Securities class action lawsuit filings declined 22% in 2020 compared to the year prior but remained well above long-term annual averages, according to a February 3, 2021 report by Cornerstone Research published in conjunction with the Stanford Law School Securities Class Action Clearinghouse. The Cornerstone Research report’s analysis of the 2020 filings is consistent with prior reports on the topic; however, the Cornerstone Research report, unlike prior reports, includes data both for federal and for state securities class action lawsuit filings. The Cornerstone Research report can be found here. Cornerstone Research’s February 3, 2021 press release about the report can be found here.
The Number of Securities Class Action Lawsuits: According to the report, there were 334 new securities class action lawsuits filed in federal and state court 2020, compared to 427 in 2019, representing a decline of 22% percent from the record-high filing levels in 2019. The 334 federal and state court securities suit filings in 2020 represented the first time since 2016 that the total annual number of federal court securities lawsuit filings fell below 400. While the number of securities suit filings declined in 2020 compared to 2019, the 334 filings was still 49% higher than the 1997-2019 annual average number of filings of 224.
The Reasons for the Decline in 2020 Securities Suit Filings: The report attributes the relative decline in the number of filings in 2020 to two principal causes. First, the number of M&A related securities class action lawsuits filings declined in 2020 to 100 from 160 in 2019, representing a decline 37.5% percent. Second, the number of Section 11 lawsuits filed in federal and state court declined to 33 in 2020 from 66 in 2019, representing a decline of 50%. As discussed below, much of this decline is attributable to the decline in the number of standalone state court securities class action lawsuits (from 28 in 2019 to 10 in 2020, representing a 64% decrease).
The Number of Core Securities Suit Filings: In addition to the decline in the number of M&A- related lawsuits in 2020, the number of “core” securities lawsuit filings also declined, but the decline was less steep than with respect to the merger suits. There were 234 core securities lawsuits in 2020, compared to 267 in 2019, representing a decline of about 12%. While the number of core lawsuits declined in 2020 relative to 2019, the 234 core lawsuits in 2020 was only slightly below the 2017-2019 annual average number of core lawsuits of 240. The 234 core lawsuit filings in 2020 was well above both the 1997-2019 average annual number of total lawsuit filings (224) and well above the 1997-2019 average annual number of core filings (190).
The Decline Number of State Court Securities Class Action Lawsuits: As I noted above, one of the most important features of the Cornerstone Research report is its analysis of state court securities class action litigation. According to the report, the number of state court securities suit filings (inclusive of both standalone state court lawsuits and state courts suits with parallel federal court lawsuits) declined to 17 in 2020 (consisting of 10 standalone state court suits and seven with parallel federal court suits), from 52 in 2019; the decline was particularly apparent in the year’s second half.
The report attributes the decline in the number of state court lawsuits to the March 2020 decision in Salzberg v. Sciabacucchi, in which the Delaware Supreme Court held that provisions in corporate charters designating an exclusively federal forum provision for liability actions under the ’33 Act are facially valid. The report also notes that the decline in the number of state court lawsuits could be attributable to the strong stock market performance in the year’s second half.
With respect to the impact of the Sciabacucchi decision on state court securities class action lawsuit filings, the report notes that during the roughly 24-month period between the U.S. Supreme Court’s March 2018 Cyan decision and the March 2020 decision Sciabacucchi, 43% of Section 11 class action lawsuits were filed as standalone state court lawsuits. However, since Sciabacucchi, the percentage of standalone state-court filings has decreased to 29% and the percentage of parallel filings has decreased to 13%. During the same period (that is, post-Sciabacucchi) federal-only Section 11 filings have increased from 17% to 58%.
Of the total of ten standalone state court securities class action lawsuits filed in 2020, seven were filed in New York. (There were 13 standalone state court securities lawsuits filed in New York in 2019). Of the 33 Section 11 securities class action lawsuits filed in 2020, 16 were federal court only, representing 48% of all section 11 lawsuits; in 2019, of the 66 Section 11 lawsuits, only 13 were federal court only, representing only 20% of the section 11 filings. Parallel filings of Section 11 actions in state and federal court declined from 25 filings in 2019 to seven filings in 2019.
The Decline in the Litigation Rate: In addition to the decline in the number of securities lawsuits filed in 2020 relative to the year prior, the litigation rate (that is, the number of securities suits against listed companies compared to the number of listed companies) also declined in 2020. Thus, the litigation rate in 2020 for all types of securities litigation was 6.3% in 2020, compared to 8.9% in 2019. The decline in the litigation rate in 2020 relative to the year prior was the first time the litigation rate declined in eight year. Though the litigation rate declined in 2020, the 6.3% litigation rate remained well above the 1997-2019 annual average litigation rate of 3.9%.
The litigation rate for S&P 500 companies in 2020 was 4.4%, compared to 7.2% in 2019 and 9.4% in 2018. The 2020 litigation rate for S&P 500 companies was the lowest it has been since 2015. The 2001-2019 annual average litigation rate for S&P 500 companies is 5.5%
The 6.3% litigation rate for 2020 is inclusive of the M&A litigation; if the M&A litigation is disregarded, the litigation rate drops to 4.2%, compared to an equivalent litigation rate for 2019 of 5.4%. The 4.2% core litigation rate in 2020, though below the core litigation rate in 2019, was still above the 3.9% annual average litigation rate for the period 1997-2019.
Securities Suits Involving Non-U.S. Companies: Non-U.S. U.S-listed companies were sued at an elevated rate in 2020 compared to prior years. The number of securities lawsuits against non-U.S. companies reach a record high of 74 in 2020, compared with 56 in 2019 and 47 in 2018. The number of filings against non-U.S. issuers has been trending upwards since 2013. As a percentage of total core federal filings, core federal filings against non-U.S. issuers increased to 33% in 2020, the highest since 2011 and the second highest on record.
IPOs, IPO Performance, and Securities Litigation: The Report contains some interesting analysis regarding the performance of IPO companies and the incidence of securities litigation. The report examines the 380 companies that completed IPOs between January 2018 and December 2019. Of these 380 companies, 53% of the companies that had not been delisted were trading below their IPO price at the time of a securities complaint or as of December 31, 2020. 51 of the 380 companies (13%) that completed an IPO between January 2018 and December 2019 were later the subject of a federal Section 11 lawsuit or state court 1933 Act filing.
As it turns out, almost all (49 out of 51) of the companies that were subject to federal or state Section 11 actions were trading below their IPO price as of the complaint date. However, not all IPOs trading below their IPO price were sued during that period; though 49 companies that completed IPOs during that period and that were trading below their IPO price were sued, as of December 30, 2020 or as of the date of the complaint, 195 were trading below their IPO price. (So 49 out of 195 trading below their IPO price were sued.) The lag between the IPO date and the filing date for IPO companies sued in 2020 was 414 days, but the median annual filing lag during the period was 287 days.
Dismissal Rates: From 1997 to 2020, 46% of core federal filings were settled, and 42% were dismissed. However, the more recent years are not fully developed; in four of the five more fully developed years of 2013 through 2017, the dismissal rate is over 50%. The dismissal rate for 2013 is 57%.
Shareholder Losses: The report reflects two difference measures of investor losses represented in the securities class action lawsuits during the year. The first of these is Disclosure Dollar Loss (DDL) which measure the dollar value change in the defendant company’s share price between the trading day immediately prior to the end of the class period and the trading day immediately after the last day of the class period. The second of these is Maximum Dollar Loss (MDL) which measure the difference in the defendant company’s share price between the trading day during the class period with the highest market capitalization and the share price on the day following the end of the class period.
The Disclosure Dollar Loss decreased to $245 billion in 2020, down from $282 billion in 2019, representing a drop of 13%, but still well above the 1997-2019 annual average DDL of $136. However, the Maximum Dollar Loss increased in 2020 to $1.584 trillion, the second highest on record, and well above the 2019 MDL of $1.187 trillion and the 1997-2019 annual average MDL Of $662 billion.
Plaintiffs’ Firms and M&A Litigation: One interesting feature of the M&A litigation filed in 2020 is the extent to which it is almost all attributable to a very small number of plaintiffs’ law firms. Of the 100 M&A-related securities suits filed in 2020, 89 of first identified complaints were attributable to one of five law firms as counsel or co-counsel (Faruqi & Faruqui LLP; Monteverde & Associates PC; Levi & Korinsky LLP; Ridgorsky & Long PA and RM Law P.C.). Since 2015, at least one of these five plaintiff firms has been listed as counsel or co-counsel on 75% of M&A filings. Ridgorsky & Long and RM Law were co-counsel on all 85 of their filings in 2020 and were responsible for “an absolute majority of federal first identified M&A complaints in 2020.”
Plaintiffs’ Firms and Securities Litigation Generally: Since 2014, three law firms (The Rosen Law Firm, Pomerantz LLP, and Glancy Prongay & Murray LLP) have been responsible for more than half of the first filed securities class action complaints. The complaints filed by these three plaintiff firms are dismissed more frequently than complaints filed by other law firms during the period 2014 through 2019. During that period, these three firms have had 53% of their class action complaints dismissed, compared to 41% of the complaints of all other firms.
Although I have attempted to summarize the Cornerstone Research report above, the report is full of rich detail too voluminous to capture in a summary. The report merits careful reading, at length and in full.
As I noted at the outset, one of the distinctive features of the Cornerstone Research report is that it captures and analyzes not only federal court securities lawsuit filing data, but it also captures state court data. The report’s data on state court litigation is interesting and important, but the report’s analysis of the downturn in state court securities lawsuit filings in 2020 after the Delaware Supreme Court’s March 2020 decision in Sciabacucchi is particularly important. For those of us who get paid to worry about companies’ securities class action litigation exposure, the downward impact of Sciabacucchi on state court securities class action lawsuit filings is both an important development and welcome news. We can only hope that the downward trend accelerates in 2021. We can also hope that the D&O insurance underwriters are paying very close attention to these trends.
In addition to its analysis of state court securities litigation filings, the report also contains a wealth of interesting and important information about what types of securities transactions attracted Section 11 lawsuits, as well about IPOs, IPO Performance, and litigation involving IPOs. For anyone concerned about the securities litigation risks of IPO companies, this analysis is vital.
The report notes and in fact details the decline in the number of federal court merger objection lawsuit filings in 2020 relative to 2019 but does not go into any depth in attempting to explain or understand this decline. I also observed this decline in the number of federal court merger objection lawsuit filings in 2020. While part of this (a small part) is attributable to the disruption of M&A activity early in 2020 due to the pandemic, there is another more important reason that the number of M&A lawsuits declined in 2020, and that is that the plaintiffs’ law firms active in filing these kinds of lawsuits increasingly are filing the suits as individual actions rather than as class actions.
In other words, the companies are still getting sued in connection with M&A transactions, and in fact they are still being sued in federal court, but the lawsuits are not being filed as class actions. While this pattern was apparent in 2020, it has become unmistakable here in the early days of 2021. My guess is that the plaintiffs’ firms, eager to try to protect their ability to extract payment of their fees as a form of a toll on the merger transaction highway, are trying to avoid court scrutiny; they hope that the individual actions will be even less likely to attract the attention of a court when the actions are dismissed. You can set you watch on it now – there will be much less federal court merger objection class action litigation in 2021, even compared just to 2020. The lawsuits will still be filed, but just as individual actions, rather than as class actions.
The report’s various observations about the plaintiffs’ law firms are interesting. The overall message is that a very significant amount of the securities class action litigation activity is the product of a very small number of plaintiffs’ law firms. It is probably a discussion for another day, but there does seem to be a problem with a set-up that allows an extremely small number of lawyers to impose all of the disruption and all of the costs on the entire system purely for their own benefit. Along those lines, no one in the universe thinks that there is more securities class action litigation than there has been historically because there is more fraud; there is more litigation because a very small number of plaintiffs’ lawyers are more aggressive. But as a I said, that is probably a topic for another day.