US Securities Class Actions Bulletin - Q1 2019
Class action filings against companies headquartered outside the US continued at elevated levels in the first quarter of 2019.
Filings up significantly in the first quarter
Overall, there were 18 new securities class actions brought against international companies in US federal courts in the first quarter1, significantly more than the 10-year average of 10 cases typically filed in Q1. If this elevated level were to continue, it would result in 72 class actions this year. As you can see from our annual statistics on page 4, this would represent a significant increase – more than double the number in 2014 and 2015.
As in previous quarters, the most filings were against companies in the technology and healthcare industries. Geographically, companies based in Europe and Asia made up the majority of the first quarter filings. Companies that are either directly listed, or those with their ADRs listed on the New York Stock Exchange comprised half of the Q1 filings. Three companies whose securities are traded only over the counter in the US were subject to a filing this quarter. A full breakdown of the filings based on headquarters, industry and listing is on page 3.
Focus on Merger Objection Suits – Different Trends for US and International Companies
International companies listed in the US face a different securities class action environment compared with their US domestic counterparts. One example of this different environment is merger objection suits (also known as M&A suits).
Commentary about the recent increase in securities class actions has highlighted the move of merger objection suits into federal courts from Delaware state courts. This resulted from a decision in the Delaware Court of Chancery where the court refused to approve a disclosure-only settlement.2 In a typical merger objection case, the plaintiffs allege that the disclosure documents filed relating to a pending takeover are false and misleading as they omit information shareholders need to evaluate the deal, such as additional financial projections or details of potential conflicts of interest. Historically, these cases have been viewed as part of the cost of taking over a public company. Cases typically resulted in the target company agreeing to produce some additional disclosure. Usually the only money changing hands is a fee to the plaintiffs’ lawyers as part of the overall settlement or agreement to dismiss the lawsuit.
The type of case matters because M&A suits can be less costly than other types of securities class actions. This is partly because of the higher dismissal rates and partly because plaintiffs typically seek additional disclosure, rather than damages. According to Cornerstone Research, for the period from 2009 to 2017, 86% of M&A cases were dismissed while only 46% of non-M&A suits were dismissed over the same period.3
Merger objection cases make up a smaller percentage of class action filings for international companies than for their US domestic counterparts. For example, in 2016, the year of the Delaware decision, M&A cases made up 31% of all class action filings, but only 5% of the actions against foreign filers were M&A suits. In 2017, when M&A cases made up 48% of the overall filings, only 10% of the SCAs against foreign filers were M&A suits. And in 2018, the overall percentage of M&A cases was 45%, whereas 22% of the securities actions against international companies were M&A actions. Over time, this difference is likely to mean international companies have a lower overall dismissal rate than their domestic counterparts. When reviewing information regarding dismissal rates and overall costs of US securities class actions, it is important to remember that the higher dismissal rates domestic US companies are currently experiencing due to this move of M&A cases into federal courts, does not currently apply to international companies in the same way.
This is just one example of how US domestic trends do not necessarily hold true for companies headquartered outside of the US. International companies need to be familiar with the US securities environment for international companies rather than rely solely on the experience of US companies.
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1 For more about class actions against companies who only trade over the counter in the US, see our insights paper: UK Public Companies and US Securities Class Actions – a Hidden Risk?
2 See In re Trulia Inc. Stockholder Litigation, C.A. No. 1002-CB at 39 (Del. Ch. Jan. 22, 2016).
3 Cornerstone Research - Securities Class Actions – 2018 Year In Review – Page 15