Investor class actions alleging violations of federal securities law fell dramatically for the second year in a row, to levels not seen since 2015, a new report said.
Securities class action filings dropped 35% from 2020, landing at just 218 new cases in 2021 compared to 333 the year before, according to the annual report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.
But one area actually saw a substantial increase in filings: cases involving special purpose acquisition companies, also known as SPACs, are up more than sixfold, the report released Wednesday said.
And those cases will keep coming, Christin J. Hill, a San Francisco-based partner with Morrison & Foerster LLP, said Wednesday. “This trend has been a long time coming, and isn’t going away any time soon.”
SPAC-Related Litigation Up
Investors filed 32 SPAC-related cases in 2021—not including a SPAC-related merger objection suit—compared to just five core SPAC cases in 2020.
“The raw number of SPAC-related cases still isn’t very high,” Darren Robbins, founding partner of Robbins Geller Rudman & Dowd LLP who regularly serves as lead counsel for investors in securities fraud class action cases, said Wednesday. “The real story here is momentum,” and practitioners will likely see more SPAC-related suits because “the very nature of a SPAC creates perverse incentives to disregard the interests of and mislead investors.”
The majority of the SPAC-related securities class actions involve class periods that began after a SPAC announced a merger with a private business but before it completed the transaction, with 21 of the 32 cases falling within that timeframe.
“SPACs are seen as a way to go public faster than a traditional IPO,” Hill, whose practice includes representing public companies in securities fraud suits, said. “The plaintiff’s bar therefore sees SPACs as an indication that these companies may not be ready for prime time, which leads to increased scrutiny, and ultimately more SPAC-related filings.”
A “flurry” of new SPAC-related litigation is to be expected, Stephen P. Blake, a Palo Alto, Calif.-based partner with Simpson Thacher & Bartlett LLP, said Thursday.
But 2021 might actually turn out to be the “high-water mark” for these securities class cases because “SPAC deal volume appears to be dropping,” added Blake, whose securities practice includes advising companies on mergers and initial public offerings.
Many federal courthouses adapted how they handle proceedings after the pandemic changed U.S. daily life in early 2020, with restricted in-person access and more virtual hearings.
Although the pandemic “slowed down the pace of court proceedings,” it probably “didn’t directly affect the rate of new filings,” Jonathan K. Youngwood, global co-chair of Simpson Thacher’s litigation department, said Thursday.
The pandemic “isn’t the whole story” on the downward trend, but it’s “certainly a significant part of it,” Robbins, who’s based in San Diego, agreed. The market saw “dramatic declines” early on but has since hit record highs, he added.
“In a well-functioning system, you’d expect to see fewer cases in such an environment, and that’s what we’re seeing,” Robbins said.
Hill agreed that the strong market is “the greatest contributor to the decline in filings.” It’s market declines that usually lead to “an increase in new and creative securities class actions,” she said.
The pandemic itself gave investors new fodder for securities class cases, including challenges to company statements on pandemic-related products and consumer demand. The number of 2021 filings involving coronavirus-related claims held steady at 17, with 10 in the first half of the year and seven in the second, the report said.
Merger Objection Cases Fall
Complaints objecting to companies’ merger proposals fell, too, the report said. Merger objection cases were partly responsible for the surge in the total number of filings starting in 2017, shortly after a Delaware Chancery Court decision disfavoring a settlement model common in those suits drove investors to file in federal court instead.
But those cases fell to 99 in 2020, and then to just 18 in 2021, the report said. That’s down from 160 in the year before the pandemic, and from a high of 198 in 2017.
“There are many righteous merger cases where shareholders have been seriously harmed,” Robbins said. “But on the whole, the courts have done well to clean up this area and shift focus to the most serious cases.”
Downturns in securities class actions are cyclical, and filings should pick up in 2022 and 2023, Robbins said.
“The forgiving nature of the historic 2020-21 bull market is dissipating,” and markets now are confronting rising interest rates and other economic issues that they didn’t have to contend with in 2021, he said.
And although “courts have struggled to remain consistently open for live hearings and jury trial during the pandemic,” that will likely change in 2022, with cases progressing at a “more regular pace,” Youngwood, who’s based in New York and leads his firm’s civil securities litigation practice, said. “You will see more live hearings and more cases set for jury trials.”
“One thing we haven’t seen yet, but I expect to see in the future, are securities class actions arising from ESG disclosures,” Hill said, referring to environmental, social, and governance matters.
Some shareholders have filed ESG-related derivative suits, similar to derivative suits on corporate diversity filed starting in 2020, she said. “But as ESG disclosure requirements (and shareholder demands for ESG disclosures) increase, I expect to see an increase in securities class actions arising from ESG disclosures.”
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