One of the more interesting story lines in the world of securities class action litigation over the past several years has been the rise of class settlement opt outs, whereby various claimants representing significant shareholder ownership interests select out of the class suit and separately pursue their own claims – and settlements. The class action opt-out litigation emerged as a significant phenomenon in the litigation arising out of the era of corporate scandals a decade ago. In an October 6, 2016 report entitled “Opt-Out Cases in Securities Class Action Settlements” (here), Cornerstone Research and Latham & Watkins LLP take a look what the statistics show about securities class action opt-outs. This recent report updates the findings in their 2013 study, based on updated data reflecting case settlements during the period 2012 to 2014. Cornerstone Research’s October 6, 2016 press release regarding the report can be found here.
With the addition of the settlements during the more recent period, the authors’ settlement database now contains 1,458 settlements entered between 1996 and 2014. The data show the percentage of settlements involving opt-outs varies quite a bit from year to year, from a high of 10.6% of all settlements in 2013 to a low of zero percent of settlements, which happened during several years in the study (most recently in 2014). In total, there have been 48 settlements in which class members have opted out of the settlement, representing 3.3% of all settlements.
Significantly, the authors were unable to identify a discernable increase in the preponderance of opt-outs over time. The largest percentage of settlements involving opt-outs occurred the years 1998 and 2013 – contrary to my own perception that the number of settlements involving opt-outs had peaked in the era of corporate scandals in the early 2000s.
The likelihood that a class member might opt out of a settlement is much greater for larger settlements – or as the authors put it, “as class action settlements get larger the propensity of plaintiffs to bring opt-out cases also increases.” Large class action settlements “represent a disproportionate percentage of cases that ultimately face an opt-out.”
This pattern is most evident for settlements of $500 million or greater. Between 1996 and 2014, 11 of 19 cases (57.9%) with settlements of over $500 million involved opt-outs. During the period 2012-2014, three of four settlement of $500 million or greater involved opt-outs.
By contrast, during the period between 1996 and 2011, 11 percent of cases with class settlements of $20 million or greater had opt outs, though between 2012-2014 almost 17 percent of class action settlements has associated opt-outs.
However, for class action settlements below $20 million during the period 199-2014, the opt-out rate was only 1 percent.
The most common opt-outs are pension funds. Pension funds were involved 21 of the 43 opt out cases during the period, and other institutional investors (mutual funds, hedge funds, and other investment companies) were involved in 20 opt-out cases.
In terms of what the class members who opt out of the settlement actually recover, the authors were able to identify 21 instances where the opt-outs’ settlement or judgment amount was publicly available. The average total value of opt-out settlements was $85.4 million, representing almost 13 percent fof the average class action settlement amount. However, owing to the effect on the average of the larger opt-out settlements, the median settlement amount may be more meaningful; the media value of opt-out settlements was only $3.9 million or slightly less than 4 percent of the related class action amount.
The largest opt-out settlement arose in the Time-Warner settlement, where the $764 million in opt-out settlements represented almost 31 percent of the class action settlement. The largest opt-out settlement as a percentage of the class action settlement involved Quest Communications International Inc., where the $411 opt-out settlement was 92 percent of the final total class action settlement amount.
As the authors note, class members may have certain incentives to try to opt-out. The most obvious is that the opt-out plaintiff may believe that by opting out and acting independently, the claimant may do better than remaining as a class member. It is true to at least a certain extent “the mere threat of an opt-out can be a powerful negotiating tool for plaintiffs.”
However, the opt-outs’ hoped-for benefit “may or may not materialize.” For starters, for opt-outs, the percentage of their recovery that they have to pay for attorneys’ fees may offset any potential benefit. In addition, based on the Second Circuit’s holding in the Indy Mac case, which held that the filing of a class action complaint does not toll the relevant statutes of repose in the securities laws, may bar the opt-outs’ attempt to proceed separately (the authors identify at least two examples in which plaintiffs’ separate opt out actions during the period 201-2014 were barred by the principles reflected in the IndyMac decision).
The authors conclude by noting that litigants “should consider the impact of opt-out cases, as these settlements can add additional costs to the class action settlement.” This consideration may be particularly noteworthy for companies that have significant pension fund and other institutional investor representation among its investors.
These issues may be significant for risk selection purposes when companies are structuring their D&O insurance. During the period 2012-2014, 17 percent of all settlement of $20 million or greater involved opt-outs. If companies seeking to settle a securities class action lawsuit must also deal with settlement opt-outs, that means that the company will incur additional defense expenses and may require additional amounts in order to resolve the separate opt-out claims. Insurance buyer seeking to decide for themselves how much insurance is enough will want to consider not only the likely range of settlements for a serious securities lawsuit against the company, but it will also want to consider the possible additional costs and settlement amounts that might be associated with separate opt-out litigation.