Largely driven by M&A-related litigation and securities suits against U.S.-listed Chinese companies, federal securities class action lawsuit filings continued to mount during the second quarter of 2011. With 48 new securities suits during the second quarter, the year-to-date total mid-way through the year stands at 105. The 2011 filings are on pace to finish the year with about 210 new lawsuits, which is well above the 1997-2009 average of 195.
The M&A lawsuits included in my tally are those that were filed in federal court and that allege a violation of federal securities laws. There were ten M&A-related federal securities lawsuits during the second quarter, or about 20% of all second quarter filings.
Many of the M&A-related lawsuits are being filed in state court and so don’t enter into the count of federal securities suits. In addition, there are a number of federal court M&A-related lawsuits that don’t allege violations of the federal securities laws; these suits typically allege breaches of fiduciary duties.
M&A-related litigation overall, including all state and federal court suits, continues to surge. Because many of these suits are filed in state court, it is difficult to get complete information. But based on the filings I have been able to track, and counting all state and federal suits of which I am aware, there have been a total of at least 125 merger-related lawsuits YTD involving as many as 90 transactions (some transactions have drawn multiple lawsuits). While this information may be incomplete, it is clear that there are many more merger-related lawsuits now being filed than traditional securities class action lawsuits. This mix of litigation has some important implications, discussed below.
But the most interesting story line relating to 2011 securities class action lawsuit filings is the number of new filings involving U.S.-listed Chinese companies. As I have previously noted (most recently here), lawsuits filings against these Chinese companies have been surging, particularly during the second quarter. There have been a total of 26 securities suits against Chinese companies so far in 2011, 19 of them filed during the second quarter. The 26 lawsuits represent almost one-quarter of all 2011 securities class action lawsuit filings. The 19 securities suits filed against Chinese companies during the second quarter represent almost 40% of all new securities lawsuit filings during that period.
Signs are that the lawsuit filings against U.S.-listed companies will continue as we head into the year’s second half. Plaintiffs’ lawyers have published news releases that they are “investigating” additional U.S.-listed Chinese companies (refer for example, here). These types of releases usually precede lawsuit filings.
Lawsuit filings against foreign companies in general have been a significant part of the 2011 securities lawsuit filings. Although the vast majority of the suits against foreign companies have involved Chinese companies, lawsuits have been filed against a number of companies from other non-U.S. jurisdictions. There have been a total of 34 lawsuits against foreign companies so far this year (about 32% of all YTD 2011 filings), involving companies from eight different countries.
These filings against non-U.S. companies are all the more notable given the U.S. Supreme Court’s June 2010 decision in the Morrison v. National Australia Bank case, which seemingly would have produced a decline in the number of new securities suits involving non-U.S. companies. But because the shares of most of these foreign company defendants trade on U.S. securities exchanges, the Morrison decision poses no barrier to the shareholder plaintiffs suing these foreign companies in U.S. courts.
Although the year-to-date filings are largely characterized by the features noted above, the suits are in other ways remarkably diverse. For example, the 105 companies named as defendants represent 70 different Standard Industrial Classification (SIC) Code categories. The SIC Codes with the highest number of filings are SIC Code Category 7372 (prepackaged software), and SIC Code Category 6022 (state commercial banks), each of which has had six securities suits during the first six months of 2011.
Though there were a number of filings in the year’s first half against banking institutions, overall far fewer of the first half filings involved financial institutions than was the case in recent years in the wake of the credit crisis. However, as I noted in a recent post, there are still lawsuits coming in that are based on credit crisis-related events. By my count, there were at least four credit crisis-related lawsuits in the year’s first half.
The first half lawsuit filings were also quite dispersed geographically. The securities suits in the year’s first six months were filed in 32 different U.S. districts. The districts with the highest number of filings in the first half were the Central District of California, with 24 filings, and the Southern District of New York, which had 19.
As is always the case and as I have frequently noted, definitional issues significantly affect the lawsuit count. For example, if I were to include the federal court M&A lawsuits that do not involve securities law allegations, I would be reporting 113 first half lawsuits, rather than 105. On the other hand, by including the federal court merger objection suits that have securities allegations, the count arguably is inflated in the other direction. (I have struggled for some time to decide whether or not the merger objection suits properly belong in this tally.) In other words, my count may vary from other published figures, largely due to these kinds of definitional issues.
The growing wave of M&A litigation is an under-discussed issue. Even though the M&A cases cases tend to be resolved quickly and usually don’t involve significant financial settlements, taken collectively they still impose an enormous cost on the system. Even if the settlement in any one case is modest (usually just the payment of the plaintiffs’ attorneys fees), there are still the defense expenses to consider. In the aggregate this litigation imposes a huge expense on the financial system. In the aggregate they are also imposing significant costs on D&O insurers, or at least those that are most active as primary insurers. Sooner or later these kinds of costs have to start taking a toll on the carriers.
The burden these costs represent may be all the more painful for the carriers because the exposures involved with these kinds of suits likely are not priced into the risk premium. In addition, it is tough to underwrite the likelihood that any one company will be acquired. But because the discussion of carriers’ loss exposures tends to focus on the higher severity risk of securities class action litigation, there is relatively little consideration given to the higher frequency exposure that these merger objection lawsuit represent. This is one of those issues that just doesn’t get the airtime it deserves – at least not so far.