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The recent annual trend toward declining numbers of corporate and securities lawsuit filings continued in the first half and second quarter of 2015, although second quarter activity did increase slightly compared to the prior quarter, according to a report from the insurance industry information firm, Advisen. If the increase in the second quarter numbers compared to the first were to continue for the remainder of the year, the number of new corporate and securities lawsuits during the year could see an annual increase for the first time in four years. The July 15, 2015 Advisen report, entitled “D&O Claims Trends: Q2 2015” can be found here.
Unlike other published reports which track only securities class action lawsuit filings, the Advisen report tracks a wide variety of types of corporate and securities lawsuit filings (including but not limited to securities class action lawsuit filings). However, the Advisen report uses its own peculiar terminology in describing the various categories of lawsuits; as a result, the report must be read with a great deal of caution.
Based on the figures from the year’s first half, the number of corporate and securities lawsuit filings that Advisen tracks are on pace to decline for a fourth consecutive year. But while the second quarter saw an eight percent decline in new filings compared to the same quarter last year, the number of filings during the second quarter did increase slightly compared to the first quarter of the year. Even so, Exhibit 1 to the report shows that if the first half 2015 filings are annualized, the projected year end total number of filings would be at the lowest level since 2009 and only slightly above levels last seen in 2008.
While there were declines during the quarter and first half in various kinds of lawsuit filings, including in particular for shareholder derivative lawsuits, breach of fiduciary duty lawsuits and merger objection cases, other types of filings increased, including what the report calls Capital Regulatory Actions (essentially, government enforcement actions), as well as Securities Class Action Lawsuits. (My own analysis of securities class action lawsuit filings, which can be found here, also found an increase in securities class action lawsuit filings during the year’s first half.)
What the report calls Capital Regulatory Actions represented 64 percent of all corporate and securities filings in the second quarter, and reflected a four percent increase from the first quarter.
During the first half of 2015, securities class action lawsuit filings represented 14 of all corporate and securities lawsuits that Advisen tracks. This percentage is well below the levels prior to the financial crisis, when securities class action lawsuits represented as much as a quarter of all filings. The percentage of this type of lawsuit declined during the financial crisis to a low of 10 percent in 2011. However, since that time, the percentage has increased, though the figures still remain below pre-crisis levels. The report suggests the possible reason for this decline may be due to “a reduction in the number of companies traded on U.S. stock exchanges and the winding down of financial crisis related litigation.” The report also suggests that the relative decline of securities class action lawsuits “may also reflect a chance in emphasis by plaintiffs’ firms, due in large part to a string of Supreme Court decisions favoring defendants.”
The report also notes that the annual number of shareholder derivative lawsuit filings has declined every year since 2011, and that early indications are that the downward trend will continue this year. During the year’s first half, the number of shareholder derivative action filings is down a total of 55 percent compared to the first half of 2014. The second quarter of 2015 had just 14 derivative lawsuit filings, compared to 61 in the second quarter of 2014.
Similarly, the number of new merger objection lawsuit filings has also declined. Through the first half of 2015, merger objection case filings have declined by 35 percent compared to the first half of 2014. However, the report does not match these filing trends against levels of M&A activity, so it is not possible to discern from the report alone whether or to what extent that the rate of merger objection lawsuit filing activity is simply a factor of the levels of M&A activity.
According to the report, during the second quarter financial firms remained the leading source of new filings and enforcement actions, representing thirty percent of all new filings during the quarter. But while companies in the financial sector represented the largest percentage of all second quarter filings, the percentage of new filings involving financial companies is below the peak of 40 percent in 2008 and 2009. The second most active sector during the second quarter was information technology companies, which represented 18% of second quarter filings.
Advisen tracks not only corporate and securities cases filed in the U.S. but those filed outside the U.S. as well. During the second quarter, new claims filings involving non-U.S. companies, filed both in the U.S. and elsewhere, accounted for 14 percent of all filings. This is the same percentage as the second quarter of 2014 but four percent lower than the first quarter of the year.
As for the reasons why overall corporate and securities litigation activity has been filing over the course of the last several years, the report identifies a number of possible factors including “less financial crisis-related litigation, fewer U.S. public company targets, and fewer mediators to assist with settlements.”
Advisen Quarterly Claims Webinar: On July 16, 2015, at 11 am EDT, I will be participating in Advisen’s free one-hour webinar discussing Second Quarter trends. Also participating in the seminar are Aspen’s Ray Hannan, Aon’s Christian Hoffman, and Advisen’s Jim Blinn. The purpose of the seminar is to discuss why D&O related litigation is decreasing; which segments are showing the greatest changes in terms and conditions; IPO pricing; and issues relating to corporate and securities claims involving biotechnology companies. Information about the webinar including registration instructions can be found here.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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