One of the characteristics of “opt-out” class actions in the U.S. is that class members retain the option of opting out of the class settlements. A new study shows that in recent years, opt-outs are becoming an increasingly common phenomenon in securities class action settlements, particularly in connection with securities cases having certain traits. The Cornerstone Research study, entitled “Opt-Outs in Securities Class Action Settlements: 2019-H1 2022” can be found here. Cornerstone Research’s October 25, 2023, press release about the report can be found here.

The Cornerstone Research report is based on its analysis of its database of 2,061 securities class action settlements during the period 1996 through the first half of 2022, including 287 securities class action settlement during the period 2019-H1 2022. The authors’ analysis shows that during the period 1996 through the first half of 2022, 5.6% of all settlements (115 out of 2,061) had at least one opt out. During the more recent period 2019 through the first half of 2022, the percentage of cases with at least one opt-out was higher than during the longer period; during the most recent period, 11.5% (33 out of 287 settlements had at least one opt-out.

The authors’ analysis shows that the percentage of cases with at least one opt out has gradually but continuously increased during the period 1996 through the first half of 2022. Thus, during the period 1996-2005, only 2.9% of all securities class action settlements had at least one opt out. During the period 2008 through 2018, 5.8% of all securities class action settlements had at least one opt-out. And as noted in the preceding paragraph, during the period 2019 through the first half of 2022, 11.5% of all securities settlements had at least one opt out.

The authors’ analysis also shows that, at least during the period 2019-1H 2022, the likelihood of at least one shareholder opting out of the settlement increased as the size of the settlement increased. Thus, for settlements during that period greater than $20 million, only 29% of cases had at least one opt-out. For settlements over $100 million, 62.5% of settlements had at least one opt-out. For settlements over $500 million, 100% of settlements had at least one opt-out.

One common reason for shareholders to opt out of a class settlement is to preserve their right to bring a direct action against the defendants raising the same or similar allegations as were asserted in the class action. However, as the report notes, “requests to opt out do not necessarily result in a direct action.” Thus, for example, during the period 2019-1H 2022, of the 20 settlements under $20 million with at least one opt-out, only nine direct actions were filed (note: some of the directs actions that were filed involved multiple shareholders). During the same period, of the 10 settlements over $100 million, five resulted in direct actions, but of the 2 settlements over $500 million, two resulted in direct actions. The report notes that direct action plaintiffs are most often institution investor opt-outs.

One of the most interesting parts of the report is the authors’ analysis of the relationship between the likelihood of settlement opt-outs and the characteristics of the class action lawsuit. The authors conclude that in class action settlements with at least one opt-out, and especially in cases in which at least one institutional investor opted out, the cases tend to have higher simplified metrics of potential damages; indicators of greater complexity of the class allegations, and indicators of greater ability to pay.

The first of these three characteristics, the higher damages metrics, is based on the authors’ observation that cases with settlement opt-outs tend to have median damages, as measured across a variety of different damages measures, than the corresponding metric across all class settlements.

The second of these three characteristics, the complexity of the class allegations, is based on class action traits such as the number of years in the class period, years between filing and settlement of the class action, presence of Section 11 or Section 12 claims, presence of non-common stock purchasers (such as bonds or options investors), presence of corresponding SEC action, and presence of criminal charges.

The third of these three characteristics, ability to pay, is measured by the corporate defendant’s asset size, market capitalization, and whether the defendant company was in bankruptcy or distressed.

The authors noted their attempt to try to make observations about the settlement of the opt-outs’ separate direct actions. However, the authors found that “settlement or judgment of direct action cases are not frequently disclosed publicly.” There is, the authors noted, “insufficient information for a systematic comparison of the recover the plaintiffs would have achieved had they remained in the class.”

The report does break down the available data in connection with the settlement of the VEREIT securities class action lawsuit. The authors note that in that case the defendants paid a total of $281.4 million to resolve 14 direct action lawsuits, including a $90 million settlement with the Vanguard funds. The direct action settlements in total represented 27.5% of the size of the class settlement. (My discussion of some of direct action settlements can be found here.)

The authors conclude by noting that the likelihood of a corporate defendant facing at least class action settlement opt out has increased over the years, and also is increased the larger the settlement it. That said, opt-outs remain “a small but meaningful part of the overall securities class action landscape.” The authors conclude that if the potential damages are large, the allegations are complex, and the issuer is financially healthy, it is more likely that at least one putative class member may opt out of a class settlement.