Cornerstone Research recently released its 2016 midyear assessment of federal securities class-actions filings. The report finds an increase in filings in the first half of 2016, with particular increases in M&A filings, filings against U.S.-exchange-listed companies and S&P 500 companies, and filings within both the Financial and Consumer Non-Cyclical sectors.
Below are some key takeaways from and observations about Cornerstone’s report:
- Increase in securities class-action filings. The first half of 2016 brought 119 new federal class-action filings – a 17% increase over the 102 filings in the second half of 2015 and the largest semiannual number of filings since the first half of 1999. If filings of securities class actions continue at the same rate for the remainder of 2016, total annual filings will number 238 – the second-highest annual number in the last 20 years.
- Increase fueled by mergers-and-acquisitions cases. The first half of 2016 saw a surge of federal M&A filings, with 24 in total – a 167% increase over the second half of 2015 and the highest number of M&A filings since the second half of 2010. These filings were highly concentrated in the Third and Ninth Circuits, which received 58% of all M&A class-action filings in the first half of 2016. The increase in federal M&A litigation might be attributable at least in part to the Delaware Court of Chancery’s crackdown on “disclosure-only” settlements and its increased reluctance to award attorneys’ fees for additional disclosures – a trend also reflected in some recent New York state-court decisions.
- Increase in cases against foreign issuers. Filings against foreign issuers increased from 2015 levels on an annualized basis, even though no new cases were filed in the first half of 2016 against Chinese issuers – frequent targets of recent securities litigation.
- Rise in securities class actions against U.S.-exchange-listed companies and S&P 500 companies. If the rate of litigation during the first half of 2016 continues through the second half of the year, 5% of companies listed on major U.S. exchanges could be subject to securities class actions in 2016. This number would be above Cornerstone’s 1997-2015 historical average and would mark the fourth consecutive annual increase. On an annualized basis, 6.4% of the companies listed on the S&P 500 were defendants in a class action during the first half of 2016 – the highest annualized rate since 2008.
- Greater likelihood of settlement, rather than dismissal, of Section 11-only class actions. Class actions alleging claims only under Section 11 of the Securities Act are less likely to be dismissed than are cases alleging both Securities Act and Exchange Act claims. Between 1997 and the first half of 2016, 38% of Section 11-only class actions were dismissed, compared to 41% for all other filings. As a result, Section 11-only cases are more likely to settle out of court. Some of the dismissals of federal Section 11-only cases were remands of cases that had originally been filed in state court and were then removed to federal court. California has been a particular hotbed of state-court Section 11 litigation. We will see whether the U.S. Supreme Court grants the pending certiorari petition in Cyan, Inc. v. Beaver County Employees Retirement Fund (a California state-court case), in which the petitioner asks the Supreme Court to clarify removability of Section 11-only class actions and the preemption of state-law claims in the wake of the Securities Litigation Uniform Standards Act of 1998 – an issue that has divided the district courts.
- Increased filings in Financial and Consumer Non-Cyclical sectors. In the first half of 2016, the Financial sector faced 17 securities class-action filings, a number equal to the total number of filings against that sector during all of 2015. The Consumer Non-Cyclical sector faced 43 new securities class actions, up from 33 in the second half of 2015 and 26 in the first half of that year. The biotechnology, pharmaceuticals, and healthcare companies included in this sector were subject to the bulk of the filings – together seeing 32 of the 43 filings. The Financial and Consumer Non-Cyclical sectors collectively accounted for more than 50% of new securities class actions.
- Ninth Circuit as most popular forum. The Ninth Circuit received 38 securities class-action filings in the first half of 2016 – slightly more than the 36 filings in the Second Circuit. Some of those Ninth Circuit cases could be Section 11 class actions removed from California state courts – a number of which cases were subsequently remanded.