Regular readers of this blog know that the statistics surrounding U.S. securities litigation in recent years are nothing short of alarming, including, for example, both record numbers of lawsuits and record percentages of listed companies sued. Severity trends are concerning as well. All of these trends are exacerbated by the impact of the U.S. Supreme Court’s 2018 Cyan decision, which opens companies conducting securities offerings to multiple, conflicting lawsuits in state and federal court. Given these trends, it is hardly surprising that there have been renewed calls from business groups for securities class action litigation reform. Now, Chubb, a leading global insurer, has added its voice to the calls for reform. In an interesting June 11, 2019 paper entitled “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation” (here), the company details the extent of the current securities litigation mess and sets forth a number of proposals for securities litigation reform.
The report opens with a useful — if also distressing — summary of the current U.S. securities class action litigation filing trends: the number of securities class action lawsuits filed in each of the last two years was at record levels; the annual volume of securities litigation is now at double 2014 levels; a rising tide of event-driven litigation has opened companies to securities suits based on operational setbacks; in 2018, one in twelve public companies (one in ten S&P 500 companies) was hit with a securities suit; in recent years over three quarters of merger transactions over $100 million (85% in 2018) attracted at least one merger objection lawsuit.
These litigation filing trends imply significant costs, although the extent of the costs is not always fully appreciated. Because of Chubb’s significant involvement in the management liability insurance arena, the company has relevant data with which to assess the costs associated with securities litigation. A particularly interesting aspect of the Chubb report is that it details the full panoply of costs – including in particular the defense expenses, a factor that is not always taken into account when discussing securities litigation costs, because the defense cost information typically is not publicly available.
According the report, over the last five years, the total cost of securities litigation, including settlements and attorneys’ fees, is $23 billion. Of that astonishing total, half of the amount has gone to the attorneys (plaintiff and defense).
The total amount of all the costs that goes to the lawyers is particularly startling with respect to merger objection lawsuits. The report contains a graphic (on page 4) showing that of the average of $3.8 million in total costs associated with defending and settling merger objection lawsuits during the period 2012-2017, fully 61 percent went to the attorneys or to pay plaintiffs’ attorneys’ expenses (29% to the plaintiffs’ lawyers, 23% to the defense attorneys, and 9% to the plaintiffs’ expenses), and only 39% actually went to shareholders. In merger objection cases during the period 2012 to 2017 that were dismissed, the average cost was $844,000, with 100% of the costs paid to defense attorneys. (Chubb’s prior report detailing the costs associated with the rising tide of merger objection litigation is discussed in detail here).
In the face of these alarming trends, the report advocates a number of reforms. First and foremost, the report advocates Congressional enactment of legislation overturning Cyan. Companies, the study notes, “should not have to incur the risk and costs of defending themselves in two or more different courts simultaneously.” Congress, the report suggests, should adopt legislation designating federal courts as the exclusive forum for litigation securities class action lawsuits under the federal securities laws.
The study also details a number of other reform proposals. Among other things, the report adopts prior calls by academics and the U.S. Chamber of Commerce to increase the amount of judicial scrutiny of over plaintiffs’ attorneys’ fees, to ensure that fees paid to lawyers are reasonable and proportional. The study also adopts some of the reform proposals from the U.S. Chamber’s prior report on securities litigation reform, including requiring greater plaintiff involvement in the securities litigation; requiring plaintiffs’ counsel to disclose any relationship (including in particular any referral fees paid or to be paid); and allowing fast-track interlocutory appeals of motions to dismiss denials.
The report contains a great deal of interesting information. The also contains an appendix with a range of interesting commentary from leading defense counsel and academics about the current problems with securities litigation, as well as possible solutions. In addition, the report opens with a letter written by my good friend John Keogh, Chubb’s Executive Vice Chairman and Chief Operating Officer. The report is interesting and worth reading in full. In particular the information in the report about defense costs – an element of securities litigation expense that is not always taken into account because there is so little publicly available information—is particularly interesting and valuable
As compelling as the paper is, and as alarming as the statistics in the paper are, the fact is that the case for securities litigation reform is even stronger than the report suggests.
First, in noting the terrible problems that Cyan has caused, the report focuses only on the problems Cyan has caused for IPO companies. The fact is, as I detailed in a recent post, Cyan poses serious risks of duplicative and conflicting litigation for companies conducting secondary offerings as well. Since just about any company might decide to conduct a secondary offering, Cyan represents a threat for every company, not just IPO companies.
Second, in talking about the scourge of merger objection litigation, the report focuses its analysis on the merger objection trends and costs during the period 2012 to 2017. As I detailed in yesterday’s post on this site, the trends in more recent times have shifted. Increasingly, fewer and fewer merger objection lawsuits are settled; rather, these days they are overwhelmingly likely to be voluntarily dismissed in exchange for an agreement to pay the plaintiff a “mootness fee,” in a process that lacks transparency and judicial scrutiny. These more recent practices provide even more compelling evidence that the merger objection litigation phenomenon is nothing more than an abusive racket by which a small number of second-tier plaintiffs’ firms are able to extract “go away” money from the participants in the M&A transaction.
With respect to the report’s reform proposals, I agree that the highest priority ought to be reforming Cyan. The decision is imposing enormous unnecessary costs but could the situation could easily be fixed. A few strokes of the pen in Section 22 of the ’33 Act are all that is required. Even in today’s divisive political environment, this ought to be a remedy to which most members of Congress ought to be able to agree. After all, Congress tried once before to consolidate all federal securities class action litigation in federal court, in the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Unfortunately, when it came to Section 22, Congress botched the job. The current state of affairs is clearly not what Congress intended when it adopted SLUSA. Congress should finish the job as it intended in SLUSA and eliminate the concurrent state court jurisdiction provisions from Section 22.
As for the other reform proposals in the study, I fear that they are less likely to be as compelling as the Cyan-related proposal. Others may want to debate the merits or demerits of the report’s other proposals. For myself, I would rather see if we could come up with a proposal or set of proposals that could drive a stake in the heart of the merger objection litigation curse. (None of the reform proposals in the report are specifically calculated to address merger objection litigation.)
Merger objection litigation is a huge waste of judicial resources and of shareholders’ money that produces absolutely no benefit for companies or their shareholders. Most current proposals to try to kill merger objection litigation have to do with reforming practices relating to mootness fees.
I have a different idea.
First, Congress should pass a law making it clear that there is no private right of action under Section 14. That would put an end to the federal court merger objection litigation. Plaintiffs’ lawyers might still seek to resort to state court to file merger objection suits, but with the increasing use of forum selection bylaws, companies (or at least those organized under the laws of Delaware) can designate Delaware as the forum for shareholder disputes. Delaware has made it clear that these kinds of lawsuits are not welcome. These two measures together could go a long way to eliminating the vast majority of merger objection suits. Eventually the plaintiffs’ lawyers filing these kinds of lawsuits would have to try to find another way to make a living.
Some may say eliminating the private right of action in Section 14 is too radical. Fine. If you don’t want to do that, then what is your idea for eliminating merger objection litigation? Please voice your thoughts, because we seriously need to do something about the merger objection litigation curse.
The important point here is that we need to talk about these things, now. That is the most important thing about the Chubb study. It is likely to focus attention on the current problems in the world of securities class action litigation, and it is likely to help spark discussion of what we need to do in order to address these problems. I applaud Chubb for its initiative in producing and distributing the report. One can only hope that it will help draw attention to the current alarming state of affairs in the U.S. securities class action litigation arena.