The risk of being targeted in a securities class action remains a core concern for directors and officers in the United States. If the pace of filings in the first half of the year continues, by year end 2016’s filings would represent the highest number of securities class actions since 2004. According to Cornerstone and the Stanford Law School Securities Class Action Clearinghouse’s 27 July 2016 Report, Securities Class Action Filings - 2016 Midyear Assessment, plaintiffs filed 119 new federal securities class action cases in the first half of 2016, a 17 percent increase over the last half of 2015.
Directors outside the US should also keep a careful eye on developments in the US. According to Cornerstone, on an annualised basis, filings against foreign issuers increased from 2015 levels in spite of an absence of filings against Chinese issuers, the most common foreign companies targeted by class actions in recent years.
Cornerstone also found that at the current pace, M&Arelated filings in federal courts will double the annual numbers observed in the last four years. This shift to federal courts may be due in part to the Delaware Court of Chancery’s January 2016 rejection of a disclosure-only settlement in Zillow’s acquisition of Trulia. Disclosureonly settlements are usually resolved by promises to make further disclosures about the transaction and a payment for plaintiffs’ attorney fees.
The greatest percentage of class actions continue to be brought against companies in the biotechnology, pharmaceutical, and healthcare sectors.
More broadly, regulatory scrutiny remains another core concern for directors, which has been heightened by the Yates memo, the September 2015, Department of Justice (DOJ) new directive aimed at targeting and holding accountable corporate executives. Under the directive, in order to earn cooperation credit, companies must turn over evidence of wrongdoing by individuals at the company. Going forward, the DOJ reportedly will not agree to corporate resolutions that include dismissal of charges against or immunity for individuals and it intends to file actions regardless of the ability to collect fines from individuals. This has the potential to pit entity against individual and will likely result in a heightened risk of internal investigation of executives and in broader and more costly actions against individuals.
This is accompanied by a focus by the SEC on the corporate boardroom and an increasing willingness to look at negligent conduct and failure to take heed of “red flags”. Directors therefore face an increased risk of individual liability.
There is a general trend towards actions being dismissed or settled more slowly, with the likely consequences being lengthier litigation, increased defence costs and higher settlement expectations from plaintiffs as they invest more time and money in their cases.
Additionally, in June 2015, the Delaware House of Representatives overwhelmingly passed legislation, which the Governor signed into law, prohibiting Delaware stock corporations from adopting “loser pays” fee-shifting bylaws, but which confirms that Delaware corporations may adopt bylaws designating Delaware courts as the exclusive forum for shareholder litigation.
The potential exposure for defendant directors in IPOrelated securities class action litigation has possibly increased due to the filing of ‘33 Act claims in state courts under concurrent jurisdiction. It can be more challenging to dispose of ‘33 Act claims in state courts than in federal courts due to more restrictive summary judgment standards in certain state courts such as California, where many public offerings occur. At the same time, the Plaintiffs’ bar has been seeking to raise settlement figures significantly for ‘33 Act claims pending in California state court. According to Professor Joseph A. Grundfest, “Plaintiffs have obviously calculated that they are likely to achieve more plaintiff-friendly outcomes in state court than in federal court, and are using a range of jurisdictional manoeuvres to try to steer an increasing number of cases away from the federal forum.
One defendant who has been shut out of federal court has petitioned the Supreme Court for a hearing, and if the Court grants the petition its ruling could have a major effect on the future evolution of Section 11 litigation.”
With respect to derivative actions, defendants sometimes find themselves defending litigation in both state and federal courts, which inevitably leads to increased costs and challenges in managing a two-front litigation. The Plaintiffs’ bar views certain state courts as particularly friendly, which drives up the settlement value of these cases.
On balance, Delaware is a more favourable jurisdiction for directors and officers in shareholder derivative actions. For example, under Delaware law, the Business Judgment Rule defence applies to both officers and directors. By contrast, California law has held that the Business Judgment Rule applies to outside directors only, and not to officers.
On a positive note, the Delaware Chancery Court’s criticism of disclosure only settlements in merger objection shareholder derivative lawsuits will likely lead to a drop in these previously high-frequency lawsuits, or at a minimum, shift the filing of such suits to federal court, which will be beneficial for defendants.
Directors of US companies whether based in the US or overseas should also be mindful of the broad territorial reach of the Foreign and Corrupt Practices Act (FCPA) and ensure their corporates have adequate anti-bribery procedures in place. Particular exposures for directors include failing to properly supervise company employees or recognise red flags surrounding a transaction that suggest potential bribery, or failing to ensure that the company maintains proper records and internal controls to identify and prevent FCPA violations.