In our US Securities Class Action Bulletin we analyse the latest data on US securities class action filings from Stanford School of Law, and identify the trends behind the numbers. The aim is to inform stakeholders at a time when class action lawsuits have hit a record high, giving clients and brokers the most up-to-date information on what is driving the challenging claims environment and, in particular, actions against foreign filers. This article reviews the full year trends for 2018 and looks ahead to what 2019 may hold.
This information is pertinent to any US-listed foreign filer, whether their shares are directly listed in the US or whether their US listing is through American Depository Receipts (ADRs). Even companies with shares traded over the counter in the US are not safe.
Last year was the second highest year on record for securities class action filings, trailing only 2017 (excluding the IPO laddering claims in 2001). Due to the high number of merger objection cases against domestic filers, we have focused most of our analysis on core filings, which exclude M&A cases. Looking only at these core filings, 2018 was also the second highest on record, following only 2008 when the volatility caused by the global financial crisis pushed filings to record levels. Focussing solely on companies with their headquarters outside the US, filings also remain at elevated levels, with 47 traditional class actions against non-US companies last year, and over 50 when including merger objection claims. This is close to double the long-term  average of 24. Importantly, there is no single cause of the spike over the last two years that can explain the elevated number of filings, as in 2011 when there was an increased number of claims against foreign filers that resulted from a high number of Chinese reverse mergers. The evidence suggests foreign filers should expect this heightened litigation environment to continue.
While class action litigation is at an all-time high, the overall numbers of US-listed firms is diminishing. There are several reasons for this, including M&A activity, cost of compliance and the relative ease of sourcing funding privately. With a smaller pool of companies for plaintiff lawyers to target and focus on, listed companies have never been at a greater risk of being hit with a securities class action suit.
Foreign filers are no exception to this rule. Rightly or wrongly, foreign filers are often viewed as less experienced than their domestic counterparts, with weaker SOX compliance and disclosures. Some plaintiffs’ lawyers pursue these companies in the belief they are more fearful of litigation in US courts and will be more inclined to settle actions earlier, and for higher amounts, than a domestic US company might.
Claims against non-US companies were brought against a wide group of industries, with ten different sectors represented in this year’s group of class actions. Leading the way was the Technology sector with nearly double the next highest contributing sectors, Services and Financial. The Healthcare, Consumer and Basic Materials sectors all had five or more suits. Two of the actions against companies in the financial sector involved companies, who had undertaken an Initial Coin Offering, or ICO, a trend likely to continue as regulators and investors come to grips with this emerging industry.
It is clear that all non-US companies with securities trading in the US could find themselves subject to a securities action. In 2018, class actions were taken against non-US companies who were directly listed on the NYSE or NASDAQ exchanges, as well as entities with ADRs traded on NYSE or NASDAQ. Significantly, four companies that were subject to a US class action had ADRs that were only traded Over-The-Counter. Whilst a foreign company with a direct listing may be more exposed, foreign companies without direct listings could still be dragged into a US court. Our insights paper European Public Companies and US Securities Class Actions – a Hidden Risk? gives more detail on this significant and rapidly changing area.
Just as no listing type is safe, there are no clear trends regarding the home country of the companies subject to securities class actions filings. The trends of 2017 were broadly replicated in 2018 with companies headquartered in Europe and Asia having the most filings. In 2017, Europe was in the lead with 21 filings versus Asia with 13, and in 2018 they flipped positions with Asia leading with 19 filings and Europe close behind with 17. However, both of these regions are experiencing filings well above their historic average, with Asia’s 19 class actions double their historic average of 8 and Europe’s 17 more than double their 20 year average of 7. An analysis of the core filings by geographic region since 2014 is on page 4.
The increased levels of core filings against international companies seem here to stay. The fact that this elevated filing environment has occurred in relatively good economic times, compared to previous spikes which occurred during an economic downturn, should be concerning for all directors and officers. The rise in filings has resulted in a corresponding increase in claims notified under D&O policies. The rise in class actions has also led to more substantial defence costs being paid out from D&O policies as cases move through the courts. Although it is still very early in these 2018 cases, the increased number of cases will likely also lead to increased settlement payments under D&O policies compared to prior periods. Significantly, the trends reveal there is no single sector, listing or geography that is targeted, so all public companies are potentially at risk.
This heighted claims environment has put pressure on the D&O market. Rates have hardened quickly outside the US, and insurers have limited the capacity deployed on US-exposed D&O. The good news is that AIG’s 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.
Of particular concern for foreign companies is the prospect that US securities laws will apply to overseas firms not listed on US exchanges. A recent Ninth Circuit Court of Appeals decision allowed plaintiffs to bring a US securities class action lawsuit against Toshiba in the wake of the company's $1.2 billion accounting scandal, despite the fact the claim was based on the purchase of Toshiba’s unsponsored over-the-counter (OTC) American Depositary Receipts (ADRs).
This should be a wake-up call to all companies with Level 1 ADRs. The case has significant implications for other unlisted foreign firms that had been somewhat shielded from securities class actions since the US Supreme court’s Morrison ruling in 2010 as it opens the door for similar actions to be taken in the future.