California State Court Stays Putative Class Action Based On Forum Selection Clause
Securities Litigation
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  • California State Court Stays Putative Class Action Based On Forum Selection Clause

    On September 5, 2018, Judge Marie Weiner of California Superior Court, San Mateo County, granted defendants’ motion to stay a putative class action on grounds of forum non conveniens in order for plaintiff to pursue the action in New York.  Plaintiff asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”) against an early childhood education service provider in the People’s Republic of China (the “Company”), several of its officers and directors, and the underwriters based on the Company’s initial public offering of American Depository Shares (“ADSs”).  Relying largely on a mandatory forum selection clause contained in a deposit agreement that set the terms for the deposit of the non-U.S. securities so that they could be traded on the New York Stock Exchange as ADS, the Court held New York was a more convenient forum and stayed the action in California. 

    The Court initially noted that where, as here, there is a mandatory forum selection clause, “the test” for determining whether the plaintiff’s chosen forum is convenient “is simply whether application of the clause is unfair or unreasonable, and the clause is usually given effect.”  In this case, plaintiff’s claims arose out of their ADS holdings.  An ADS is a security that represents a share of a non-U.S. company that has been deposited with a U.S. bank.  The terms of the ADS are governed by a deposit agreement, typically among the company and a deposit bank.  Here, the Deposit Agreement between the Company and its deposit bank contained a mandatory forum selection clause (referenced in the Registration Statement for the IPO): “[b]y holding an ADS or an interest therein, you irrevocably agree that any legal suit, action or proceeding against or involving . . . ADSs or ADRs, may only be instituted in a state or federal court in the City of New York, and you irrevocably submit to the exclusive jurisdiction of such courts with respect to any such suit, action or proceeding.”  The Court held it would honor this forum selection clause so long as the clause was neither unfair nor unreasonable, noting that “[m]ere inconvenience or additional expense” did not render a forum selection clause unreasonable.  In this particular action, plaintiff had first filed the action in New York federal court and later voluntarily dismissed it.  In light of that procedural history, the Court found plaintiff could not argue reasonably that the forum selection clause was unfair or unreasonable. 

    Plaintiff also argued that the case should not be dismissed in favor of New York because the other defendants were not parties to the Deposit Agreement.  The Court accordingly also considered other aspects of the forum non conveniens analysis, including the private interests of the litigants and the interests of the public in maintaining the action in California.  The Court found that the balance of interests favored New York because some of the underwriters’ headquarters and the majority of their employees who worked on the IPO were located there.  Meanwhile, the registration statement signatories were Chinese and/or Hong Kong residents.  Indeed, the only witness and documents located in California were plaintiff’s.  The Court thus held it was clear that more of the evidence would be located in New York, and that it would be substantially less burdensome to litigate the case in New York.  The Court stayed the California action, subject to application to lift the stay if the claims are not able to be adjudicated against all defendants in New York.

    In the wake of the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 583 U.S. __ (2018), that Securities Act class actions can be brought in state court, companies have considered various responses, including adopting provisions in their articles of incorporation or bylaws requiring securities lawsuits to be brought in a particular forum.  Although this decision rested on a forum selection clause contained in a deposit agreement, it suggests these or similar efforts to limit the impact of the holding in Cyan ultimately might prove successful.
    CATEGORY: Jurisdiction