The recent trend toward declining numbers of corporate and securities lawsuit filings continued in the first quarter of 2015, according to a report from the insurance industry information firm, Advisen. If the level of activity in the year’s first quarter were to continue for the rest of the year, the number of new corporate and securities lawsuits would approach pre-crisis levels. The report, entitled “D&O Claims Trends: Q1 2015” can be found here.
Unlike other published reports which track only securities class action lawsuit filings, the Advisen report tracks a wide variety of types of corporate and securities lawsuit filings (including but not limited to securities class action lawsuit filings). However, the Advisen report uses its own peculiar terminology in describing the various categories of lawsuits; as a result, the report must be read with caution.
As Advisen has detailed in prior reports, the annual numbers of new corporate and securities lawsuit filings has declined for the past three years, as the wave of lawsuit filings associated with the financial crisis subsided. Based on the levels of corporate and securities lawsuit filings during the first quarter of 2015, it appears that this “downward trend may continue for at least one more year.” The overall number of new corporate and securities lawsuit filing during the first quarter was nine percent below the number in the first quarter of 2014 and 11 percent below the fourth quarter of 2014.
Exhibit 1 to the report shows that if the first quarter 2015 filings are annualized, the projected year end total number of filings would be at the lowest level since 2009 and only slightly above levels last seen in 2008.
Not all types of lawsuits declined during the quarter. While the number of derivative lawsuits, merger objection lawsuits, and securities class action lawsuits declined during the year, the number of lawsuits that the report categorizes as “capital regulatory actions,” “securities individual actions,” and fiduciary duty lawsuits all declined during the quarter.
Among the various types of lawsuits that Advisen tracks, the category with the highest number of new lawsuits in the first quarter was what the report calls “capital regulatory actions” (essentially, regulatory enforcement actions). These types of suits represented 62 percent of all recorded events. This elevated level of activity in the first quarter follows the year just completed, in which these types of actions also increased relative to the prior year. The report suggests this increased number of enforcement actions may be the “direct result” of the financial fraud task force that SEC Chair Mary Jo White created in 2014.
The number of securities class action lawsuit filings in the first quarter of 2015 (42) was essentially flat compared to the first quarter of 2014 (43).There was a time before the financial crisis when securities class action lawsuits represented as much as a quarter of all of annual corporate and securities class action filings. In more recent years, the number of securities class action filings as a percentage of all corporate and securities lawsuit filings fell to as low as ten percent, in 2011. Since that time, this percentage has inched upward; in 1Q15, securities class action lawsuits represented 14 percent of all corporate and securities suit filings.
The number of derivative lawsuit filings has also been declining since 2011. The downward trend apparently will continue in 2015. There were only 22 derivative lawsuit filings in the first quarter, compared to 55 in the first quarter of 2014 and 31 in the fourth quarter of 2014.
The number of new merger objection lawsuit filings also decreased in the first quarter of 2015, following a declining trend that has spread across the past three years. There were only 33 new merger objection lawsuit filings in the first quarter of 2015, compared with 60 in the first quarter of 2014. The report does not benchmark the number of merger objection lawsuits against the level of merger activity, so the report’s absolute filings numbers say nothing about the whether the rate of merger objection lawsuit filing activity is going up or down.
Another possible explanation for the decline in merger objection suits is the increasing prevalence of forum selection bylaws. These types of bylaws, which the Delaware courts validated in 2013, not only could be reducing the incidence of multi-jurisdiction merger litigation, but it could be dampening the overall number of merger objection lawsuits filed, and could also explain in part the decline in derivative lawsuit filings.
More companies in the financial services sector were hit with new corporate and securities lawsuits in the first quarter of 2015 than any other sector. Thirty percent of all companies named in corporate and securities lawsuits in the first quarter were in the financial services sector.
New actions (filed both in the U.S. and outside the U.S.) against companies domiciled outside the U.S. as a percentage of all new corporate and securities lawsuits rose to the highest level in ten years during the first quarter of 2015. Sixteen percent of all corporate and securities lawsuits filed in the first quarter of 2015 involved non-U.S. companies, compared to only 14 percent in 2014 and only ten percent as recently as 2009.
In considering why the overall numbers of corporate and securities lawsuits has been declining in the recent years compared to the filing levels seen during the financial crisis, the report suggests, among other things, that the decline may be due to “less financial crisis-related litigation” and to “ fewer public company targets.” Both of these considerations are important factors. I would add a couple of other factors that may be affecting the overall filings level; the elevated levels of the financial markets; the relatively healthy level of the overall economy (especially compared to the financial crisis years) and low interest rates (which reduce borrowing costs, putting less pressure on corporate income statements and balance sheets). Also, as noted above, forum selection bylaws may be reducing the curse of multi-jurisdiction litigation, which may be contributing to the lower numbers of merger objection and derivative lawsuits that are being filed.
Advisen Webinar, Thursday April 23, 2015: On Thursday, April 23, 2015, at 11 am EDT, I will be participating in a free, hour-long Advisen webinar, in which the first quarter claims trends will be discussed. The webinar discussion panel will also include Ben Fidlow of Willis; Brian Stoll of Towers Watson; and Jim Blinn of Advisen. Information about the webinar, including registration instructions, can be found here.