In conjunction with my July 2016 visit to Munich for meetings at Munich Re, I sat down for an interview with Christian Furhmann, Chief Executive Manager at Munich Reinsurance Company. The interview, which Munich Re previously published here, is reprinted below. I would like to thank my friends at Munich Re for their permission to republish the interview on this site.
On 14 July 2016, Kevin LaCroix, author of the famous D&O-Diary, visited Munich. I had a chance to interview him on latest D&O liability trends and their consequences for insurers.
Christian Fuhrmann: How would you describe the development of securities litigation in the US over the last few years?
Kevin LaCroix: First of all, you have to keep in mind that the number of securities class action lawsuits filed in the U.S. is often event-driven. For example, the number of filings spiked in the immediate aftermath of the global financial crisis. However, there have been some definite filing trends in recent years:
– The frequency of securities class action lawsuits has increased every year since 2011. In 2015, the likelihood that a U.S.-listed company would experience a U.S. class action lawsuit was at its highest level since the U.S. securities laws were substantially revised in 1995. This development was largely driven by the number of lawsuits filed against companies that have recently completed initial public offerings (IPO) and the number of lawsuits filed against U.S.-listed companies domiciled outside the U.S.
– Certain industries were particularly susceptible to securities lawsuits over the last few years. Life sciences companies were the most frequent targets of U.S. securities lawsuits, followed by high tech companies. Lawsuits against these two industry sectors accounted for nearly 40 percent of all U.S. securities class action lawsuit filings in 2015.
– The severity trends are more variable. Both average and median securities class action lawsuit settlements are significantly affected by the size of the claimed damages and the size of the defendant company’s market capitalization. In other words, when plaintiffs target larger companies, the size of the average and median settlements tends to rise as well. The reverse is also true; that is, if smaller companies predominate among the securities lawsuit targets, average and median settlements fall. In 2015, the lawsuit filings generally targeted smaller companies, while the S&P 500 companies (the largest U.S. companies) had a securities class action frequency rate that was materially lower than that of U.S.-listed companies overall. This suggests that upcoming settlements are likely to be lower as these lawsuits move toward the settlement stage.
How many of the claims filed were successful?
Not all cases filed actually make it to the settlement stage. The trend in recent years has been toward a higher dismissal rate. In each of the years 2011-2015, motions to dismiss were granted in over 50% of cases filed. This might be interpreted to suggest that the increase in the number of filings has been driven at least in part by an increase in the number of non-meritorious cases.
Is securities litigation still mainly a US phenomenon?
Due to changes in the local law, securities class action litigation are now well-established in other countries as well, particularly in Canada and Australia. In Europe, the most significant development in that regard is the March 2016 settlement of Fortis investor claims for €1.204 Billion under the Dutch collective settlement procedures. This significant settlement represents a watershed event in the development of European collective settlement actions. Not surprisingly in light of the magnitude of several recent corporate scandals, several groups of aggrieved investors have initiated action under the Dutch collective settlement act to recover investment losses. The car emissions scandal has led to the filing of collective shareholder actions in Germany as well. Thailand and India have also recently adopted legislation that will facilitate collective investor actions.
Will the US remain the most important market for securities disputes or will other jurisdictions take over?
Some commentators have already raised the question whether jurisdictions other than the U.S. will become the preferred forum for collective investor actions. Australia was suggested in this context, as well as – in light of the Dutch collective settlement procedures – the Netherlands.
In which way are securities litigation trends influenced by new litigation funding mechanisms and new actors in that field?
One of the most significant developments on the litigation landscape in recent years has been the growth of third-party litigation funding. This phenomenon is already well-established in Canada and Australia, and it is becoming increasingly important in the U.S. as well. The litigation funds themselves have substantial assets, with hundreds of millions of dollars available to invest. They have been very important actors in a number of the most significant collective shareholder action developments, particularly outside of the U.S., often working in conjunction with U.S.-based plaintiffs’ securities class action law firms. The activity of these funding firms is likely to encourage future litigation frequency.
How about regulatory changes? What are the implications of the so-called Yates Memo?
Regulatory developments can be a significant contributor to D&O claims activity, since regulatory claims and enforcement actions often lead to follow-on civil litigation. In the U.S, one of the most important regulatory developments is the September 2015 memorandum from Deputy U.S. Attorney General Sally Yates. Basically, the memo says that in order to receive any credit for cooperating, a company subject to an agency investigation must divulge all information relevant to the wrongdoing of individual persons at that company. The obvious implication of this is a significant potential conflict between the interests of companies and their employees. The company has significant incentives to provide information suggesting individual wrongdoing. Individuals at the company, unsure of whether they might be targeted, might therefore want their own separate legal counsel from the outset of the investigation. It is likely that this will make investigations costlier, as well as more difficult to resolve. This could have negative implications for the resolution of parallel civil litigation as well.
Cyber risks are a “hot topic“ in just about any context nowadays. What about D&O claims related to cyber incidents?
A number of commentators, including me, have suggested the possibility that cybersecurity concerns could lead to litigation against companies’ directors and officers. There have been a number of shareholder derivative lawsuits filed against the boards of companies involved in significant data breaches. However, some of these lawsuits were recently dismissed. For some months now, no cybersecurity related D&O lawsuits have been filed, despite several high-profile data breaches in the interim. Yet, it is still too early to say that there isn’t a risk of cybersecurity-related D&O claims. The risk of cybersecurity-related regulatory actions remains, and regulators have been interested in pursuing regulatory actions against companies they feel have not taken sufficient steps to protect private or sensitive information. In addition, just because the plaintiffs’ lawyers have not been successful so far, does not mean that they won’t eventually find a way to pursue claims in a more successful way. They certainly have every incentive to continue to try.
Looking ahead: Apart from what we already discussed, which trends are likely to shape the future of D&O liability over the next years?
As regulators around the world become more active and increasingly cooperate across borders, companies will face a wide range of regulatory exposures. Along with the increased risk of regulatory enforcement actions comes the risk of follow-on civil actions. These risks likely will be greatest with respect to anti-corruption enforcement, competition and anti-trust enforcement, as well as environmental enforcement. The Brexit and the upcoming U.S. presidential election could have an impact as well. Companies operating in an uncertain and changing environment could find themselves facing an increasing host of issues that could lead to D&O claims.