The torrid pace of securities class action lawsuit filings continued in the first half of 2018, coming in at a rate only very slightly below last year’s record-setting pace. While a significant number of the first half filings are attributable to merger objection lawsuit lawsuits, the number of traditional filing alone during the first half of the year were well above historical levels. If the first half’s pace continues in the second half of the year, the projected number of year-end filings would approach last year’s elevated total.
The Total Number of Filings: There were 204 federal court securities class action lawsuit filings in the first half of the year, which is slightly below the 224 lawsuits filed in the first six months of 2017. The filing pace slowed slightly in the second quarter of 2018 compared to the first quarter; there were 112 securities lawsuit filings in the first quarter, compared to 92 in the second quarter.
The 204 securities suit filings in the year’s first six months projects to a year-end total of 408 filings, which would be slightly below last year’s filing total of 412. The projected year-end total of 408 filings is more than double the 1996-2016 annual average number of filings of 193.
Though the filing pace in the first half of 2018 is slightly below the pace in the first half of 2017, the pace in the year’s first six months is much greater than historical filing levels for equivalent half-year periods. During the period 1996-2016, the semiannual period with the highest number of securities suit filings was the second half of 2016, when there were 148 filings. In other words, the number of lawsuits filed in the year’s first six months is greater than in any six month period other than during the record-setting year of 2017.
Merger Objection Lawsuits and Traditional Filings: A substantial number of the 1H18 filings were merger objection lawsuits. Readers will recall that due to the Delaware judiciary’s hostility to the disclosure-only deals that usually characterize the settlements of merger objection suits, plaintiffs’ lawyers began filings these suits in federal court rather than in state court. Of the 204 securities suit filings in the first half of 2018, 83 (or about 40.6%) were merger objection lawsuits.
While a substantial number of the first half filings were merger objection cases, there nevertheless were significant numbers of traditional lawsuit filings in the first six months of the year. There were 121 traditional cases filed in the first half, which projects to an annual total of 242 lawsuit filings. The traditional filings alone project to be well above the long-term annual average number of filings of 193.
Place of Filing: The 204 first half securities suits were filed in 41 different federal district courts. As has been the case in the past, the greatest numbers of filings were in district courts in California and New York. However, there were some other districts that also saw substantial numbers of filings.
The district with the most filings in the first half of the year is the Northern District of California, with 38. With the filings in the other California districts – 13 in the Central District of California; 3 in the Southern District of California; and 1 in the Eastern District of California – the total number of filings in the California federal district courts for the year’s first half is 55, representing about 27% of all first half filings.
The Southern District of New York had the second highest number of filings in the year’s first half, with 29. With the filings in the other district courts in New York – 8 in the Eastern District of New York, 1 in the Western District of New York, and 1 in the Northern District of New York – there were a total of 39 securities suits filed in federal district courts in New York in the first six months of the year, representing slightly less than 20% of all filings.
There were a total of 94 securities suits filed in the federal district courts in New York and California together in the year’s first half, representing 46% of all of the securities suit filings in the first six months of the year.
There were other district courts with significant numbers of filings. For example, there were 20 securities suit filings in the District of Delaware in the first half. (18 of these 20 filings were merger objection lawsuits.) There 15 filings in the year’s first half in the District of Jersey. No other federal district had double-digit numbers of filings in the first half.
First Half Suits by Industry: The first half suits were filed against a broad range of kinds of companies. The 204 companies sued in securities suits in the first half represented 102 different SIC Code categories. There were certain industries that saw concentrated numbers of filings. For example, there were 25 suits filed in the first half against companies in the 283 SIC Code Group (Drugs). There were an additional 6 lawsuits filed against companies in the SIC Code Group 384 (Surgical, Medical, And Dental Instruments and Supplies). There were a total of 31 lawsuits filed in first half against life sciences companies in these two categories together, representing 15% of all first half filings.
There were 12 lawsuits filed against companies in the 737 SIC Code Group (Computer Programming, Data Processing, And Other Computer Related Services). There were an additional 7 suits filed against companies in SIC Code Category 3674 (Semiconductors), bringing the total of lawsuits in these high technology categories to 19, representing slightly less than 10 percent of all filings.
There were a total of 50 lawsuits filed against companies in these two life sciences and high technology categories, representing just under 25% of all first half lawsuit filings.
Filings Against Non-U.S. Companies: A number of the first half suits were filed against non-U.S. companies. There were a total of 25 securities suit filings against non-U.S. companies, representing about 12% percent of all first half filings. The percentage of lawsuits against foreign companies was down compared to comparable percentage in recent years. In several recent year, the filings against foreign companies have approach 20% of all securities suit filings.
These 25 lawsuits against foreign companies were filed against companies from 15 different countries. The country with the highest number of securities suit filing in the first half of the year was China, which had five of first half filings.
IPO-Related Lawsuits: Six of the first half federal court securities suit filings involved IPO-related allegations. Of the six, four involved companies that had completed their IPOs in 2017, and two involved companies that had completed their IPOs in 2018.
Litigation Rate: Readers will recall that analysis of the 2017 securities class action lawsuit filings showed that the rate of litigation (that is, the ratio of the number of lawsuits to the number of U.S.-listed companies) was more than 8 percent, and that even the rate for traditional lawsuits alone was more than 4 percent and nearly double the long term annual average rate. Based on the pace of filings, it looks as if this elevated litigation rate has continued in 2018. In other words, the chance of an individual listed company experiencing a securities class action lawsuit is significantly elevated compared to long-term historical norms. This fact has significant implications for companies and their insurers. In recent months, the D&O carriers have been bemoaning their poor loss experience and claims results, exacerbated in 2016 and 2017 by significantly increased numbers of federal court securities class action lawsuits. Given the continued elevated pace of securities class action lawsuit filings in the first half of 2018, the insurers’ recent adverse loss experience seems likely to continue in 2018.
The trend toward greater securities class action litigation frequency is now well-enough established that it could be argued that long-term securities litigation frequency risks have changed categorically. This means not only that publicly traded companies not only now face an overall greater risk of securities class action litigation than in the past, but it also means that their D&O insurers also may be facing a significantly increased litigation frequency risk as well. To the extent that insurers’ pricing models are not taking these increased risks into account, their pricing calculations may result in premium charges that come up short.
At the same time, however, the analysis above suggests that the increased risks are not distributed evenly throughout the universe of companies. Clearly, some companies represent a greater risk than other companies. As the current heightened securities litigation frequency levels, it is increasingly important for D&O underwriters to understand the differences in risk among all public companies and to segment the risk accordingly.
A Final Note about Data Sources and Methodology: The data used in the analysis above were compiled from a variety of sources, including media outlets (such as Bloomberg and Yahoo Finance), online legal news services (including Law 360, Justia, and Advisen), and other online data services (including the Stanford Law School Securities Class Action Clearinghouse). In addition, during the course of the year, I audited my lawsuit dataset by comparing it to those being compiled by other litigation monitoring services.
In tallying the number of securities class action lawsuits, I count each company sued for the same basic set of allegations only once, regardless of the number of complaints filed, which is different from the methodology used by other prominent securities litigation monitoring sources. At least some of these services count each complaint separately (at least if the complaint is filed in a separate judicial district), unless and until the separate lawsuits are consolidated.
With respect to the merger objection lawsuits, it is important to note that I counted a lawsuit in my tally only if the case was filed a class action lawsuit and only if it alleged a violation of the federal securities laws. By the same token, I did not count lawsuits in my tally if they were not filed as class action lawsuits. I also did not count a lawsuit in my tally if the complaint did not allege a violation of the federal securities laws. This is an important consideration in comparing my tally to other published tallies, as at least some of the other public sources include federal court merger objection lawsuits in their tallies even if the complaints allege only breaches of fiduciary duty and do not allege a violation of the federal securities laws.
The different methodologies used will not only result in different litigation counts, but it could also result in differing analytical conclusions. It is very important to understand the methodologies used by the different prominent securities litigation monitoring services and to understand how the methodologies used will affect analyses of the data.