Actions Against Foreign Filers at an Historical High
This past year has seen interesting and emerging activity arising in securities litigation in United States courts against foreign filers. Companies with headquarters or principal places of business outside the United States (“non-US issuers”) continue to be targets of securities class action lawsuits filed in the United States. In 2020, the number of securities class actions filed against non-US issuers reached a historical high. 1
As the graphs in the PDF show, in 2020, there were 65 2 core securities class actions filed against non-US issuers, representing 33.7% of all federal cases filed in 2020, and a 16% increase from the 56 core filings made in 2019. This was the largest year-over-year increase in the past 5 years and the highest annual number of securities class action suits against non-US issuers in history.
Nearly half of all non-US issuers (46%) named in a securities class action in 2020 were listed on a US exchange using an American Depository Receipt (ADR) program rather than a full stock exchange listing. That breaks down to Level 3 ADRs (60%), Level 2 (14%) and Level 1 (26%). 3 Statistically, the level of exposure to securities litigation of ADR listings is beginning to equal to that of a full listing, regardless of type.
The recent US appellate court decision in Stoyas v. Toshiba Corp held that a foreign issuer could be liable under US securities laws for selling securities in the US, even if the company was not involved in the sale (e.g. an “unsponsored” ADR). This ruling increases the likelihood that foreign companies with US securities will be subject to a securities class action. Our whitepaper, US securities law liability for securities issuers outside of the United States in a post-Toshiba environment, co-authored with Norton Rose Fulbright, provides additional insight into this ruling.
From an exchange perspective, there were 30 suits filed against NASDAQ listed businesses, 26 suits against NYSE listed firms, and 9 against OTC-BB listed companies. Historically, NASDAQ-listed issuers have seen the larger proportion of yearly securities class action suits.
Cases were brought in courts across the US including New York (56%), California (25%), New Jersey (11%), Oregon and Pennsylvania (3% each), and Delaware (2%). The most popular district in New York was the Southern District, and in California, the Central District. In terms of circuit split, 37 complaints were filed in the Second Circuit, 18 in the Ninth Circuit and 10 in the Third Circuit.
Diverse Geographic Distribution
As in recent years, the geographic spread of class actions was weighted towards companies with headquarters in China, with 24 filings in 2020, a sharp increase from 17 the previous year. This is partly attributable to differences in public-company accounting practices between China and the US which often lead to compliance issues with US listing rules. Statistically, Chinese issuers tend to engage in higher risk sectors – technology, online commerce, and financial services. The second largest number of filings were against Canadian businesses, with 12 cases, 4 of which relate to cannabis sales and distribution. This was followed by Germany and Israel with 4 filings each.
The national securities class action legal regime in China recently changed with the enaction of “The New Securities Law,” at the end of 2019. Our white paper, Securities Class Actions under the New Securities Law in China provides further detail of this new legislation. It is too early to predict whether this new law will have a material effect on US class action filings.
Regionally, Asia took the lead with 28 filings, followed by Europe with 16 filings. In past years, the numbers of cases against issuers from Asia and Europe have reversed but historically the two regions have always incurred the largest percentage of the overall suits against non-US issuers.
Technology Remains the Most Frequently Litigated Sector
Claims against non-US issuers were brought against companies in a wide group of sectors, ranging from transportation to consumer, financial services, and healthcare. The most frequently litigated sectors in 2020 were technology (18), healthcare (13), financial (10) and services (8).
All of these industries tend, by their very nature, to attract scrutiny. Technology companies continue to be targeted for litigation based on the outcome of new project launches. Pharmaceutical companies’ statements about product performance and marketing practices may leave them open to litigation.
The vast majority of lawsuits alleging misrepresentations arose out of inadequate or insufficient internal and external controls — such as accounting practices, financial disclosures, and bribery, corruption, and money-laundering. Other filings related to opioids, data breaches, the environment, and occupational safety.
Dismissals / Settlements
Keeping in mind the high costs associated with lengthy and drawn-out litigation proceedings, the number of dismissed securities class actions in 2020 were at unprecedented levels. Out of the core foreign filers, only five cases were dismissed quickly – ranging from three days up to five months. The remaining 60 cases are still ongoing. We also observed a surge in settlements. For the first time since 2016, two settlements worth more than one billion dollars were reached.
Looking Towards 2021
Looking to 2021, it is unlikely that the volume and frequency of securities class actions will slow down. Legislative changes and external events continue to create new exposures. In 2020, California enacted Assembly Bill No. 979 which requires a publicly held domestic or foreign corporation with principal executive offices located in California to have a minimum of one director from an “underrepresented community” 5 no later than the close of calendar year 2021. NASDAQ submitted a proposal to the US Securities & Exchange Commission (SEC) to adopt new listing rules related to board diversity and disclosure in December 2020.
Four class actions involved IPOs and prospectus liability, while one case involved a Special Purpose Acquisition Company (SPAC) transaction. This filing 6 alleged the Defendants failed to disclose material, adverse facts about the company’s business, operations, and prospects as relating to the transaction. Given the increasing number of SPAC IPOs during 2020, we expect further securities class actions in this area. Recent filings support this hypothesis as 5 SPAC securities class actions were filed in the first two months of 2021, compared to 4 SPAC-related suits in all of 2020.
Companies should also be aware of concerning trends in a rise in shareholder derivative lawsuits being filed in the US courts against the boards of non-US issuers. In 2020, there were 6 derivative class actions against non-US. issuers in US courts. Many of the 6 companies traded in the US as ADRs. For directors and officers, this heightened environment of litigation exposure should be of great concern. These risks can be mitigated by boards actively monitoring their public disclosures, ensuring strong corporate governance, and maintaining robust enterprise risk management practices.
The D&O insurance market for non-US issuers has undergone significant changes and retraction in the past 24-36 months with a lack of insurers who are willing to provide D&O capacity despite a steep rise in demand resulting in tougher market conditions. The hardening insurance market is making it more expensive and more difficult to secure D&O coverage.
AIG’s underwriting teams are available and eager to discuss insured’s D&O needs with their brokers. Our claims team has significant experience assisting clients in the defence and settlement of securities class actions, providing helpful insight and support when directors and officers need it most. At AIG, our strong claims expertise means we will not only offer specialist help when a claim occurs, but will also assist in mitigating potential claims in the first place.
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1 Compiled using data from Stanford School of Law – Securities Class Action Clearinghouse, a collaboration with Cornerstone Research and used with permission. Core filings are all federal securities class actions, excluding those defined as M&A filings, consolidated into one to prevent double counting. Differences in review methodology mean AIG’s totals may be different to the ones in other sources.
2 This tally excludes the 11 cryptocurrency cases, and the case against the Republic of Ecuador.
3 ADRs Level 1 requires the least amount of compliance and regulatory oversight. whereas ADRs Level 2 and 3 are required to fulfil all registration and reporting requirement imposed by the SEC.
4 The numbers of industries represented are 12.
5 “Director from an underrepresented community” means an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.
6 Triterras, Inc.