As prior reports have noted (for example, here), securities suits filings against companies based outside outpaced the filing activity levels overall in the year’s first half. A new report from AIG takes a closer look at the first half 2020 U.S. securities suit filings against non-U.S. companies, and concludes among other things that the first half filings could result in the highest annual total of lawsuits against foreign filers in years. The AIG report, entitled “US Securities Class Actions: International US-Listed Companies/H1 2020” can be found here.
The AIG report is based on data from Cornerstone Research. The report shows that during the year’s first six months, there were 35 core filings (that is, securities class action lawsuit filings excluding merger objection lawsuits) against non-U.S. companies with U.S. listings. (This filings tally does not include the several securities class action lawsuits that were filed against a number of cryptocurrency companies in April.) The 35 lawsuits filed against non-U.S. companies in the year’s first half is well above the first-half 2019 total of 29 lawsuits against foreign filers.
There were a total of 111 core filings in the year’s first half, meaning that the 35 core filings against non-U.S. companies represented 31.5% of all first half core filings. This rate of core litigation filings against foreign filers is well above the trailing five-year average annual foreign filer litigation rate of 16%. Indeed, Cornerstone Research itself said in its own report on the first half U.S. securities suit filings that the 31.5% rate of litigation against foreign filers in the first six months of 2020 is the highest percentage of litigation against foreign filers since 2011 (when the number of lawsuits against non-U.S. companies were inflated by the flood of lawsuits against Chinese reverse merger companies). The highest annual percentage of filings against non-U.S. companies relative to the total annual number of filings during the period 2015 to 2019 was 23.5%, in 2017.
The 35 first half filings against foreign issuers implies a year-end total of 70 securities suits against non-U.S. companies, which would be the highest annual total in many years. A table in the report shows that the highest annual number of filings against non-U.S. companies during the period 2015-2019 was 56 (in 2019).
Of the 35 first half 2020 filings against foreign issuers, the largest number (16) were against companies in Asia; seven were against companies in Europe; five were against companies in Canada; and seven were against companies outside of Asia, Europe, and Canada.
As far as the industries of the foreign companies hit with securities suits (inclusive for purposes of this analysis of both the core suits and the merger objection lawsuits), the largest number of suits (15) were against companies in the technology sector, with the next largest number of suits against companies in the financial sector (11) and the healthcare sector (5).
Comparing the regions and sectors with the highest number of securities suits in the first half of 2020 to the regions and sectors targeted in prior years, the report notes that most frequently hit regions and sectors changes significantly from year to hear. The report states that “both regions and sectors impacted can rapidly switch within a short period of time proving that no company is immune to the exposures faced.”
In discussing the implications of the increased exposures that the first half 2020 filings activity suggests, the report states that company officials “have become more aware of the litigation environment for non-U.S. companies and recent developments have only heightened the risk.”
The report notes that the D&O insurance marketplaces is reacting to the apparently heightened U.S. securities litigation risk for non-U.S. companies. The report notes that “premiums and retentions are increasingly fairly rapidly as global carriers implement underwriting strategy shifts to reign [sic] in capacity and better manage volatility.” The report notes further that “in extreme cases, carriers are now exiting the sector in an attempt to regroup as the market continues to harden.”
Company officials, the report states, “should engage with their insurance broker and insurer early in the D&O renewal process to set expectations and discuss options available.”
The heightened rate of U.S. securities litigation against non-U.S. companies is for real; as Cornerstone Research noted in its report on first half U.S. securities suit filings, “Although annualized core filings are down 9 percent, annualized core filings against non-U.S. issuers are on pace to be the highest on record.”
I generally concur with the analysis in the AIG report, which is directionally consistent with my own analysis (although my numbers differ slightly from those used in the AIG report). Although I commend the AIG report and think that anyone involved in underwriting or broking U.S. listed companies based outside the U.S, the report must be read carefully.
For example, although most of the analysis in the report refers only to core lawsuit filings, some of the analysis in the report refers to all filings (inclusive of both core filings and merger objection lawsuit filings). Most confusingly, in one insufficiently explained paragraph, the report refers to “AIG’s analysis of its own class action data,” which paragraph can only be interpreted to suggest that AIG’s own data differs from Cornerstone Research’s data – the AIG figures referenced appear to be significantly different from the Cornerstone data. Also the list of cases in the back of the report includes the cryptocurrency cases, even though those cases are excluded from the various tallies referenced in the report. To be sure, several of these concerns are in fact addressed in footnotes in the paper; just the same, the report needs to be read carefully, to avoid apples to oranges comparisons.
One additional analytic point that the report omits is to compare the number of lawsuits filed against non-U.S. companies with U.S. listings to the number of non-U.S. companies overall listed on U.S. exchanges. Non-U.S. companies represent about 16% of all companies listed on U.S. exchanges, so the fact that securities suits against foreign issuers represented 31.5% during the year’s first half suggests that non-U.S. companies are much likelier to get hit with a securities suit than are domestic U.S. companies. It has in fact been the case that the percentage of all U.S. securities suits against non-U.S. companies has for years been greater than the percentage of foreign filers among all U.S.-listed companies would suggest.
While this greater likelihood of lawsuits against non-U.S. companies has been apparent almost every year for many years now, some care should be taken in considering the reason for this greater likelihood. In many instances, the greater claims frequency exposure for these non-U.S. companies may not be due to the fact that they are foreign companies; much of the litigation frequency against these companies is due to their industry, not their foreign location. Thus, for example, pharmaceutical companies from Ireland are not getting sued because they are Irish, they are getting sued because they are in a high-litigation sector. The same is true, for example, for Israeli technology companies and Canadian cannabis companies. In many instances, a company’s industry is the most important litigation risk marker, and to further debit these companies because they are located outside the U.S. could represent double-counting.
Even though non-U.S. companies with U.S. listings face a threat of U.S. securities litigation that was at least as great as the threat that their U.S.-based counterparts faced, for many years, until quite recently, these non-U.S. companies enjoyed D&O insurance pricing that was significantly less than the pricing that the U.S.-based companies paid. This discounted pricing was a reflection of the fact that due to intense price competition insurers outside the U.S. used a different pricing model than domestic U.S. insurers used. The result was that for many years the insurance was underpriced relative to the risk. As a result of years of accumulated claims frequency and severity, the insurers have in recent months dramatically changed their approach to non-U.S. companies with U.S. listings, as I detailed in a prior post (here).
The upshot for the non-U.S. companies is that they now not only no longer enjoy the kind of discounted pricing that was available to them, but they are facing wrenching price increases as the insurers seek not only to root out the unwarranted discounts but also to bring pricing to levels that the claims frequency and severity require, as the AIG report notes.
One final note. The heighted level of claims activity against non-U.S. companies in the year’s first half has continued so far in the year’s second half. Just in the month of September so far, there have been seven securities lawsuits filed against non-U.S. companies, out of the 19 lawsuits filed month-to-date. The year-end total may well prove to be in the range that the first half filing figures suggested.