As I have detailed in prior posts, U.S. securities class action lawsuit filings remained at historically high levels in 2019. Among the 2019 securities suit filings were significant number of lawsuits filed against non-U.S. companies with U.S. listings. As detailed in a new report from the Dechert law firm, there was an uptick in 2019 the number of U.S. securities lawsuits filed against non-U.S. companies compared with the year prior. The Dechert report also details a number of trends with respect to filings against non-U.S. companies, as well as the trends with respects to dispositive motions in these cases. The March 11, 2020 report can be found here.
Number of Non-U.S. Companies Sued: Of the 404 federal court securities class action lawsuits filed in the U.S. during 2019, just over 15% (64 out of 404) were brought against non-U.S. companies. These cases represent an 18.5% increase over the 54 securities lawsuits that were filed against non-U.S. companies in 2018. As the report suggests, these litigation activity levels make it “imperative that multinational companies not only pay attention to recent filing trends in the U.S. but that they take proactive measures to mitigate any potential risks.”
Countries Represented Among Non-U.S. Companies Getting Sued: The three countries with the largest numbers of companies experiencing securities class action lawsuits in the U.S. in 2019 were China, the U.K., and Canada.
Of the 64 non-U.S. companies that were hit with securities suits in the U.S. in 2019, 18 have corporate headquarters or principal places of business in China. (Of these 18, 15 are incorporated in the Cayman Islands.) Twelve of the 64 companies have headquarters or principal places of business in the U.K. Nine have headquarters or principal places of business in Canada. (Of the nine Canadian companies, six are in the cannabis business.) Other countries with significant numbers of companies experiencing U.S securities suits are Ireland (4); Israel (2); and Switzerland (2).
Size of Non-U.S. Companies Getting Sued: The non-U.S. companies hit with U.S. securities suits in 2019 included both small and large companies. Sixteen of the 64 non-U.S. companies experiencing securities suits in 2019 had market caps under $250 million, while 20 of the 64 had market caps over $5 billion. (All dollar amounts in USD.)
Most Frequent Industry Sued Among Non-U.S. Companies: Among the 64 non-U.S. companies sued in U.S. securities class action lawsuits in 2019, the industry with the largest number of securities suits was the biotechnology and drug industry, which had 18 of the 64 lawsuits. Software and Programming had 5, Business Services had three, and Communications services had three. The remaining 35 companies were distributed across a wide range of other companies.
Most Active Plaintiffs’ Firms: During 2019, the law firm that filed the most lawsuits against non-U.S. companies was The Rosen Law Firm, as was also the case in 2018. The Rosen law firm filed twenty first-in-court filings against non-U.S. issuers and was appointed as lead counsel in 13 cases. The Pomerantz law firm, with 12 first-in-court filings, had the second-most number of filngs against non-U.S. comapneis in 2019, and Glancy Prongay & Murray lawsuits followed with seven first-in-court filings against non-U.S. companies. With respect to lead counsel appointments, Levi & Korsinsky was selected seven times, while the Pomerantz law firm and the Robbins Geller law firm were each appointed as lead counsel six times.
Types of Allegations Against Non-U.S. Companies: The report notes a number of significant substantive trends among the various lawsuits filed against non-U.S. companies in 2019:
- Six of the 2019 securities suits against non-U.S. companies involved allegations that the companies had misrepresented the prospects of U.S. Food and Drug Administration (FDA) approval for drugs or devices or had misrepresented compliance with FDA rules and regulations.
- Three of the non-U.S. companies hit with 2019 securities suits was alleged to have failed to disclose alleged violations of Chinese government regulations.
- Three of the securities suits against non-U.S. companies involved allegations related to alleged underlying bribery or corruption scheme.
- Seven of the non-U.S. companies hit with securities suits in 2019 were alleged to have failed to disclose conflicts of interest that were relevant to investors.
Dispositive Motions During 2019: During 2019 and early 2020, court issued relatively fewer rulings on dispositive motions than had been the case during 2018 and early 2019. During 2019 and with respect to lawsuits filed against non-U.S. issuers filed in 2018, there were only seven dispositive motions rulings; four were voluntarily dismissed; and one was dismissed pursuant to a stipulation between the parties. With respect to 2019 filings, there were no dispositive rulings in 2019, while eight were voluntarily dismissed, and one was dismissed pursuant to a stipulation between the parties.
Of the seven dispositive rulings during 2019, two of the cases involved dismissals in their entirety on international comity grounds; and five of the seven filed in the Southern District of New York were dismissed on different grounds (inclusive of one case dismissed in early 2020). While the dispositive rulings include a number of dismissals, the report notes while the rulings may be instructive it is at the same time “difficult to discern trends from just seven dispositive decisions.
Commentary on the Toshiba Case: The report includes commentary on the most recent decision in the U.S. securities class action lawsuit pending against Toshiba. (The recent decision is discussed in detail here.) The decision, the report notes, “demonstrates that even companies with unsponsored ADRs trading in the U.S. can be subject to U.S. securities laws” and that “it is not enough to simply defend the matter by arguing that the company did not sponsor the ADRs.) For a recent guest post discussing at greater length the Toshiba ruling’s implications for non-U.S. companies, please refer here.
Conclusion: The report concludes by saying that “a company does not need to be a U.S. issuer to face potential securities class action liability in the United States.” Indeed, as the report itself shows, “non-U.S. issuers remain targets of securities class action suits even when the alleged actions occurred abroad and even with unsponsored ADRs trading the United States.” The report ends with a short list of specific steps companies can take to try to mitigate their risk.
Discussion: The potential exposure of non-U.S. companies with listings in the U.S. to U.S. securities class action litigation has often been underappreciated, particularly outside the United States (a point that I have made in detail in earlier posts). But while I do believe advisors to non-U.S. companies with U.S. listings should be more mindful of the companies’ U.S. securities litigation exposure, there is a further point that I also think needs to be appreciated.
While non-U.S. companies are subject to U.S. securities suits in significant numbers, it may not be the case, or at least it may not always be the case, that the reason that non-U.S. companies are getting hit with U.S. securities suits is because they are non-U.S. companies.
Along those lines, I think it is important to note that the industry most significantly represented with U.S. securities suits among non-U.S. companies is biotechnology and drug industries. These are also the industries that are most frequently represented in U.S. securities suits against domestic U.S. companies. Care should be taken when assessing the risk of non-U.S. companies to take into account the fact that industry may be at least as important, if not more important, in identifying securities litigation risk than is the country of domicile of principal place of business.
To put it another way, Irish pharmaceutical companies or Israeli high tech companies may not be getting sued because they are Irish or Israeli, but because they are in industries that are more susceptible to securities litigation, regardless of home country. My concern is that there is not “double counting” involved in assessing the securities litigation risk of these kinds of companies.
All of that said, U.S.-listed Chinese companies may represent their own category of risk. The number of 2019 lawsuits filed against Chinese companies were the allegation was that the company had not disclosed violations of Chinese government regulations suggests that there may be an additional country specific consideration involved with these companies.