Securities class action litigation observers know that securities suits frequently are accompanied by shareholder derivative lawsuits based on the same essential allegations. A recent report from Cornerstone Research, entitled “Parallel Derivative Action Settlement Outcomes: 2023 Review and Analysis,” takes a look at the settlement patterns for these kinds of parallel derivative suits. As the report shows, in recent years, nearly half of all securities class action lawsuits have been accompanied by a derivative lawsuit, and the securities suits with accompanying derivative suits typically are associated with higher settlements. The Cornerstone Research report can be found here. Hat Tip to the August 26, 2024 Cooley law firm memo about the report, here.

The Cornerstone Research report is based on the authors’ analysis of 425 securities class action lawsuit settlements between 2019 and 2023. Of these 425 securities suits, 198 (or 47%) involved parallel derivate suits. The authors identified 110 derivative suit settlements from among these 2019-2023 parallel derivative lawsuits. Of these 110 derivative settlements, 29 (or 26%) involved monetary settlements and 101 (92%0 involved therapeutic provisions. (These two amounts add up to more than 100% as some of the monetary settlements also include therapeutic provisions.)

Of the 425 securities class action settlements during the period 2019-2023, the median settlement amount (adjusted for inflation) was $14.5 million. Securities class actions with accompanying derivative claims are typically associated with higher settlements than those without accompanying derivative settlements. The authors observed that there is a 36% settlement premium for cases with a parallel derivative lawsuit among cases that settled between 2019 and 2023.

Of the 29 parallel derivative case settlements that involved a monetary component, the median derivative settlement was $8.9 million (which was 26% of the associated securities class action settlement).  

Of the parallel derivative suit settlements (including both monetary and non-monetary settlements), 87% called for some form of corporate therapeutics. Examples of the therapeutics included enhancements to board independence; revisions to the charters of key board committees; reforms tailored to case-specific allegations; and the adoption or strengthening of compensation clawback rules.

The median plaintiffs’ attorney fee award for all parallel derivative action settlements during the period was $828,122. The median fee among cases with a monetary settlement was $2,970,000, while the media fee for those without a monetary settlement was $629,888 (79% lower). The lower fee for cases with a non-monetary settlement is “consistent with the absence of a direct financial benefit associated with those settlements.”

The authors also noted that there are certain factors associated with the likelihood of a monetary settlement in a parallel derivative action. Overall, the report notes, “derivative settlements with a monetary component are associated with higher securities class action settlements, consistent with a view that the monetary settlements correlate with the size of the case or the strength of the underlying allegations.” In particular, derivative settlements with a monetary component were more likely to be associated with an SEC action or criminal charges against the defendants or related parties in connection with the allegations covered by the underlying class action.

While during the period 2019-2023 nearly half of all securities class action lawsuits were associated with a parallel derivative claim, only 40% of all securities suits in 2023 were associated with a parallel derivative suit, the lowest level since 2011. With respect to this observation, the report notes that while overall federal court derivative lawsuit filings accelerated during the period 2015 to 2020, federal court derivative suit filings overall declined in more recent years. Overall derivative suit filings remain well above levels seen prior to 2017.

These filings trends “contributed to the significant numbers of large monetary derivative settlements in recent years.” Thus, during the period 2005 and 2023, there were 29 derivative suit settlements of at least $50 million, 16 of which occurred since 2020. These large derivative settlements “may pave the way for other large derivative settlements and/or more derivative filings in the coming years.” N.B.: The source the authors cite for the number of large derivative settlements is The D&O Diary (here).