Securities Litigation: Class Actions Arising From IPOs, Practical L. (last visited Feb. 8, 2021).
[v] The Laws That Govern the Securities Industry, U.S. Sec. & Exch. Comm’n, https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry [https://perma.cc/NFF3-K6L5] (last visited Feb. 8, 2021).
[vi] Id.
[vii] 15 U.S.C. § 77k(a).
[viii] U.S. Supreme Court Grants Certiorari in Case Presenting Issue of Whether the Private Securities Litigation Reform Act’s Automatic Stay of Discovery Applies to Securities Act Cases Filed in State Court, Shearman & Sterling (July 7, 2021), https://www.lit-sl.shearman.com/us-supreme-court-grants-certiorari-in-case-presenting-issue-of-whether [https://perma.cc/AC55-DF8S].
[ix] See James Chen, Private Securities Litigation Reform Act (PSLRA), Investopedia (Mar. 29, 2020), https://www.investopedia.com/terms/p/pslra.asp#:~:text=The%20purpose%20of%20the%20Private,lawsuits%20on%20a%20regular%20basis. [https://perma.cc/Z7F2-LSHZ].
[x] 15 U.S. § 77z-1(b)(1).
[xi] John Elwood, Mopping Up Final Business with 13New Relists, SCOTUSblog, (July 1, 2021, 3:57 PM), https://www.scotusblog.com/2021/07/mopping-up-final-business-with-15-new-relists/ [https://perma.cc/26DC-B2AH].
[xii] Peter B. Morrison et al., Supreme Court Grants Review of Scope of PSLRA Stay, Skadden, Arps, Slate, Meagher & Flom LLP (July 2, 2021), https://www.skadden.com/insights/publications/2021/07/supreme-court-grants-review-of-scope-of-pslra-stay#:~:text=On%20July%202%2C%202021%2C%20the,the%20Securities%20Act%20of%201933. [https://perma.cc/D6EX-MFT9].
[xiii] Alison Frankel, SCOTUS case on state-court shareholder class actions is off. Now what?, Reuters (Sep. 2, 2021, 4:13 PM), https://www.reuters.com/legal/government/scotus-case-state-court-shareholder-class-actions-is-off-now-what-2021-09-02/ [https://perma.cc/7XNR-AVKD].
[xiv] See Chen, supra note ix.
[xv] Id.
[xvi] See Gregg L. Weiner et al., Discovery Stay in Securities Act Cases Remains a ‘Pivotal’ Issue After Case Settles Before U.S. Supreme Court Argument, N.Y. L. J. (Nov. 5, 2021, 2:00 PM), https://www.law.com/newyorklawjournal/2021/11/05/discovery-stay-in-securities-act-cases-remains-a-pivotal-issue-after-case-settles-before-u-s-supreme-court-argument/ [https://perma.cc/49QB-3TWV].
[xvii] Compare In re Everquote, Inc. Sec. Litig., 106 N.Y.S.3d 828, 828 (N.Y. Sup. Ct. 2019) (a stay of discovery pending a motion to dismiss was granted where the court determined that the PSLRA’s automatic stay of discovery applies in state court), with In re Dentsply Sirona, Inc., No. 155393/2018, 2019 WL 3526142, at *16 (N.Y. Sup. Ct. Aug. 2, 2019) (concluding that the PSLRA’s stay does not apply to state court actions as it would undermine federal precedent).
[xviii] Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 294 (2006).
[xix] Id. at 296 (quoting Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-254 (1992)).
[xx] Chisom v. Roemer, 501 U.S. 380, 405 (1991) (Scalia, J., dissenting).
[xxi] 15 U.S.C. § 77z-1(b)(1).
[xxii] Arlington Cent. Sch. Dist. Bd. of Educ., 548 U.S. at 296 (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)) (internal quotations omitted).
[xxiii] See Cyan, Inc. v. Beaver Cty. Emples. Ret. Fund, 138 S. Ct. 1061 (2018) (the Court explaining that the PSLRA’s “safe harbor” provision for certain forward-looking statements applied even when a ’33 Act suit was brought in state court).
[xxiv] Antonin Scalia & Bryan A. Garner, Reading Law 167-73 (1st ed. 2012).
[xxv] H.R. Conf. Rep. No. 104-369, at 31 (1995).
[xxvi] S. Rep. No. 104-98, at 14 (1995).
[xxvii] E.g., Matter of PPDAI Grp. Sec. Litig., 116 N.Y.S.3d 865 (N.Y. Sup. Ct. 2019).
[xxviii] Matthew Solum et al., Securities Law and the Supremacy Clause, Sec. Regul. Daily (April 30, 2021), https://www.kirkland.com/-/media/publications/article/2021/04/securities-regulation-daily-securities-law-and-the.pdf?la=en [https://perma.cc/7QGR-KKTS].
[xxix] Id.
[xxx] Id.