The Delaware Supreme Court recently heard arguments for an appeal of a court case on shareholder lawsuits that could have significant implications for biotech companies. Here’s what you need to know.
The background: Companies have seen an increase in overlapping shareholder lawsuits under the Securities Act of 1933 in multiple state courts—what’s called “forum shopping” to try to get a more favorable result. This drives up costs due to the cost of defending these lawsuits as well as the cost of D&O (directors and officers) insurance, which helps mitigate litigation costs.
So, companies decided to do something about it. Companies like Stitch Fix, Roku, and Blue Apron included a “federal forum selection provision” in their charters, meaning shareholders could only sue them in federal court—one case, one judge, one set of rules—instead of duplicating the lawsuit in numerous states.
But shareholders challenged these provisions. In Sciabacucchi v. Salzberg, the lower court in Delaware struck down the federal forum selection provisions, holding Delaware state law does not permit them.
Last week, the companies appealed in the Delaware Supreme Court. If the lower court’s ruling is upheld, companies will be back to defending lawsuits in multiple states—meaning costs for litigation and D&O insurance will continue to rise. The court is expected to make a decision within 90 days.
Why it matters: As costs of litigation and D&O insurance rise, they divert essential capital from the labs of small biotechs—and thus, from new cures. Companies need to determine where investor money is best spent—and we know that’s on research, not duplicative lawsuits.
Read more about why this issue is important to innovation and cures.
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