M&A Suits Drive First Quarter Securities Litigation Activity

M&A Suits Drive First Quarter Securities Litigation Activity

Largely as a result of a flood of M&A related lawsuits, there were a significant number of new securities class action lawsuits filed in the first quarter of 2011, and even factoring out the M&A lawsuits, the first three months of the year still represented an active period for securities lawsuit filings.

Taking the merger objection suits into account, there were a total of 55 new securities class action lawsuits filed in the first quarter. That would imply an annualized rate of 220 securities suits for the year, which would be well above both the 176 filed in 2010 and the 1996-2009 annual average of 195 filings. However, the rash of merger suits filed during the first quarter does complicate the numeric analysis, as the changing mix of cases may make the year to year measures somewhat of an apples- to-oranges comparison.

There were 20 federal court merger objection lawsuits in the first quarter. (There were even more state court merger objection lawsuits, as discussed further below.)  Subtracting the federal court merger objection lawsuits from the first quarter securities class action lawsuit filing tally would reduce the number of first quarter filings from 55 to 35, which would be idenitcal to the 35 new securities suits filed in the first quarter of 2010. Obviously, the process of determining what to include in the lawsuit count has a huge impact on the ultimate tally.  I have further observations about "counting" the securities suit filings below.

The 55 securities suits in the first quarter represent a surprisingly diverse range of kinds of companies. The companies targeted in the 55 suits represent 42 different Standard Industrial Classification (SIC  Code categories. Only two SIC Code categories had as many as three companies sued - SIC Code Category 2834 (Pharmaceutical Preparations) and SIC Code Category 3674 (Semiconductors and Related Devices.).

By interesting contrast to recent years' filing patterns, the first quarter filings included relatively few companies in the 6000 SIC Code group (Finance, Insurance and Real Estate). While the credit crisis litigation wave was unfolding and lawsuits against financial companies flooded in, suits against companies in the 6000 SIC Code group predominated. The relative decline of litigation activity in this category provides even further proof that the credit crisis related litigation wave has largely played out. I count a total of only three cases in the first quarter that might even arguably be categorized as credit crisis related. Among these three were  two new securities suits in the first quarter involving failed or troubled banks, which is a filing phenomenon that seems likely to continue in the weeks and months ahead.

Among the 55 first quarter cases were nine suits filed against companies domiciled outside the United States. In addition to these nine, there were two additional companies sued that were incorporated in the United States but that have their principle place of business outside the U.S. These eleven total cases represent about 16.3% of all first quarter filings, a percentage that is above the approximately 12% of 2010 filings that involved non-U.S. companies. This relative increase in the incidence of filings against non-U.S. companies is frankly unexpected in light of the U.S. Supreme Court's June 2010 decision in Morrison v. National Australia Bank (about which refer here).

The persistent elevated level of filings against non-U.S. companies is largely attributable to the surge in lawsuits involving Chinese companies. Four of the nine lawsuits filed in the first quarter against non-U.S. companies were filed against Chinese companies. Three additional lawsuits involved companies incorporated elsewhere but with their principle places of business in China. These seven suits together represent about 12.7% of all first quarter filings. Indications are that this phenomenon of suits involving Chinese companies is likely to continue, as in recent days, plaintiffs' lawyers have issued numerous press releases (for example, here and here)  indicating that they  are "investigating" certain other Chinese companies (a development that usually presages a subsequent lawsuit filing.)

As the new filings have shifted away from financially related companies, the jurisdictions in which lawsuit filings have been concentrated have also shifted. During the credit crisis litigation wave, lawsuit filings were concentrated in the Southern District of New York. Indeed, there were nine new securities suit filings in the Southern District of New York during the first quarter 2011, but for the first time since 2007 there were more quarterly filings in a federal district other than the Southern District of New York. Specifically, there were ten new securities lawsuit filings in the Central District of California, and another five in the Northern District of California, a changing jurisdictional mix that reflects the shifting mix of companies that are getting sued.

More About the Merger Objection Lawsuits: As I noted above, there were twenty new federal court merger objection lawsuits filed during the first quarter of 2011. A total of at least 63 different M&A transactions produced merger objection litigation in the first quarter, but many of the lawsuits relating to these transactions were filed in state court rather than in federal court. In addition, some of the transactions provoked lawsuits in both state and federal court, and some provoked multiple different lawsuits in different states.

Breaking all of this M&A related litigation down, and counting both the state and federal merger objection lawsuits,  there were a total of at least 81 different lawsuits relating to at least 63 different transactions. OF these 81 lawsuits, 20 were filed in federal court and 61 were filed in state court. As indicated above, some transactions produced multiple lawsuits in different jurisdictions.

A Note About Counting: Some readers may note that my count of 55 first quarter securities lawsuits differs substantially that the 39 lawsuits reported as of today on the Stanford Law School Securities Class Action Clearinghouse website. There are two reasons for this difference. One is timing, as I have counted suits that have not yet made it onto the Stanford site's list. The other is counting protocol, as I have included 11 federal merger objection suits on my list that are not included on the Stanford website list.

As I have noted numerous times in the past on this site, one of the most challenging parts about keeping a running tally of securities class action lawsuit filings is deciding what you are going to count. As part of my counting protocol used during the first quarter, I have chosen to "count" all federal court securities suits, including all merger objection suits. This has produced a count that differs in certain particulars from the Stanford website count. However, I should hasten to add that my count includes all of the cases noted on the Stanford site. It just includes a few more.

These differences underscored the importance of definitional consistency when making comparisons across time. The comparisons are only meaningful if the counting protocols are consistent over time.

Finally, and whatever else might be said about the increasing numbers of merger related lawsuits, it seems apparent that the mix of cases is decidedly shifting. While there may be fewer traditional securities class action lawsuits being filed than in some prior years, the amount of total litigation activity is at or above historical averages when the merger objection litigation is taken in to account. And it also seems to be the case that at least as a matter of percentages of all filings, the merger objection lawsuits now outweigh the tradtional securities class action lawsuits.

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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