According to NERA Economic Consulting’s latest annual securities litigation report, there were a “record number” of securities class action lawsuit filed in 2016. The January 23, 2017 report, which is entitled “Recent Trends in Securities Class Action Litigation: 2016 Full-Year Review” (here), attributes the growth in filings during the year largely to the number of federal court merger objection lawsuits, which more than doubled from the previous year. NERA’s January 23, 2017 press release about the report can be found here.
The Number of Securities Suit Filings: There were 300 federal court securities class actions filed in 2016, according to the NERA report, which represents the highest annual number of federal court securities class action lawsuit filings since 2001, a year in which the number of filings was distorted by the filing of the filing of 310 IPO laddering cases. If the IPO laddering cases are taken out of the analysis, the 300 securities class action lawsuit filed in 2016 represents the highest annual number of securities suit filings since the passage of the PSLRA.
The 300 securities suits filed during 2016 represents a 32% increase over the 228 filed in 2015 and a 36% increase over the 2011-2015 average annual number of securities suit filings of 221. The 300 filings also represent a 38% increase over the post-PSLRA annual average number of filings of 217.
Impact of Merger Objection Suits: The “considerable growth” in securities suit filings in 2016 was “driven by dramatic growth in federal merger-objection cases,” as well as by “steady growth” in the number of traditional securities cases.
According to NERA, the number of federal court merger objection lawsuits filed in 2016 doubled to 88 (representing about 29% of all filings), up from 44 in 2015 (representing about 19% of all filings). The report also notes that the number of federal court merger objection lawsuits increased even though there was a 13% year-over-year drop in the number of merger deals involving U.S. companies.
The report attributes the increase to a shift in filing forum for merger suits following the January 2016 Delaware Chancery Court decision in the Trulia case (about which refer here), in which the court evinced its strong skepticism of disclosure-only settlements for merger objection suits.
While the increase in the number of merger objection suits was a significant factor in the heightened number of securities suit filings in 2016, it was not the only factor. According to NERA, the number of traditional securities suit filings in 2016 (197) represented a 23% increase in the number of traditional securities suit filings in 2015, and also represented the fourth consecutive annual increase in the number of traditional suit filings.
Rate of Securities Litigation: The increased numbers of securities suits in 2016 were filed against a universe of U.S.-listed public companies that is quite a bit smaller than was the case earlier in the post-PSLRA era. According to the report, there were 5,743 public companies in 2016. While this represents an increase over the 5,283 public companies in 2015, it is still well below the more than 6,000 listed companies in 2006, and the more than 8,700 companies in 1996. With more lawsuits being filed against a smaller pool of listed companies, the likelihood than any individual company will be hit with a securities suit has increased.
In 2016, approximately 5.2% of all listed companies were involved in a federal securities class action lawsuit, well above the 3.2% average probability for the period 2000-2002, as well as above the 4.3% probability in 2015.
However, when the merger objection lawsuit filings are taken out of the analysis, the figures look slightly different. The average probability of a “traditional” securities suit was only 3.4% in 2016, only slightly higher than the average probability during the 2000-2002 period.
Filings Against Foreign Domiciled Issuers: The NERA report contains in interesting analysis of filings against U.S.-listed foreign domiciled issuers. The report shows that the number of foreign issuers declined from 17.1% of all issuers in 2015 to 13.4% of all issuers in 2016, but that the percentage of all securities suit filings against foreign issuers also fell, from 14.4% of all filings in 2015 to 8.5% of all filings in 2016. The report notes that this decline in the percentage of all suits filed against foreign companies coincides with the 50% increase in the proportion of filings involving merger objection claims, which less frequently target non-U.S. companies.
Because such a high percentage of 2016 filings involved merger objection suits, and because (as the NERA report noted), foreign issuers usually are not involved in these kinds of claims, I thought it would be useful to compare the filings against foreign issuers not against the total number of all securities suits, but rather against only the “traditional” securities suit filings. Using the NERA’s figures for the number of traditional suits, it looks to me as if the suits filed against foreign issuers represented about 18.9% of all traditional filings in 2105 and about 12.6% of all traditional filings in 2016, in each case much closer to the percentage that of all listed companies that the foreign issuers represent (17.1% and 13.4%, respectively).
Investor Losses: The NERA report uses a specific measure to track the aggregate amount of investor losses that the annual lawsuit lawsuits represent, based on the aggregate amount that investors lost from buying the defendants’ stock rather than investing in the broader market during the class year. According to the report, this aggregate figure “jumped” to a record high of $468 million, more than 2.75 times the 2015 rate and greater even than the level of losses in 2008, at the height of the financial crisis. Claims related to regulatory investigations (particularly those pertaining to antitrust allegations, about which refer here and here) made up a record 44% of the aggregate investor losses.
Industry Sectors: In 2016, 28% of securities cases were brought against firms in the Health Technology and Services sector. There were 85 filings in the Health Technology and Services sector, almost doubling from 2015 levels. Other than the Finance sector during the year 2007 through 2009, filings have not been so concentrated in a single sector since 2005.
Number of Cases Settled or Dismissed: There were a total of 262 cases resolved in 2016 either through dismissal or settlement, the highest annual number of case resolutions since the enactment of the PSLRA. This annual total of case resolutions is largely a result of the significant number of dismissals (149), again the highest annual total since the PSLRA. In fact, 2016 was the first year since the PSLRA that the number of dismissals exceeded the number of settlements.
Half of the cases dismissed in 2016 were done so in the first 11 months after filing, the fastest dismissal pace since the enactment of the PSLRA, and more than 35% lower than the five year trailing average dismissal time of 17 months. The faster dismissal time during 2016 was largely due to the merger objection suits, which while representing only 28% of all cases dismissed, made up 52% of the cases dismissed in less than 11 months.
Average and Median Settlements: Largely as a result of two mega settlements, the average securities class action settlement in 2016 was $72 million, more than 35% greater than the 2015 inflation-adjusted 2015 average settlement of $53 million. Excluding the cases that settled for more than $1 billion, the average securities lawsuit settlement in 2016 was $43 million, about 19% below the 2015 average of $53 million. (The two 2016 billion dollar settlements arose in the Household International Case and the Merck case.)
While a few large settlements drove up the average settlement value in 2016, many small settlements kept the median settlement value relatively stable. The median settlement value in 2016 increase by more about one-fifth to $9.1 million, up from an inflation-adjusted 2015 median settlement value of $7.4 million. Interestingly, of all cases that were resolved through settlement in 2016, more than half of all settlements are below $10 million (as has been the case for several years).
Impact of Counting Methodology: It is important to note particular aspects of the counting methodology NERA uses may account in part for differences between NERA’s tallies and tallies reported in other published accounts (including my own). First, NERA separately counts each lawsuit filed against the same defendant with the same allegations filed in different jurisdictions, unless or until the suits are consolidated in a single jurisdiction; other public sources (including this blog) count these suits only once. Second, NERA’s tally includes not only so-called “traditional” securities class action lawsuits and merger objection lawsuits, but also includes what it calls “other” lawsuits (which includes breach of fiduciary duty, management self-dealing, and violation of security holder contractual right). NERA includes 15 of these “other” suits in its 2016 tally, which would account for much of the difference between the tallies NERA has reported and tallies reported in other sources.
Though the counting methodologies used results in different tallies, the various tallies are directionally consistent and largely support the same conclusions. My own tally, including a description of the methodology used, can be found here.