The number of federal securities class-action filings surged to a record high in 2016 as plaintiffs’ lawyers turned to the federal courts to file suits over merger and acquisition deals.
Class-action filings totaled 270, an increase of 43% on the 188 filings in 2015 and 44% above the 1997–2015 historical average, according to a report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.
The gain reflected in large part 80 filings related to M&A transactions, the highest level since 2009 when the report began separately categorizing M&A filings.
Dr. John Gould, a senior vice president at Cornerstone, said challenges to mergers had shifted from state to federal courts since the Delaware Chancery Court ruled in January 2016 that it will not routinely approve settlements of stockholder class actions when the terms do not include any monetary recovery for the class.
In so-called disclosure-only settlements, companies have been able to resolve cases by making additional disclosures in advance of the stockholder vote on a transaction.
Conversely, the number of claims filed in state court under Section 11 of the Securities Act, which imposes liability for material misstatements or omissions in registration statements, reached a seven-year high of 18 in 2016. Before 2015, these types of state filings occurred infrequently, ranging from one to five per year.
“Plaintiffs’ lawyers are getting creative,” said Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse. “They recognize that federal courts are more likely to toss their Section 11 claims, so they funnel that litigation to California courts.”
“And, when the Delaware judiciary shuts the door on merger settlements that provide no measurable benefit for shareholders, they file in federal court by bringing claims that can’t be moved back to state court,” he added. “This is rational forum-shopping behavior by plaintiffs’ lawyers trying to maximize their returns.”
Traditional filings, excluding M&A and Chinese reverse merger deals, rose 11% in 2016, maintaining their momentum from 2015. The previous three semiannual periods have all had more than 90 such filings, including 94 in the second half of 2016.