As we ease into the final two weeks of the year, it seems likely that just about all of the securities class action lawsuits that are going to be filed this year have already been filed. Sure, one or two more may slip in yet, so it is not quite time for the final analysis of the year’s filings. But with the year just about done, there are some trends that already seem clear. One is the increased numbers of IPO-related securities lawsuits, which I recently noted here. Another securities class action filing trend is the heightened level of securities suit filing activity involving non-U.S. companies. The number of securities suit filings against non-U.S. companies during the year was both above historical levels and disproportionately greater than the number of foreign companies whose shares are listed on U.S. exchanges.
In 2015 YTD, there have been 34 securities class action lawsuits filed against non-U.S. companies (that is, companies that have either organized under the laws of a foreign jurisdiction or that have their principal place of business in a foreign jurisdiction). There were also 34 securities suit filings against foreign companies in 2014. The 34 filings this year (and last year) are well above the historical average of 22 annual filings against non-U.S. companies during the period 1997 to 2013. The 34 filings this year represent about 18 percent of all securities class action lawsuit filings in 2015 YTD, well above the 1997-2013 historical average of 11 percent. (The historical figures are drawn from Cornerstone Research, here, page 15).
The 34 securities class action lawsuits filed in 2015 YTD against non-U.S. companies involved companies from 18 different countries. As has been the case for the past several years, the country with the highest number of companies sued is China, with 15 (if Alibaba, which is based in Hong Kong, is included). The lawsuits against Chinese companies represent about 44 percent of all suits filed in 2015 YTD against non-U.S. companies, and about eight percent of all 2015 YTD securities suit filings. The suits against Chinese companies reflect in part another 2015 filing trend, which is the prevalence of filings against IPO companies. Of the 15 Chines companies sued, four completed IPOs in 2014 or 2015.
After China, the country with the most new lawsuits in 2015 was Brazil, which had three. Two of the three (involving Braskem and Eletrobras) related to companies that were drawn into the Petrobras bribery scandal. Petrobras itself was named as defendant in a securities class action lawsuit in the U.S. in December 2015. The third of the three Brazilian suit involved Vale, S.A., relating to the dam breach disaster at joint venture facility (about which refer here). In addition to the Brazilian companies, there were two other non-U.S. companies that were named in securities suits following on after news about corruption or briber investigations, SQM (a Chilean company) and VimpelCom Ltd. (based in the Netherlands).
During 2015, foreign companies were sued with disproportionately greater frequency than their representation among U.S. listed companies might suggest. Non-U.S. companies represent only about 16 percent of all U.S. listed companies, but the filings against non-U.S. companies represent over 18 percent of all 2015 filings. Nor is this a new phenomenon. While the proportion of non-U.S. listed companies has held pretty steady at around 16 percent over the last few years, the foreign companies have been sued in disproportionately greater numbers during that time. For example, in 2013, filings against non-U.S. companies represented 18 percent of all filings, and in 2014, filings against non-U.S. companies represented about 20 percent of all filings.
The lesson for D&O underwriters from these statistics would seem to be that U.S.-listed non-U.S. companies have a greater chance of being hit with a U.S. securities lawsuit than do U.S. companies. While that is probably one conclusion to be drawn from the facts, a closer look at the reasons for the lawsuits against non-U.S. companies suggests a more complex analysis. For starters, the increase in the number of lawsuits against non-U.S. companies during 2015 is largely due to the significant number of lawsuits against Chinese companies. This has been the case every year going back to 2011, when there was a significant upsurge of cases involving Chinese companies that had obtained their U.S. listings by way of a reverse merger with a listed shell company. As discussed here, a frequent source of problems for the U.S.-listed Chinese companies is that they must file financial reports in both the U.S. and in China, which all too often results in discrepancies.
Another factor contributing to the number of filings against non-U.S. listed companies is the episodic outbreak of scandals, such as that involving the companies ensnared in Petrobras bribery investigation, and Volkswagen, which is caught up in a scandal involving its diesel cars’ emissions performance.
The disproportionate incidence of securities litigation against non-U.S. companies arguably is contrary to expectations. Following the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, in which the Court held that the U.S. securities laws apply only transactions on the U.S. securities exchanges and domestic transactions in other securities, the expectation was that U.S. securities lawsuit filings against non-U.S. companies would decline. However, every year during the period 2010 to 2015, the percentage of all securities filings involving non-U.S. companies has been above both 2009 level and above the annual average percentage during the period 1997 to 2013. The fact is that almost all of the lawsuits during that period involving non-U.S. companies have involved companies with U.S. listed securities (the only exceptions have been companies like Tesco, who unlisted ADRs trade over the counter in the U.S., a situation that raises interested issues under Morrison, as discussed here).
The prevalence of U.S. securities suit filings against non-U.S. companies is just one of several trends represented in the 2015 YTD filings. I will review the other filing trends in my annual year-end analysis, which I will publish shortly after New Year’s Day.