Just as the overall number of securities class action lawsuit filings declined in 2021 relative to the year prior (as discussed in detail here), the number of securities suits filed against non-U.S. companies declined in 2021 as well, although the number of suits against foreign companies as a percentage of all 2021 securities suit filings decreased only slightly, as reflected in a new report from the Dechert law firm. The February 24, 2022 report, entitled “2001 Developments in U.S. Securities Fraud Class Actions Against Non-Issuers,” can be found here.
According to the report, the number of securities class action lawsuits filed in 2021 against non-U.S> companies “dropped significantly” compared to 2020. There were 42 securities class action lawsuits filed in 2021 against non-U.S. companies, compared to 88 in 2020. This decline in part reflects an overall decline in the number of securities class action lawsuits during 2021, which declined 35% compared to 2020, largely as a result in the drop in the number of new merger objection lawsuits.
While the overall number of securities class action lawsuits declined in 2021, the decline in the number of new securities suits against non-U.S. companies as a percentage of all securities suit filings declined less steeply. Thus, while the number of filings overall declined 35%, the number of cases against non-U.S issuers as a percentage of all securities suit filings declined only “slightly,” from 27% in 2020 to 20% in 2021.
The majority of securities suit filed in 2021 against non-U.S. companies were filed against companies headquartered in or with their principal place of business in China (18) and Canada (7), followed by the United Kingdom (4). Israel and Ireland both had two each. All of the complaints filed against companies headquartered in China involved companies incorporated in the Cayman Islands.
The Second Circuit saw the highest number of securities suit filings against non-U.S. companies in 2021. Of the 42 securities suits filed in 2021 against non-U.S. companies, 32, representing roughly 75% of all 2021 securities suit filings against non-companies, were filed in the Second Circuit. Of these 32 Second Circuit suits, the largest number were filed in the Southern District of New York. There were 20 securities suits filed in 2021 in the Southern District of New York against non-U.S. companies (representing about 48% of all 2021 securities suits against non-U.S. companies). Many of the securities suits filed in the Southern District of New York against non-U.S. companies involved companies headquartered in China; 11 of the 18 cases filed in 2021 against Chinese headquartered companies were filed in the Southern District of New York.
With respect to the kinds of cases that were filed in 2021 against non-U.S. companies, 10 cases (about 24%) involved alleged misrepresentations in connection with regulatory requirements or approvals, including seven cases involving cases alleging misrepresentations relating to China’s regulatory requirements or approvals (of which four involved regulations pertaining to data protection and cybersecurity).
In addition, there were five securities suits (representing roughly 12% of all 2021 securities suit filings against non-U.S. companies) filed against non-U.S. companies alleging violations of the securities laws based on overstated revenues arising from accounting fraud and/or false user metrics.
In terms of the industries in which the defendant companies are involved in the suits filed in 2021 against non-U.S. companies, the largest portion of suits involved companies in the software and programming industries (10), seven of which were against companies headquartered in China, and companies in the biotechnology and drugs industry (7). (I believe these industry observations are significant, because these domestic companies in these industries are also frequently sued. These observations support a point that I have made numerous times, which is that the non-U.S. companies that get hit with securities suits are not necessarily getting suit because they are foreign companies, but because they are getting sued because they in high-risk industries – other than, perhaps, with respect to Chinse companies.)
The Rosen law firm filed the most new securities class action lawsuits in 2021 against non-U.S. companies (12), followed by the Pomerantz law firm (9). The report notes that during the period 2018-2020, the Rosen Law Firm was “the most active plaintiff law firm in this space.” The report also notes that The Rosen Law Firm and Pomerantz were appointed lead counsel in the most cases in 2021 (with 6 and 5 respectively).
According to the report, courts rendered nine dispositive motions in 2021 in securities suits filed in 2019 and 2020 against non-U.S. companies. The report notes that “while it is hard to discern trends from just nine dispositive decisions, the courts’ reasoning for dismissing cases” may still be useful for other non-U.S. companies that find themselves subject to a U.S. securities suit. In 2021, courts dismissed cases for reasons including “failing to allege any actionable or material misstatement, lack of standing and lack of personal jurisdiction.” In addition, 12 securities suits against non-U.S. companies were resolved by settlements.
The report notes in conclusion that “though the overall number of securities class actions has gone down in 2021, the proportion of cases against non-U.S. companies has not changed significantly.” The point is that “a company does not need to be based in the United States to face potential securities class action liability in the federal courts.”
Accordingly, companies should take appropriate steps to try to “mitigate their risks,” including speaking truthfully and disclosing both positive and negative results; ensuring that disclosure process are well-documented and consistently followed; and working with counsel to ensure that the disclosure plan in place encompasses press releases, SEC filings and statements made by executives.