Over the course of the past few weeks, very substantial settlements were announced in two separate securities class action lawsuits, one involving the giant Internet company Alibaba and one involving the auto manufacturing company Fiat Chrysler. Given the size of these settlements, they are interesting in and of themselves. However, the settlements are interesting, separately and together, for several other reasons, among other things for the fact that both involve companies organized and based outside the U.S. but with securities trading on a U.S. exchange. Each of these settlements is described below, and a discussion of the settlements’ significance follows.
As detailed here, Fiat Chrysler Automobiles N.V. and certain of its directors and officers were sued in September 2015 in a securities class action lawsuit filed in the Southern District of New York. Fiat Chrysler is a Netherlands corporation with its principal executive offices located in London.
In their Fourth Amended Complaint (here), the plaintiffs alleged that the defendants misleadingly reassured investors that the company was substantially in compliance with vehicle safety and emissions regulations and that the company “constantly” monitored and adjusted its operations in order to ensure continued compliance, when, in reality, the plaintiffs alleged, the company “blatantly and willfully” disregarded its reporting obligations to U.S. safety regulators , and ignored the company’s obligation to report safety defects to consumers and to remedy defects. The complaint also alleged that the company used “defeat devices” and software in order to make it appear that its vehicles comply with emissions tests.
In a November 2017, Southern District of New York Judge Jesse M. Furman entered an order (here) denying the defendants’ motion to dismiss the plaintiffs’ Fourth Amended Complaint, the latest in a series of orders in which the court had denied in whole in part the defendants’ various motions to dismiss the plaintiffs’ complaints. On June 15, 2018, Judge Furman granted the plaintiffs’ motion for class certification (here).
In September 2018 and January 2019, the parties participated in mediation sessions before retired judge Daniel Weinstein. These mediation sessions ultimately resulted in an agreement in principle to settle the case for the company’s payment of $110 million. The parties’ agreement to settle the case was memorialized in an April 5, 2019 stipulation of settlement (here). The settlement is subject to court approval. As part of the settlement agreement the defendants deny their involvement in any wrongdoing. In exchange for the payment of the settlement amount, the defendants are to receive a full release. Under the terms of the settlement, class counsel will apply to the court for an award of fees not to exceed 30% of the settlement fund. On April 10, 2019, Judge Furman entered an order preliminarily approving the settlement.
In January 2015, Alibaba Group Holdings Limited and certain of its directors and officers were sued in the Southern District of New York several securities class action lawsuits. The separate lawsuits were later consolidated into a single action. On September 14, 2014, Alibaba completed a $25 billion IPO on the NYSE. The consolidated complaint was filed on behalf of a class of persons who purchased Alibaba’s American Depositary Shares (ADS) on the NYSE between September 14, 2014 and January 29, 2015.
In their consolidated complaint (here), the plaintiffs alleged that throughout the class period Alibaba failed to disclose that on July 16, 2014, just two months before the company’s IPO, Alibaba was the subject of an administrative enforcement proceeding by China’s State Administration of Industry and Commerce at which the company was “admonished” for a wide range of legal violations, to which the company allegedly admitted. The consolidated complaint alleges among other things that the proceeding, the charges, and the admissions were not disclosed to investors.
As reflected in an amended June 2016 order (here), Southern District of New York Chief Judge Colleen McMahon granted the defendants’ motion to dismiss. However, in a December 2017 summary order (here), the Second Circuit vacated the district court’s dismissal ruling and remanded the case to the district court for further proceedings.
In Fall 2018, while discovery was ongoing, the parties participated in mediation, and the parties participating in mediation again in February 2019 and March 2019, after discovery had closed. Following a March 22, 2019 mediation session, the mediator, retired Judge Layne Phillips, recommended that the case be settled for $250 million, to which the parties agreed. The parties’ agreement was memorialized in an April 26, 2019 stipulation of settlement (here), as reflected in Alibaba’s April 29, 2019 press release regarding the settlement (here). On May 1, 2019, the court entered an order (here), preliminarily approving the settlement.
Under the settlement, the defendants are to receive a complete release. The defendants also deny any involvement in wrongdoing. The settlement papers provide that the plaintiffs’ counsel will seek from the court an award of in an amount not to exceed 25% of the settlement fund.
These two separate securities suits involving different parties and different allegations, and each settled for different reason and different amounts. Just the same, there are a number of things that the two settlements have in common, that make these settlements noteworthy, separately and together.
The sheer size of the settlements is among the noteworthy aspects that these cases have in common. However, beyond the size of the settlements, there are a number of other attributes of these settlements that make the settlements of note.
First, both of these settlements involve non-U.S. companies whose securities trade on U.S. exchanges. To me this point is worth emphasizing because of the ongoing debate about the risk exposure of non-U.S. companies whose shares trade on the U.S. exchanges. During my recent trip to Europe, one of the recurring topics of discussion was the extent of securities litigation exposure on non-U.S. companies with U.S. listings. The fact is that it has long been the case (as often has been noted on this blog) that non-U.S. companies are hit with securities class action lawsuit at a greater rate than the universe of all U.S. listed companies. The frequency risk that the non-U.S. companies face is frequently overlooked; indeed, for some time non-U.S. companies have paid less for their D&O insurance than their domestic U.S. counterparts. These two recent settlements underscore the fact that the non-U.S. companies not only face a substantial frequency risk but that they also face a substantial severity risk as well.
To be sure, as I noted in a recent post (here), the global D&O insurance marketplace has recently begun to recognize that non-U.S. companies with U.S. listings should not be priced at a discount to their U.S. counterparts, particularly given that in recent years non-U.S. companies with U.S.-listed securities have seen an increase in securities class action claims frequency and in aggregate securities class action claims severity. This recent trend toward increasing D&O insurance premiums for non-U.S. companies with U.S.-listed securities was in fact the topic of an April 15, 2019 Wall Street Journal article (here). If nothing else, these two recent settlements underscore the heightened securities litigation severity risk that non-U.S. companies face that is behind the recent increase in D&O insurance premiums for non-U.S. companies with U.S. securities litigation exposure.
Second, as nine-figure settlements, the settlements of these cases both represent what are often referred to among those who monitor securities litigation as “mega settlements.” The presence or absence of mega settlements can significantly affect the aggregate level of securities settlements in a given year, as well as the average settlement level for the year. Indeed, in 2018, the presence of several mega settlements during the year meant that aggregate and average settlements were substantially above the year before. Assuming for the sake of discussion that both the Fiat Chrysler and the Alibaba settlements receive final approval during 2019, these two mega settlements could well point toward 2019 being another year with significant aggregate and average securities class action lawsuits settlements.
Third, there are several interesting unanswered questions about these two settlements. Neither the settlement documents nor the companies’ press releases say anything that I could find about the contribution toward these settlements by the companies’ D&O insurance carriers. (If anyone out there is aware of any public statement about the insurance that I overlooked, please let me know. For that matter, I would be grateful if anyone with any intel about D&O insurers’ contribution to either of these settlements would let me know.) Without knowing the extent of insurers’ contribution toward these settlements and the defense of these claims, it is hard to say one way or the other what impact these settlements might have on the insurers involved. But to the extent insurers are contributing in whole or in part, these settlements could represent a significant additional factor in the trend noted above toward increased D&O insurance pricing for non-U.S. companies with U.S. listings.
Fourth, these settlements are huge, but they are far from the largest of all time. The $150 million Fiat Chrysler settlement, as big as it is, not quite large enough to even make the top 100 U.S. securities class action lawsuit settlements. In order to break into the top 100, the settlement would have had to have exceeded $164 million. The $250 million Alibaba settlement is large enough to make the Top 100 list. $250 million is large enough to tie for 68th on the list. I point this out because in discussing the U.S. securities litigation exposure of non-U.S. companies, my non-U.S. colleagues often try to use statistics about how few of the largest settlements involve non-U.S. companies. I would think the sheer size of these settlements alone would be enough to communicate to anyone that the potential securities litigation exposure of non-U.S. companies is substantial, without regard to the list. However, in case it is important to anyone, I wanted to point out here that the Alibaba settlement makes the top 100 and the Fiat Chrysler is just below the list as well. (The December 31, 2018 Top 100 settlements list of ISS Securities Class Action Services can be found here. I discussed the list in a prior post, here.)
Fifth, the plaintiffs’ fee to be sought from the court in each case was described in the settlement papers in a “not to exceed” basis. The papers in both cases refer to amounts not to exceed a specified percentage. The not to exceed amounts in dollar terms are, respectively, $33 million in the Fiat Chrysler case, and $62.5 million in the Alibaba case. The actual amount to be awarded by the courts remains to be seen. However, it seems likely the plaintiffs’ counsel are looking at a substantial payday. Just in case you were wondering what drives this kind of litigation.
I have one more observation about the Alibaba settlement. Alibaba’s IPO is at the heart of the allegations in the lawsuit filed against Alibaba. The IPO was massive, and so in the end was the cost of resolving the lawsuit filed in the wake of the IPO. These observations seem relevant just now, when so many highly valued companies are going public. Along those lines, and coincidentally, Uber is going public later this week. Other high profile and highly valued “unicorn” companies also recently went public or hope to be going public soon. The Alibaba lawsuit is reminder that along with the benefits of having listed securities come burdens, responsibilities, and exposures.
It seems relevant here to reiterate here, as I pointed out in a recent post (here), that Lyft was hit with a securities class action lawsuit just 13 days after its IPO. As the recent Alibaba settlement shows, the litigation exposures that these high-profile and highly valued IPO companies can face are substantial. There are a number of other current factors that raise the exposure factor for IPO companies even higher than it has been in the past; among other things, the recent U.S. Supreme Court decision in Cyan confirming that state courts retain concurrent jurisdiction for liability claims under the ’33 Act (the very type of claim most likely to be filed against an IPO company) means that IPO companies face the possibility of parallel state and federal court litigation, which could be complicated and costly to resolve. All of these factors together mean that the insurance market for IPO companies is under pressure now, particularly for “unicorns” and other highly valued companies that are seeking to go public.
Those interested in seeing what some companies, including Uber, are trying to do to confront these exposures will want to take a look at Alison Frankel’s May 1, 2019 post on her On the Case blog (here). It appears that some IPO companies are continuing to include federal forum selection provisions in their bylaws, even though the Delaware chancery court has held such provisions to be invalid and unenforceable.