Federal securities class-action suits jump to 20-year high in 2016 — report

Federal securities class-action lawsuits totaled 270 in 2016, the highest level in 20 years, and up from 188 in 2015, said a report released Tuesday by Cornerstone Research and Stanford Law School Securities Class Action Clearinghouse.

Among S&P 500 companies, 8.4% were the targets of these lawsuits in 2016, the highest level since 9.2% in 2008 and up from 2.6% in 2015. The targeted companies accounted for 10.9% of the S&P 500’s market capitalization, up from 3.2% in 2015.

According to the report, the 2016 increase was primarily driven by 80 filings related to mergers and acquisitions, the highest number of M&A filings since 2009 (when those filings were first tracked separately) and up from 17 in 2015.

“M&A filings increased markedly after the Delaware Chancery Court’s rejection in January 2016 of a disclosure-only settlement in Trulia, shifting several merger-objection lawsuits from state to federal venues,” said John Gould, senior vice president at Cornerstone Research, in a news release about the report. “But this is just part of the story. Traditional filings (those that aren’t M&A and Chinese reverse merger cases) maintained their momentum from 2015 and the first half of 2016. The previous three semiannual periods have all had more than 90 such filings, including 94 in the second half of 2016.”

The Jan. 22, 2016, Trulia ruling upended a pattern of shareholder litigation filing, contending corporate M&A parties failed to disclose sufficient information to enable shareholders to evaluate a deal (Zillow’s acquisition of Trulia) and make an informed decision on voting. Recognizing that disclosure-only settlements could be harder to come by, these lawsuits may have switched to federal courts from state courts.

Of the 270 total filings in 2016, 228 were filed against U.S.-based companies and 42 against non-U.S. companies. This compares to 154 and 34, respectively, in 2015.

The report also looked at overall alleged market losses and found for 2016 an aggregate $823 billion loss in defendant companies’ market value from the trading day with the highest market capitalization during the class-action period to the trading day immediately following the end of the class-action period. This is up from $371 billion in 2015 and marks the first year since 2008 that losses exceeded the historical average of $595 billion.