Largely due to a “substantial reduction” in the number of merger objection lawsuit filings, as well as a decline in the number of Section 11 and 1933 Act securities class action filings, the number of federal and state court securities class action lawsuits filed in the first six months of 2021 “dropped considerably” compared to the second half of 2020, according to a new report from Cornerstone Research. Filings of core Section 10(b) suit filings were, however, only “down modestly.” The report, entitled “Securities Class Action Filings: 2021 Midyear Assessment,” can be found here. Cornerstone Research’s July 28, 2021 press release about the report can be found here. My own analysis of the 1H21 federal court securities class action lawsuit filings can be found here.
According to the report, there were 112 securities suits filed in federal and state courts in the first half of 2021, representing a 25% decline in the number of filings compared to the 150 filed in the second half of 2020. The decline, according to the report, was “largely driven by a sharp drop in M&A filings,” as there was a 66% decline in merger objection lawsuit filings in the first half of 2021 compared to the second half of 2020.
However, while filing pace in the first half of 2021 was off considerably compared to last year, the 112 securities suit filings in the year’s first half, while the lowest semiannual number of filings since the first half of 2015, was only slightly below the average semiannual number of securities suit filings during the period 1997-2020 of 114.
There were only 12 federal court merger objection lawsuits filed as class actions in the first half of 2021, the fewest in the federal courts since the second half of 2014. Federal court merger objection class action lawsuits in the year’s first six months declined 66% compared to the second half of 2020. However, as the report details, merger deal activity increased in the first half of 2021. (The report does not mention it, but the plaintiffs’ lawyers active in this space have not just gone away; they are continuing to file federal court merger objection lawsuits in substantial volume. However, they are filing the lawsuits as individual actions, not as class actions, so the lawsuit activity is not captured by the Cornerstone Research data and analysis.)
Another factor in the overall decline in securities suit filings in the first half of 2021 was the decline in the number of Section 11 and 1933 Act filings. The number of state court securities lawsuit filings in the first half of 2021 was “dramatically lower” than during the period between the first half of 2018 and the first half of 2020. A bar chart on page 14 of the report clearly shows that the increase in state court securities suit filings starting in 2018 followed the U.S. Supreme Court’s March 2018 decision in Cyan, and the more recent decrease in state court securities suit filings followed after the Delaware Supreme Court’s March 2020 decision in Sciabacucchi (in which the court upheld the validity and enforceability of federal forum selection charter provisions). One interesting detail noted in the report about state court securities suit activity is that all five of the state court securities suits filed in the first half of 2021 were filed in New York.
While merger objection lawsuit filings are down compared to recent periods and the number of Section 11 and 1933 Act filings are also down, core federal filings are only down modestly compared to recent levels. Core federal filings – those excluding Section 11 and state 1933 Act filings – “are on pace to be only 11% lower than their 2020 totals.”
One factor that contributed to the securities suit filing activity in the first half of 2021 was the volume of cases filed relating to SPACs. According to the report, there were 14 SPAC-related securities suits filed in the first half of 2021, compared to 7 in 2020 and only 6 in 2019. Interestingly, while nearly all of the federal SPAC related securities suit filings in 2019 were merger objection lawsuit, none of the SPAC-related securities suits filed in the first half of 2021 had M&A allegations; rather, all of the 2021 filings included 10(b) allegations.
The report contains an interesting note about the rate of litigation involving SPAC merger transactions. The report notes that between the start of 2019 and July 15, 2021, 166 SPAC merger transactions have closed. Over this same period, there have been 23 core federal SPAC-related securities suit filings, “a litigation rate of roughly 14%, comparable to the cumulative core litigation rate that newly public issuers face in the first three years after IPOs.”
Another trend-related phenomenon on which the report comments is the number of COVID-19-related securities lawsuit filings. The report notes that there were 10 securities suit filings related to COVID-19, largely concentrated in the first four months of the year.
The report also comments on the number of securities lawsuits filed against U.S.-listed non-U.S. companies. Last year, federal court securities class action lawsuit filings against non-U.S. issuers was a significant factor in the overall level of federal court securities suit filings activity. According to the report, there were 74 securities suit filings against non-U.S. issuers during the full year 2020; by comparison, there were only 15 first half securities suit filings against non-U.S. issuers during the first half of 2021, which project to a year end total of only 30. The report notes that “at the current pace, the number of core filings against non-U.S. issuers would be the lowest total since 2014.” The filings against non-U.S. companies as a percentage of all securities suit filings is also down; as a percentage of total core federal filings, core federal filings against non-U.S. issuers “decreased to 16% [in the first half of 2021] from 33% in 2020, the lowest share of filings since 2009.”
In addition to the overall number of securities lawsuits declining in the first half of 2021, the rate of litigation (measured as a ratio of the number of suits filed to the number of listed companies) also declined in the year’s first half. The rate of litigation the first six months of 2021 projects to a year-end rate of litigation of 4.2%, compared to 6.3% in 2020 and 8.9% in 2019. As these numbers suggest, the projected year end litigation rate would represent a significant decline from the litigation rate that prevailed during the period 2016-2020. The projected year end rate would be the lowest litigation exposure since 2015. The projected year end rate for merger objection litigation activity would be the lowest level since 2014.
The Disclosure Dollar Loss (DDL) index – that is, the index of the dollar value change in the defendant companies’ market capitalization between the trading day immediately preceding the end of the class period and the trading day immediately following the end of the class period – fell to $80 billion, down 50% from the second half of 2020 and 54% below its all-time high in the first half of 2019.
The Maximum Dollar Loss (MDL) index – that is, the index of the dollar value change in the defendant companies’ market capitalization between the trading day with the highest market capitalization during the class period to the trading day immediately following the end of the class period—“dropped sharply” to $364 billion in the first half of the year, down nearly 64% from the second half of 2020.