Largely driven by a surge in the number of federal court merger objection class action lawsuits, the number of securities class action lawsuit filings during 2016 reached record high levels. The number of filings in 2016 accelerated as the year increased, with a significantly greater number of filings in the year’s second half, compared to the number of filings in the year’s first half.
The Number of Federal Lawsuit Filings: There were a total of 270 federal court securities class action lawsuits filed in 2016, which represents a whopping 43% increase over the number of filings in 2015, when there were only 189 federal court securities suit filed. The 2016 filing figures represent the highest annual number of securities class action lawsuit filings since 2001, when the filings levels were distorted by the number of IPO laddering cases that year. If (as is usually the case for purposes of securities class action statistical analysis) the IPO laddering cases are disregarded, the number of securities class action lawsuits filed in 2016 is the highest annual total on record.
The 270 filings in 2016 is well above the long-term historical average annual number of filings. The number of securities suit filings in 2016 is 44% above the 1997-2014 annual average of 188.
Not only was the number of filings in 2016 greater than long-term annual averages, but the filing pace significantly accelerated as the year progressed. There were 122 filings in the first six months of 2016, but there were 148 filings in the year’s second half. The 148 filings during the second half of 2016 is the highest semiannual number of filings since at least 2006; the 148 filings is also 57% above the semiannual average number of filings for six month periods of 94 between 1996 and 2015.
The Rate of Litigation: Not only was the absolute number of securities lawsuit filings at record levels in 2016, but the rate of litigation was also at record levels as well, as a reflection of the lower number of companies listed on the U.S. securities exchanges in 2016 compared to earlier periods.
The long-term average annual percentage of all U.S.-listed companies hit with securities suits during the period 1997-2015 was roughly 3.0%. Due to the increased level of litigation activity and the decrease in the number of listed companies, the litigation rate in 2015 was 4.0%, the highest litigation rate since the passage of the Private Securities Litigation Reform Act in 1995. However, at 2016’s half-way mark, Cornerstone Research projected, based on the filing rate during the year’s first half, that the year-end litigation rate would approach 5.0%. Using Cornerstone Research’s mid-year estimate for the number of public companies, the 2016 litigation rate could have been as high as 5.9%, which would represent an unprecedented rate of litigation, well above even last year’s record litigation rate.
The Number of Merger Objection Lawsuits: The single most important fact in significant surge in securities suit filings was the significant number of merger objection lawsuits filed in federal court during the year.
It appears that due to the Delaware court’s hostility to disclosure-only settlements of merger objection lawsuits, the plaintiffs’ attorneys are filing merger objection lawsuits in federal court rather than in state court, leading to an overall increase in the number of federal court securities class action lawsuits.
By my tally, there were 73 federal court merger objection securities class action lawsuit filed in 2016, representing about 27% of all federal court securities suit filings. This compares with 14 federal court merger objection securities class action lawsuit filings during the full-year 2015, representing about 7% of all securities suit filings.
Interestingly, the plaintiffs’ lawyers continued to file merger objection lawsuits in federal court even after the scathing opinion by the well-respected Seventh Circuit Judge Richard Posner in August 2016, in which Judge Posner expressly adopted Delaware’s skeptical approach to disclosure-only settlements in merger objection suits. Of the 73 federal court merger objection class action lawsuits filed in 2016, at least 39 were filed after Judge Posner’s opinion in the Walgreen case was published.
It is worth noting that even if the 73 federal court merger objection lawsuits were entirely disregarded, the 197 remaining traditional securities lawsuit filings would still represent an increase over both the 189 lawsuits filed in 2015 and long-term annual average during the period 1997-2014 (188).
Moreover, it could be argued that the merger objection lawsuits cannot be entirely disregarded, as there have long been federal court merger objection lawsuit filings, and the merger objection lawsuits in recent years in particular been a significant factor in the number of annual number of federal court securities suit filings. A comparison between the 2016 filings in which the merger objection suits filings were disregarded would only make the most sense of the merger objection lawsuits during prior years were disregarded as well.
Lawsuits Against Non-U.S. Companies: Another significant factor in the increase in the number of federal court securities class action lawsuit filings in 2016 was the significant number of cases filed during the year against non-U.S. companies. There were 45 securities suits filed against non-U.S. companies during 2016, representing about 17 percent of all securities suit filings during the year. By way of comparison, there were 34 securities suits filings against non-U.S. companies in both 2014 and 2015.
This significant run-up in the absolute number of securities lawsuits filed against non-U.S. companies is all the more significant is it largely had nothing to do with the increase in the number of merger objection lawsuits that jacked up the overall number of securities lawsuit filings in 2016. Only three of the 45 securities suits filed against non-U.S. companies were merger objection lawsuits; the remaining 42 were traditional securities class action lawsuit filings.
The non-U.S. companies continued to be hit with securities litigation at greater rates than their representation among U.S.-listed companies would suggest. While 17 percent of all 2016 securities suit filings targeted non-U.S. companies, foreign companies represented only about 16 percent of all U.S. listings.
The 46 non-U.S. companies hit with securities suits in 2016 represented eleven different countries. The countries with the greatest number of companies hit with U.S. securities suits were Israel (with nine); Ireland (7); Canada (6); China, including Hong Kong (5); Brazil (4); and Germany (4)
Filings by Industry: The 2016 securities class action lawsuit filings hit companies across a broad range of industries. The 270 securities class action lawsuit filings during the year hit companies in a total of 100 Standard Industrial Classification (SIC) codes.
As has been the case for many years, companies in the life sciences experienced the highest number of securities suit filings in 2016. The 2834 SIC Code category (Pharmaceutical Preparations), with 42 securities suit filings, had the highest number of any single SIC code category. The 283 SIC code Industry Category (Drugs) had a total of 49 filings, the highest number in any single Industry Category. There were also an additional eighteen companies named as securities suit defendants in the 3800 SIC Code series (Measuring and Analyzing Instruments), including eleven in the 384 SIC code group (Surgical, Medical and Dental Instruments and Supplies). The total number of companies across all of the various life sciences categories that were hit with securities suits in 2016 was 67, representing about 25% of all 2016 federal court securities lawsuit filings.
Another sector that experienced a significant number of securities suits during 2016 was the Industry Group 737: Computer Programming, Data Processing, and Other Computer Related Services. There were a total of 24 companies in this SIC Code Group hit with securities suits in 2016, including 13 in SIC Code category 7372, Prepackaged Software.
These two groups, Life Sciences and Computer Programming/Data Processing, together collected a total of 91 securities suit filings in 2016, representing 33.7% of all filings during the year.
Filings by Court: The 2016 federal court securities class action lawsuits were filed in a total of 43 different federal district courts, but many of the filings were concentrated in just a few courts.
By far the largest numbers of suits were filed in the Southern District of New York. During 2016, there were a total of 60 securities suits filed in the Southern District of New York, representing 22% of all securities class action lawsuit filings during the year. There were also an additional three lawsuits filed in the Eastern District of New York
A significant number of federal court securities lawsuits were filed in district courts in California. There were a total of 35 securities suits filed in the Northern District of California in 2016, and another 31 filed in the Central District of California. With the four additional securities suits filed in the Southern District of California, there were a total of 70 securities suits filed in California federal district courts in 2016, representing nearly 26% of all securities suits filed during the year.
Taken together, the 133 suits total filed in the New York federal district courts and the California federal district courts represented just under half (49.2%) of all 2016 securities class action lawsuit filings.
Follow-On Civil Actions: Another significant factor in securities lawsuit filing patterns in 2016 was the significant number of securities class action lawsuits filed in the wake of the announcement of a regulatory investigation.
A particularly distinct category of these kinds of claims emerged during the year, when shareholder claimants filed a series of lawsuits against companies caught up in antitrust investigations. In total, at least seven securities class action lawsuits were filed in 2016 against companies caught up in these industry-focused antitrust investigations. In addition to these antitrust investigation-related lawsuits, there were a number of follow-on securities class action lawsuits filed against companies caught up in anticorruption or bribery-related investigations as well. There were a total of at least nine securities class action lawsuits filed in 2016 as follow-ons to a bribery or corruption investigation. Along with these antitrust and anti-corruption related claims, other types of follow-on civil action that has emerged are the claims that have been filed in the wake of environmental investigations.
Altogether, the follow-on antitrust investigation lawsuits, the follow-on bribery investigation lawsuits, and the environmental investigation claims represented a total of at least 18 follow-on securities class action lawsuits in 2016, representing nearly seven percent of all of the securities class action lawsuits filed in 2016.
IPO Lawsuits: One of the significant factors in the number of securities class action lawsuits filed in 2015 was the significant number of securities suits filed during the year involving IPO companies. During 2015, there were 29 IPO-related securities lawsuit filings in both state and federal courts (representing about 15% of all securities suit filings), compared to 2014, when there were 17 IPO-related securities lawsuit filings in both state and federal courts (representing about 10% of all securities suit filings).
There were a significant number of IPO-related lawsuits filed in 2016 as well, but not as many as were filed in 2015. During 2016, there were a total of 13 securities class action lawsuits filed against IPO companies, representing about 4.8% of all securities class action lawsuits during the year.
The companies hit with IPO lawsuits during 2016 were from the following IPO classes: 2014, 4 companies; 2015, 7 companies; 2016, 2 companies. Given the reduced numbers of IPOs completed in 2016 compared to 2015 and 2014, the likelihood is that there will be fewer IPO-related lawsuits in 2017, absent a significant uptick in the number of IPOs in the early part of the year.
There were be a great deal of discussion in the upcoming weeks and months as the 2016 securities suit filing figures are released and picked up by the mainstream media. I suspect there will be a host of alarmist articles focused on the magnitude of the increase in 2016 compared to 2015 and compared to long-term averages.
However, there is a very important sense in which the jump in the number of securities lawsuit filings during 2016 may not as significant as the data might at first suggest.
The fact is that many of the merger objection lawsuits that were filed in federal court in 2016 likely would have been filed in state court in prior years, before the Delaware court made its hostility to disclosure-only settlements apparent. The increase in the number of federal court securities class action lawsuits during 2016 arguably represents mostly a category shift between state courts and federal courts, rather than a dramatic increase in the overall number of lawsuits filed.
To the extent that the apparent increase in securities suit filings simply represents a category shift between state and federal court, the apparently dramatic increase arguably is significantly less momentous than might have seemed to be the case on first impression.
That said, as noted above, even if the merger objection lawsuit filings during 2016 are entirely disregarded (an analytic approach which as noted above may not be entirely justifiable), the number of securities suit filings increased in 2016 compared to 2015 and compared to long-term averages. Indeed, the number of securities suit filings has increased every year since 2011.
There are a number of other significant factors behind this recent annual increases, the most significant arguably is the changes in the securities suit filings arising from changes in the plaintiffs’ securities bar.
As Michael Klausner and Jason Hegland of Stanford Law School detailed in their June 2016 guest post on this blog (here), since 2009, a significantly larger number of securities class action lawsuits (both in terms of absolute numbers of lawsuit filings and in terms of percentage of all lawsuits filed) are now being filed by a group of small plaintiffs’ firms that were not previously active in filing securities lawsuits. These firms, which Klausner and Hegland call “emerging” law firms, have not only been responsible for the gradually increasing numbers of annual lawsuit filings, but they are also disproportionately responsible for the decrease in “average case quality” as measured a number of different ways.
It appears to me that the activities of these “emerging law firms” accounts for a large proportion of increased numbers of 2016 securities class action lawsuits. Indeed, and just to complete the picture, these emerging law firms are also responsible for many of the federal court merger objection lawsuits as well.
Among the important practical implications arising from the emerging firms’ increasing activity is not just the fact that there are likely to be higher number of lawsuits filed in the future but also that the lawsuits are increasingly likely to involve smaller companies, as measured by the size of the defendant company’s market capitalization.
Doug Greene of the Lane Powell law firm wrote in a December 27, 2016 post on his D&O Discourse blog (here), that one of the key securities litigation developments in 2016 was “the persistence of securities class actions brought against smaller public companies primarily by smaller plaintiffs firms on behalf of retail investors,” a development that Greene said represents “a fundamental shift in the securities class action landscape.”
These firms’ increased targeting of smaller companies not only has important implications for the susceptibility of smaller firms to securities suits, but these patterns also have important implications for settlement ranges and overall average and median severity calculations. Klausner’s and Hegland’s analysis also shows that these shifts also appear to have important implications for dismissal rates as well.
A Final Note About Data Sources and Methodology: The data used in the analysis above were compiled from a variety of sources, including media outlets (such as Bloomberg and Yahoo Finance), online legal news services (including Law 360 and Advisen), and other online data services (including the Stanford Law School Securities Class Action Clearinghouse). In addition, during the course of the year, I took advantage of opportunities to audit my lawsuit dataset by comparing it to those being compiled by other litigation monitoring services.
In tallying the number of securities class action lawsuits, I count each company sued for the same basic set of allegations only once, regardless of the number of complaints filed, which is different from the methodology used by other prominent securities litigation monitoring sources. At least some of these services count each complaint separately (at least if the complaint is filed in a separate judicial district), unless and until the separate lawsuits are consolidated.
With respect to the merger objection lawsuits, it is important to note that I counted a lawsuit in my tally only if the case was filed a class action lawsuit and only if it alleged a violation of the federal securities laws. By the same token, I did not count lawsuits in my tally if they were not filed as class action lawsuits. I also did not count a lawsuit in my tally if the complaint did not allege a violation of the federal securities laws. This is an important consideration in comparing my tally to other published tallies, as at least some of the other public sources include federal court merger objection lawsuits in their tallies even if the complaints allege only breaches of fiduciary duty and do not allege a violation of the federal securities laws.
The different methodologies used will not only result in different litigation counts, but it could also result in differing analytical conclusions. It is very important to understand the methodologies used by the different prominent securities litigation monitoring services and to understand how the methodologies used will affect analyses of the data.