As predicted in my A Perfect D&O Storm (February 2016), this year has seen some rough seas — at least from a D&O liability perspective.
Securities class action filing activity grew to more than one-third higher than the 10-year securities class actions filing average. When considered along with several huge settlements announced this year, the heightened activity could mean rising D&O claim tides.
Putting aside securities class actions, 2016 offers a few rays of sunshine. Last year’s first-half drop in derivative filings from 131 to 87 (34%) has been followed in 2016 by a drop of 31% — from 87 to 60 derivative shareholder actions. Also, merger objection claims are down 17% to 87.
Securities class actions
Not so long ago, several respected experts trumpeted as imminent the likely demise of the securities class action. That did not happen. Then, a couple of years ago, Halliburton Co. v. Erica P. John Fund (Halliburton II) practically put the industry on hold as, again, experts contemplated the potential demise of the securities class action. That also did not happen. Rather, the contrary proved true. Securities class actions are alive and well. They remain a persistent, potentially growing threat to directors, officers and issuers.
Stanford Law School’s Securities Class Action Clearinghouse reports 119 securities class actions filed in the first half of 2016 — 37% higher than the 10-year average of 87. Does that suggest a record year or simply a rough first half? It is hard to know. With the tough economic environment — made a bit tougher by the U.K. decision to leave the E.U.— continued heightened volatility is likely. Prepare for a continuing trend of heightened securities class action filing activity. Better to play it safe.
The data from the first half of 2016 suggests we can expect securities class actions to remain the predominant driver of D&O claim severity. Household International, Inc. topped the reported settlements at $1.575 billion, followed in the U.S. by the $830 million settlement of a long-running securities class action (SCA). At least five top SCA settlements exceeded $200 million.
Although not a securities class action, the $1.3 billion settlement of related investor options in the Netherlands through the Dutch collective settlement procedure is the second biggest securities settlement announced so far in 2016. More importantly, it demonstrates very real securities claim severity risk outside the U.S. borders, too.
Who was targeted?
Of the 119 new securities class actions, health care (30), technology (22) and services (20) sectors were targeted the most. Seemingly perennially leading targets—life sciences and high-tech companies—lead again with 25 (21%) and 13 (11%) of the securities class actions filings.
Derivative shareholder actions
The 34% drop in first half derivative shareholder actions was 44% below the 102 filing average for the last 10 years. This is particularly good news since last year’s first half fall in derivative shareholder actions was followed by an 11% increase in the second half—potentially leaving doubt as to whether derivative shareholder actions were trending downward.
What is driving that potential trend? Maybe forum selection bylaws are actually working? Perhaps Delaware courts’ heightened scrutiny of non-monetary settlements has plaintiffs’ lawyers chasing other options? Again, it is hard to know.
Merger objection suits
In the first half of 2016, merger objection suits dropped 17% year-over-year—following drops in the prior two first half periods of 18% and 26% respectively. While mergers and acquisition (M&A) activity is down so far this year, last year saw a record $4.77 trillion worth of deals announced. So, it is unclear whether an uptick in deal activity would necessarily result in a corresponding increase in merger objection suits.
Total withdrawn M&A for the first half of 2016 is at the highest level since 2007. Will the failed deal activity result in more M&A suit filings? Not so far.
D&O insurance opportunities
With securities class action exposure apparently trending up, it may be time to take advantage of a very competitive D&O market that may not last. Intense competition among D&O insurers has brought premiums to historic lows.
As carriers look to grow in the wake of successive years of premium decline, pockets of opportunity have developed. Enhanced coverage and best-in-class policy wording may not cost more, and some savvy buyers have found that even enhancements that come with a price can deliver unprecedented risk transfer value.
The statistics provided in this alert were compiled from information contained in the Stanford Law School’s Securities Class
Action Clearinghouse and Advisen databases as of the date this report was prepared.