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Securities Class Actions Report: Filings Against Public Companies Down for Second Year in a Row

February 8, 2022

/Management Liability/D&O

2021 may show that 2020 was not an anomaly when it comes to the frequency with which plaintiffs bring securities class action lawsuits against public companies: securities class action filings are down for the second year in a row.

The drop in the rate of filings for the past two years—2020 and 2021—breaks a decade-long trend that was going the other way.

Filings Peaked in 2019, Trending Downwards

The cause? A major cause of the overall decrease is the decrease of securities class action filings in state courts for Section 11 claims.

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Good News: Drop in Section 11 Claims in State Court

Parallel filings of Section 11 claims in both federal and state courts reached a peak in 2019 (40 cases) as a result of the US Supreme Court’s decision in Cyan v. Beaver County Employees Retirement Fund. By contrast in 2021, there were only eight of these cases. This represents an 80% drop from 2019.

The reason? In March 2020, the Delaware Supreme Court in Sciabacucchi v. Salzberg affirmed that Delaware corporations can insert federal forum selection provisions in company charter documents (also known as the “Grundfest Clause”). Such provisions require shareholders filing Section 11 claims to do so exclusively in federal court, which is to say not in state courts. Most IPO companies took note and adopted federal forum provisions. As a result, Section 11 suits in State court have dropped off and now mostly only include foreign filers who have not adopted federal forum provisions in their charter documents.

Section 11 Claims Down in State Courts, 2019-2021

While there is a decrease in state courts of Section 11 claims against IPO companies, there has not been a decrease in the overall rate of filings against IPO companies. Seventeen percent of the cases (31 of 182 cases) in 2021 involved Section 11 filings as compared to 14% in 2020.

While IPO companies can benefit from federal forum provisions, there has been no letup in Section 11 federal court filings against newly public companies. We do not expect the rate of filings against IPO companies to slow down at a significant rate in 2022.

Class Action Filings by Industry: Tech and Biotech in Top Spots

Technology and biotechnology sectors continue to see the majority of class action filings. In 2021, these two sectors made up more than half of the cases filed at 55%. This is up from 47% in 2020.

The increase can be attributed to pandemic-related allegations against biotech companies at 25% in 2021 versus 19% in 2020. For example, one notable case was against AstraZeneca for clinical trial issues for its COVID-19 vaccine.

Manufacturing took third place, as shown below.

High Technology and Biotech Filings

Finally, one trend we are keeping an eye on, as discussed in the report, is the trend of litigation against companies that have recently gone public through a de-SPAC transaction.

2021: Notable Year for Settlements

The year 2021 saw 101 settlements for an aggregate of $3.2 billion. The year was notable for high-dollar settlements of $50 million or more, for the largest number of settlements reached, and for total dollars being paid in settlements in any one year in the past decade.

A settlement with Twitter for $809.5 million accounted for 25% of the settlement dollars. The following shows the top 10 settlements of 2021:

Graph Showing High Settlements in 2021

The robust settlement activity is not surprising; there was a build-up of hundreds of open cases that had reached a peak in 2020 with more than 550 cases yet to be resolved—101 of these cases came to a resolution in 2021.

Impact on D&O Insurance Rates

No doubt insurance carriers will be forced to consider the rise in settlement dollars when considering both renewals and new business. However, the drop in filing activity over the past two years is a trend in the right direction for D&O insurance buyers and insurance carriers.

As noted in our Mid-Year Report, there are positive signs that the market could soften for rates with the introduction of new capacity in the D&O market, creating healthy competition among carriers and better rates in the D&O liability insurance market.

Thus, the hardest parts of the “hard market” for D&O coverage appear to finally be easing up. Having said that, the surge in filings against de-SPACs will mean that insurance carriers will not be inclined to pull back on the rates for new de-SPAC companies, given that this class of risk has yet to be fully vetted in the courts.

Access the DataBox Year-End Report now for more details on what’s covered in this article and more, including:

  • What pandemic-related class actions were notable in 2021
  • Why SPACs are in the litigation spotlight
  • How class action filings panned out against foreign companies last year
  • Which industries had the highest settlements

Get instant access to the DataBox Year-End Report now >>>

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

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Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn