According to the latest annual securities litigation survey, securities class action lawsuit filings were at “record” levels in 2016. A surge of federal court merger objection lawsuit filings during the year accounted for much of the activity, but even so-called “traditional” securities lawsuit filings were at elevated levels, according to report, which was release jointly by Cornerstone Research and the Stanford Law School Class Action Clearinghouse. The January 31, 2017 report, entitled “Securities Class Action Filings: 2016 Year in Review,” can be found here. Cornerstone Research’s and the Stanford Law School Class Action Clearinghouse’s January 31, 2017 press release can be found here.
Number of Filings: According to the report, there were a record 270 securities class action lawsuits filed in 2016, which is 44 percent greater than the number in 2015 (188) as well as the average number of class action lawsuits filed during the period 1997-2015 (also 188). The filing activity increased as the year progressed; the number of filings in the second half of 2016 was 21 greater than in the year’s first half. The filing activity in the second half of 2016 was the highest for any semiannual period between 1996 and 2016.
Merger Objection Lawsuits: Much of the increase in 2016 filing activity is attributable to the increase in federal court merger objection filings; there were 80 federal court merger objection lawsuit filings during the year, more than four times greater than the number in 2015 (as plaintiffs’ lawyers shifted their filings from state court to federal court, as a result of Delaware state court rulings hostile to the kind of disclosure-only settlements that largely characterize the resolution of these cases). The 80 federal court merger objection lawsuit filings during 2016 was the highest number since Cornerstone Research first began separately tracking the M&A lawsuits in 2009.
Litigation Exposure: The litigation exposure of U.S. exchange-listed companies was greater than in any year since 1996, when the securities laws were significantly revised. If the merger objection lawsuits are taken into account, the likelihood during 2016 that any listed company would get hit with a securities lawsuit was 5.6%. Even if the merger objection lawsuits are disregarded, the chance that a U.S. listed firm be sued in a “traditional” securities lawsuit was 3.9%, compared to 3.5% in 2015 and compared to a 1997-2015 average of 2.8%. The percentage of the likelihood of a traditional lawsuit has increased every year since 2011. During 2016, approximately one in 25 companies listed on U.S. exchanges was the subject of a “traditional” class action lawsuit.
California State Court Securities Suits: As I have previously noted on this blog, an increasing number of securities class action lawsuits filed against IPO companies are being filed in state court. The report contains some useful statistics regarding the lawsuits that have been filed in California state court in recent years. According to the report, there were a total of 18 of these California state court securities suits filed in 2016, including 7 that also had a parallel federal court suit, and 11 that were filed only in state court. These 2016 figures compare to a 2010-2015 annual average of five California state court securities suit filings, including an average of 2 with parallel federal court actions and 3 filed in state court alone. The increase in the number of California state court filings may be attributable to the fact, documented in the report, that only 33 percent of California state court Section 11 suits were dismissed during the 2010-2015 period, compared to 54 percent of federal court Section 11 suits.
Foreign Companies: The number of filings against foreign issuers increased in 2016 to 42, from the 34 filed in 2015 and the historical annual average of 23 filings. The filings against foreign issuers represented 15.5% of all filings, which actually represented a decrease from 2015 (when these suits represented 18% of all filings) despite the increase in the number of suits against foreign companies; the decrease in the percentage of total filings is largely because few merger objection suits involve foreign companies.
Industry Focus: The number of filings in the Pharmaceutical, Biotechnology, and Healthcare subsectors increased for the fifth consecutive year and the 80 lawsuits against companies in these industries during 2016 more than doubled the 1997-2015 historical average of 32. The 80 lawsuits also represented an 86 percent increase over the 43 suits filed against companies in these industries in 2015.
S&P 500 Companies: Of companies in the S&P 500 at the beginning of 2016, about one in 12 companies (8.4%) was a defendant in a securities class action lawsuit during the year, compared to 2.6% in 2015 and the annual average during the period 2001-2015 of 5.5%.
The Disclosure Dollar Loss (DDL)– that is, the change in a firm’s market capitalization between the trading day preceding the end of the class period and the trading day following the end of the class period – increased by 2 percent during the year, but was only 89 percent of the annual average.
The Maximum Dollar Loss (MDL) – that is, the change in a firm’s market capitalization from the trading day during the class with the highest market capitalization to the trading day following the end of the class period – increased 122 percent from 2015 to 2016 and exceeded the 1997-2015 average by 38%. 2016 was the first year since 2008 that the MDL exceeded the historical average. The increase in MDL was largely attributable to the number of mega filings during the year.
Conclusion: The report is detailed and interesting, and worth reading at length and in full. The report’s findings and observations about the 2016 filings and filing trends and patterns generally are largely consistent with my own findings and observations as detailed in my year-end analysis of the 2016 securities suit filings, which can be found here.