The number of securities class action settlements as well as the aggregate, average, and median securities class action settlement values all increased in 2016 compared to the prior year, according to the latest annual report from Cornerstone Research. The report, entitled “Securities Class Action Settlements: 2016 Review and Analysis can be found here. Cornerstone Research’s March 15, 2017 press release regarding the report can be found here.
Number of Settlements: According to the report, U.S. courts approved 85 securities class action settlements in 2016. While this number of settlements is only slightly higher than the 80 approved in 2015, it does represent the highest number of approved settlements since 2010. The report attributes the increase in the number of approved settlements to “the recent increase in the number of case filings.”
Aggregate Settlement Values: While the number of approved settlements increased only slightly in 2016 compared to the number approved the year before, the aggregate value of the approved settlements increased substantially. The aggregate value of settlements approved in 2016 was $5.9 billion, nearly double the $3.0 aggregate value of settlements approved in 2015. The aggregate dollar value of approved settlements was the highest annual amount since 2007. The 2016 total settlement dollars exceeded the inflation-adjusted annual totals for eight of the nine prior years.
The Number of Mega Settlements: There were ten “mega” settlements approved in 2016, the highest annual number of mega-settlements in the last ten years. (A mega-settlement is a settlement over $100 million.) These ten settlements accounted for $4.8 billion (81%) of all of the total $5.9 billion in settlement value in 2016. Two of these settlements exceeded $1 billion, the first billion dollar settlements approved since 2013, and the first time since 2006 with multiple settlements over $1 billion in one year.
Annual Average Settlement Values: The large number of mega settlements contributed to an almost two-fold increase in the average settlement amount from 2015 to 2016. In 2015, the average settlement amount was $38.4 million, whereas in 2016, the average settlement amount was $70.5 million. The average settlement amount in 2016 was also considerably higher than the historical average settlement amount; the average settlement amount during the period 1996-2015 was $55.5 million.
Annual Median Settlement Values: The median settlement amount also increased in 2016 compared to the prior year as well. The median settlement in 2016 was $8.6 million, compared to $6.1 million in 2015, representing an increase of almost 40 percent. The median settlement amount during the period 1996-2015 was $8.3 million.
The Number of Smaller Settlements: In addition to the number of mega settlements, another factor contributing to the increased average and median settlement amounts is that there were fewer smaller settlements approved during the year. There were only 10 cases in 2016 (representing 12 percent of all settlements) that settled for $2 million or less, compared to 20 cases in 2015 (representing 25 percent of all settlements) in 2015. The percentage of cases settling for less than $5 million also decreased in 2016 compared to prior years. In 2016, 27.1% of all settlements were below $5 million, compared to 34.8% of all settlements during the period 1996-2015.
Average “Estimated Damages”: Another factor contributing to the higher average and median settlement values in 2016 is that the average “estimated damages” involved in cases that settled in 2016 was higher than in prior years. (“Estimated damages” is a simplified measure of shareholder losses.) Compared to the prior five years (2011-2015), 2016 average “estimated damages” were 30 percent higher, although median “estimate damages” were 14 percent lower. In general, higher estimated damages are associated with larger defendants (as measured by asset values) and more mature firms (as measure by the time since the company went public). The median settlement as a percentage of “estimated damages” was 2.5% in 2016, significantly higher than 2015’s historic low of 1.8% (representing an increase of 39 percent).
’33 Act Claims Settlements: Interestingly, these “estimated damages” figures vary substantially for cases that allege only Section 11 and/or Section 12(a)(2) claims. The median settlements and median “estimated” damages were lower for these kinds of cases, but the median settlement as a percentage of estimated damages was higher. During the period 1996-2015, the median settlement for these kinds of cases was $4.0 million, the median estimated damages was $55.6 million, while the median settlement as a percentage of “estimated damages” was 7.4%.
Other Settlement Factors: In addition to higher “estimated damages,” other factors also contributed to the increase in settlement values in 2016. These other factors include the percentage of settlements with public pension plans with lead defendants, the number of restatement cases, and the increased size of issuer defendants.
Impact of Accounting Allegations: The presence of accounting allegations has a significant upward effect on settlement values. During the period 1996-2016, median settlements as a percentage of “estimated damages” was 3.5% for cases involving a restatement, compared to 2.7% for cases without a restatement allegation; and 3.9% for cases involving accounting irregularity allegations, compared to 2.9% for cases without accounting allegations.
Institutional Investor Involvement: The involvement of an institutional investor lead plaintiff is also a significant factor associated with larger settlements. In 2016, the median settlement amount for cases with institutional investor lead plaintiffs was more than two-and-a-half times greater than that without an institutional investor lead plaintiff. Institutional investors tend to be involved as plaintiffs in cases with larger “estimated damages.” The cases in which institutional investors become involved also tend to involve larger corporate defendants, longer class periods, securities in addition to common stock, accounting allegations, and other factors associated with more serious cases such as criminal allegations.
Impact of Parallel SEC Actions: In general, cases with a corresponding SEC action typically involve significantly higher settlement amounts and higher settlements as a percentage of “estimated damages.” However, in 2016, median settlements for cases with an SEC action ($8.4 million) differed only slightly from the median settlement for cases without a corresponding SEC action ($8.6 million).
Time to Settlement: The time to settlement tends to be longer for larger cases (as measured by issuer defendant size and “estimated damages”). In general, larger settlements are associated with cases that settle after a ruling on the motion to dismiss but before summary judgment and cases that settle after a ruling on the motion for summary judgment.
Settlement Values According to Litigation Stage: During the period 2007-2016, the median settlement for cases that settle before the dismissal motion ruling was $6.8 million; the median settlement for cases that settled after the dismissal motion ruling but before the summary judgment ruling was $8.6 million; and the median settlement after the summary judgment ruling was $13.3 million. Interestingly, however, the median settlement values as a percentage of “estimated damages” declined correspondingly with respect to settlements at each of these later procedural stages.
Projected Future Settlement Trends: As far as likely future settlement trends, the report notes that the record number of case filings in 2016 following on four consecutive years of year-on-year increases in the number of filings suggests that the number of settlements is likely to grow in the coming years. However, while the number of settlements may increase, due to the absence of very large cases (as measured by market capitalization loss) suggests that over the next few years, a drop in mega settlements may follow.