Here at Woodruff Sawyer, we’ve been tracking securities class action trends for decades. Starting in 2013, we had a run of record-breaking years in terms of securities class action filings until the record high in 2019 of 268 filings.
Then 2020 hit. That was the year that the Delaware Supreme Court in Sciabacucchi v. Salzberg affirmed that Delaware corporations could insert federal forum selection provisions in company charter documents.
This ruling curtailed plaintiffs’ ability to bring Section 11 suits against IPO companies in both state and federal court venues. As a result of the ruling, IPO companies began adopting federal forum provisions, and Section 11 suits in state court have dropped significantly.
That is part of the reason for the downward trend in recent years as filings continue to plummet. By the close of 2022, there were just 168 cases filed—a 37% decrease since 2019.
In this article, I’ll go over some of the highlights of Woodruff Sawyer’s Databox 2022 Year-End Report.
You can access the report for more detailed information here:
DataBox 2022 Year-End Report >>
In 2022, nearly half of all class actions involved the following types of suits:
- Twenty-one percent (21%) were Section 11 claims against IPO companies.
- Sixteen percent (16%) were suits against de-SPACs.
- Thirteen percent (13%) were suits involving COVID-19 matters.
IPOs Still a Major Target
If you’ve been following our analyses over the years, you are familiar with the fact that IPO companies are a favorite target of the plaintiffs’ bar.
Plaintiffs like to bring Section 11 suits under the Securities Act of 1933 against IPO companies when the trading price falls below the IPO price. These suits allege material misstatements and omissions in the S-1 registration statement. Although there is a three-year statute of limitations on these suits, these cases are usually brought within the first 12 months after going public.
As mentioned, IPO companies—fortunately—are no longer fighting on two fronts for the same lawsuit in federal and state courts. However, Section 11 suits remain a popular way to target IPO companies. In fact, the frequency of filings against IPO issuers is up.
In 2022, we saw 35 of the 168 securities class action filings were against IPO companies for Section 11 claims. This is up from the previous year, where IPO Section 11 litigation represented 17% of the cases and in 2020, 14%.
Fewer de-SPACs, Fewer Lawsuits
The year 2022 saw an 18% drop in class action suits against de-SPAC companies from 2021. The most significant drop occurred in the second half of 2022, when there was a 65% decline.
The reason? The SPAC landscape slowed significantly during that period, so there were fewer de-SPAC transactions.
In April 2022, the Securities and Exchange Commission issued proposed rules that would require enhanced disclosures for de-SPAC transactions. This would create greater liability for both the SPAC and the acquired company.
This, paired with the economic headwinds of 2022, put a damper on the SPAC market. As a result, there were fewer newly de-SPACed companies for the plaintiffs to target.
COVID-19 Cases Linger
In 2022, plaintiffs filed 21 suits that referenced COVID-19 for a total of 61 class action filings related to COVID-19 since the beginning of the pandemic.
Class action suits in this area involve the following:
- Issues with the development or production of COVID-19 treatments or tests.
- Business directly impacted by an outbreak/surge of the virus.
- Vulnerabilities such as post-merger integration, staffing, sales, inventory and/or product issues that were, in part, caused by or occurred during the pandemic.
Four companies involved in developing COVID-19 vaccines or tests settled their cases in 2022, totaling nearly $53 million.
Settlements Are Still Significant
While we see decreases in filings, overall decreases in settlement amounts are not yet forthcoming. Total settlement dollars in 2022, although down from the decade-high of $3.2 billion in 2020, still exceeded the 10-year average of $2.3 billion, for a total of $2.4 billion paid out in 2022. Also, the distribution of settlements in 2022 was very different from those in 2021. There was a 7% increase in settlements of $20 million and over compared to 2021, indicating that in 2022 more companies had to write bigger checks to settle their claims.
2023 Outlook on Securities Class Actions
What will 2023 look like for securities class actions? Download your copy of Woodruff Sawyer’s Databox 2022 Year-End Report for more details on why we believe:
- There will be fewer IPO Section 11 class action filings this year.
- 2023 will be a bellwether year for testing the viability of de-SPACs.
- There will be a shift in how COVID-19-related suits are categorized.
When you access the report, you can also dive into:
- Securities class actions by industry, company size, and location.
- Settlements in 2022 and over the past decade.
Bottom line: Regardless of company type, those that don’t get ahead of managing the investment community’s and shareholders’ expectations in the current economic environment will be vulnerable to securities class actions in 2023.
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