The United States District Court for the Southern District of California recently addressed two novel issues under the Securities Litigation Uniform Standards Act of 1998 (the "Act"). The Act generally requires that class actions involving nationally traded securities be maintained in federal court. Specifically, the court ruled that the application of the Act is not limited to class claims seeking monetary damages only, and that the so-called "Delaware carve-out" exception to the Act does not restrict the venue of excepted actions to the defendant's state of incorporation.
Plaintiff Robin Gibson filed a class action complaint for monetary relief in the San Diego Superior Court on behalf of himself, shareholders and investors of defendant PS Group Holdings Inc. ("PS Group"), a Delaware corporation. Plaintiff alleged that PS Group and its officers and directors breached their fiduciary duties under Delaware law by, inter alia, failing to disclose material facts about a third party's offer to acquire PS Group. Plaintiff then amended the complaint to include a claim for breach of the duty of candor after PS Group filed a proxy statement that allegedly contained various misstatements and omissions concerning the fairness of the acquisition. Plaintiff, however, dropped his claim for compensatory relief, and sought equitable remedies only.
The defendants promptly removed the action to federal court pursuant to the Act on the basis that the amended complaint alleged a violation of state law based on misrepresentations or omissions made in connection with the purchase or sale of PS Group's stock. Plaintiff then filed a motion to remand the action to state court, alleging (i) that the action was not a "covered class action" under the Act because only equitable, not compensatory, relief was being sought and (ii) that the action met the "Delaware carve-out" exception to the Act since it asserted state law breach of fiduciary duty claims alleging fraud in connection with a vote on a merger or acquisition.
The court first dismissed plaintiff's contention that the action was not a "covered class action" under the Act because it sought equitable relief rather than monetary damages. While the court noted that the Act defines a "covered class action" to include any single lawsuit in which "one or more of the named parties seek to recover damages on a representative basis . . .," it observed that plaintiff selectively amended his complaint to omit a claim for damages solely to defeat removal under the Act. "A rule that allows a plaintiff to defeat a defendant's right to remove a class action through such a hollow procedural maneuver would surrender the . . . Act's application to the class action plaintiffs the statute seeks to keep at bay," the court stated. Accordingly, the court looked beyond the face of the amended pleadings and concluded that the plaintiff's claim was a "covered class action" under the Act.
The court next addressed whether the "Delaware carve-out" expected plaintiff's claims from application of the Act. The court noted that the Act's Delaware carve-out provides that certain "covered class actions . . . based upon the statutory or common law of the State in which the issuer is incorporated . . . may be maintained in a State or Federal court by a private party." Although the parties agreed arguendo that plaintiff's action met the Act's definition of "covered class action" -- the action was pursuant to the law of defendant PS Group's state of incorporation and involved defendants' recommendation with respect to the sale of securities -- they disagreed on whether the exception was available on the facts presented. Specifically, the defendants maintained that the legislative history of the Act established that the "Delaware carve-out" applies only when a class action is instituted in the defendant's state of incorporation. Since the plaintiff filed the action against PS Group, a Delaware corporation, in California, defendants argued that it could not be remanded to the San Diego Superior Court under the Act.
The court disagreed. The court stated that since the statutory language of the Act was unambiguous, it was not necessary to resort to legislative history as defendants urged. The court then observed that the Act's Delaware carve-out exception permits a plaintiff to bring a claim based on the law of the state of the defendant's incorporation -- here, Delaware --- in any state or federal court -- here, in San Diego Superior Court -- and did not in any way contain a restriction on venue. Accordingly, the court remanded plaintiff's action to the San Diego Superior Court. *
Gibson v. PS Group Holdings, Inc., No. 00-CV-0372, 2000 U.S. Dist. LEXIS 3158 (S.D. Cal. Mar. 8, 2000).