Securities class action lawsuit filings in the first half of 2016 leapt to their highest level in years, according to a recent report from Cornerstone Research. According to the report, which is entitled “Securities Class Action Filings: 2016 Midyear Assessment,” both the number of lawsuit filings and the rate of litigation were well above long-term historical semiannual averages in the first six months of 2016. The increases are attributable in part to the increase in federal court M&A-related securities litigation, as discussed below. The report can be found here. Cornerstone Research’s July 26, 2016 press release about the report can be found here. Cornerstone Research’s analysis is largely consistent with my own review of the first half securities suit filings, which can be found here.

 

The Number of First Half Securities Suit Filings: According to the report, there were 119 securities class action lawsuit filings in the first half of 2016. The 119 filings in the year’s first half represent the highest number of semiannual filings since the first half of 1999. This semiannual filing tally is well above the 87 securities suits that were filed in the first half of 2015 and the 102 that were filed in the second half of 2015. The 119 securities suit filings in the year’s first six months is 27 percent above the historical semiannual average of 94 between 1997 and 2015.

 

If the number of filings in the year’s first half were to continue for the rest of the year, the year’s projected total of 238 securities suits would be the second-highest number of filings in the last 20 years. The projected annualized number of securities suit filings would represent an increase of 27 percent over the 1997-2015 historical average of 188 annual filings. As discussed below, the increase in the number of filings in the first half of the year is largely due to a substantial increase in the number of federal court M&A-related securities suit filings.

 

The First Half Litigation Rate: Assuming the filing activity in the second-half of 2016 turns out to be the same as the first half, five percent of U.S. exchange-listed companies will be subject to filings this year, which would be the highest annual litigation rate since 1997. A five percent litigation rate would not only be well above the 4.0% rate in 2015 (which was itself the highest annual litigation rate in the period 1997-2015), but it would also be well above the historical annual average litigation rate during the period 1997-2015 of 3.0%. A 5 percent litigation rate would be the highest annual rate since 1997.

 

M&A-Related Litigation Activity: Much of the increase in the number of securities suit filings in the year’s first half is attributable to the increase in the number of federal court M&A-related lawsuits filings. The number of federal M&A-related securities class action lawsuits increased to 24 in the first half of 2016, compared to a range of five to nine per semiannual period during the period 2012 through 2015. The number of merger-related filings increased by 167 percent from the second half of 2015 and the merger suit filings were the highest they have been since the second half of 2010.

 

The report notes that in January 2016, the Delaware Court of Chancery rejected the disclosure-only settlement in the lawsuit relating to Zillow’s acquisition of Trulia (about which refer here). The report speculates that this Delaware Chancery Court development “may have resulted in some venue shifting of merger objection lawsuits,” which in turn would explain the increase in the number of federal court M&A-related lawsuit filings in the first six months of 2016.

 

Litigation Involving S&P 500 Companies: Historically, securities litigation activity has been concentrated on the larger companies. This pattern reversed itself in 2015, when the rate of litigation activity involving S&P 500 companies was below the rate for all listed companies. However, in the first half of 2016 the traditional filings activity patterns returned, as filings against larger companies increased. In the year’s first six months, filings against S&P 500 companies were more frequent that the historical average and at the highest annualized average since 2008. Assuming filings in the second half of 2016 equal the pace of the first half, more than 6 percent of S&P 500 companies will be sued in 2016. A 6 percent litigation rate would be greater than the rate during all of the years 2009 through 2015.

 

Litigation Against Foreign Issuers: Filings against foreign issuers increased in the first half of 2016 compared to 2015 levels in spite of the absence of filings against Chinese issuers, which in recent years has been the most common foreign companies targeted by class actions. Based on the number of foreign issuers on the U.S. exchanges, the litigation rate against foreign issuers increased in the first half of the year from 3.7 percent in 2015 to an annualized rate of 4.5 percent, which is the highest foreign issuer litigation rate since 1997. Figures 10 and 12 in the report show that over the period 1997 through 2016, both the number of filings against foreign issuers and the rate of foreign issuer litigation has steadily increased.

 

Disclosure Dollar Loss: Disclosure Dollar Loss (DDL) is the dollar value change in a company’s market capitalization between the trading day immediately preceding the end of the class period and the trading day immediately following the end of the class period.  In contrast to the increase in the number of filings in the year’s first six months, the DDL declined to $43 billion in the first half of 2016, 28 percent below the historical semiannual average of $60 billion (largely due to the absence in the year’s first six months of large “mega” filings).

 

Maximum Dollar Loss: Maximum Dollar Loss (MDL) is the dollar value change in a company’s market capitalization between the trading day during the class period with the highest market capitalization and the trading day immediately following the end of the class period. The first half MDL of $331 billion represented a 24 percent increase from $266 billion in the second half of 2015. The first half MDL was 11 percent higher than the 1997-2015 semiannual average of $297 billion.

 

Industry Sector: The industry sector with the most securities class action lawsuits in the first six months of 2016 was Consumer Non-Cyclical, which had 43 lawsuits (36%). This sector is predominately composed of biotechnology, pharmaceutical, and healthcare companies. Collectively, there were 32 lawsuits against companies in these areas, representing 26.8 percent of all first half filings.