Court of Appeals of Texas Affirms Dismissal of Nonresident Issuer, Individual Defendants and Underwriters For Lack of Personal Jurisdiction In Securities Lawsuit Due To Insufficient Contacts With The State
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  • Court of Appeals Of Texas Affirms Dismissal Of Nonresident Issuer, Individual Defendants And Underwriters For Lack Of Personal Jurisdiction In Securities Lawsuit Due To Insufficient Contacts With The State
    On January 21, 2020, the Court of Appeals of Texas dismissed for lack of personal jurisdiction a putative class action against a chemical products manufacturer (the “Company”), certain of its officers and directors, and underwriters of the Company’s initial public offering (“IPO”) and secondary public offering (“SPO”) (the “Underwriters”).  The Court remanded claims against the remaining defendants, companies from which the Company was spun off in the IPO (“Predecessors”), for the trial court to transfer the venue from Dallas County to Montgomery County.  Venator Materials PLC v. Macomb Cnty. Employees’ Retirement Sys. & Firemen’s Retirement Sys. of St. Louis, No. 05-19-01177-CV, 2020 WL 289296 (Tex. App. Jan. 21, 2020).  Plaintiffs allege that defendants violated sections 11, 12(a)(2), and 15 of the Securities Act of 1933 by failing to disclose the effects of a fire at one of the Company’s facilities.  The Court held that the Texas contacts of the Company, the individual defendants, and the Underwriters were insufficient to confer general or specific personal jurisdiction.
    Headquartered in the United Kingdom, the Company is a manufacturer of chemical products.  A fire occurred in one of its facilities in Finland on January 30, 2017.  The Company later issued securities on August 3, 2017, in an offering in which it was sold off from its Predecessors, and in a secondary public offering on November 30, 2017.  Due to extensive damage from the fire, the Company later abandoned the facility, which caused it to lose 13% of its production capacity.  Plaintiffs subsequently filed a lawsuit alleging that the offering documents for the IPO and SPO failed to disclose the extent of the damage from the fire and its effect on the Company. 
    The lower court held that it had personal jurisdiction over the Company, the individual defendants, and the Underwriters, and these defendants filed an expedited appeal.  The Court of Appeals reversed the lower court, and, in doing so, examined whether a Texas court had either (i) general jurisdiction over defendants challenging jurisdiction because they had continuous operations in Texas that were “so substantial and of such a nature as to justify a suit,” or (ii) specific jurisdiction because those defendants’ respective activities in Texas themselves “g[a]ve rise to the liabilities sued on.”  Before conducting this analysis, however, the Court rejected plaintiffs’ argument that the nationwide service of process provision contained in Section 22(a) of the Securities Act conferred personal jurisdiction.  Although some federal courts have held that this provision confers nationwide personal jurisdiction, the Court held that the provision in any event does not apply to state courts.
    The Court then held that general jurisdiction was not present with respect to the Company, because it did not have continuous and systematic contacts with Texas.  The Court further held that there was not specific jurisdiction over the Company, because the IPO and SPO offering documents, which are the basis of the lawsuit, were not prepared or filed in Texas, or directed into it.  The Court pointed out that the fire that was allegedly misrepresented occurred in Finland.  Although the Predecessors were headquartered in Texas, the business that was spun off in the IPO and became the Company was headquartered in the United Kingdom.  In reaching these holdings, the Court rejected plaintiffs’ arguments based on disclosures in the offering documents that the Company had administrative offices in Texas and the fact that the registration statement for the IPO was signed in Texas.  According to the Court, the Company was headquartered in the United Kingdom, and the offering documents were still “directed outward—to regulators in Washington, D.C. and to potential investors nationwide.”  The Court reached similar conclusions with respect to the individual defendants, none of whom was a Texas resident at the time of the events giving rise to the lawsuit and none of whom worked on the offerings in Texas.
    With respect to the Underwriters, the Court first held that there was no general jurisdiction, because the Underwriters are not Texas corporations and do not have their principal places of business there.  The Court also held that specific jurisdiction over the Underwriters was unavailable, because there was not a substantial connection between the allegedly false statements in the offering documents and the Underwriters’ contacts with Texas.  Plaintiffs pointed to the underwriting agreement for the offerings as a basis for jurisdiction, because it was between the Underwriters, the Company, and the Predecessors, the latter of which are located in Texas.  The Court held that merely contracting with a Texas resident was insufficient to confer specific jurisdiction and further pointed out that the underwriting agreement’s New York venue and choice of law provisions negated any inference that the parties were “invoking the benefits and protections of Texas law.”  Although the underwriting agreement required notices to the Company and its Predecessors to be sent to Texas addresses, the Court held that the “performance of the contract is to be completed elsewhere”, because its “payment provision requires payment of the purchase price and delivery of certificates for the securities at a specified address in New York, New York, ‘at 9:00 A.M. (New York City time).’”  Finally, the Court rejected plaintiffs’ argument that the Underwriters’ work on the offerings was “Texas-directed”, because the Underwriters were required to conduct due diligence on financial results that were consolidated with the Predecessors’ Texas-based businesses.  The Court held that “the ‘operative facts’—the adequacy of the disclosures about the [] fire and its consequences to [the Company]—are not facts connected to Texas” and held that the Underwriters specifically structured their agreement “so as neither to profit from the forum’s laws nor be subject to its jurisdiction.”
    Although the Supreme Court, in Cyan Inc. v. Beaver County Employees Retirement Fund, held that securities class actions can be filed in state court, the Court of Appeals decision is a reminder that this does not permit plaintiffs to file lawsuits in any state of their choosing and that the issue of whether a court has personal jurisdiction over a defendant will be an important consideration.