The past decade has shown a steady year on year rise in securities litigation filed against companies domiciled or headquartered outside of the United States (non-US issuers). From an historic high of 65 core filings in 2020, we saw a fall in 2021, with filings slightly below the annual 10-year average of 42 cases.
There were 45 securities class actions (SCAs) filed against non-US issuers in 2021, of which 39 were core cases which did not involve merger objection litigation. Of these 39 core cases, there were also 5 parallel suits brought in state courts. For the purposes of this report, we will focus on the 39 core filings.
Though it is still too early to draw any firm conclusions from this year-over-year decrease in filings, the effects from ongoing Covid-related lockdowns in 2021 are likely to be a material mitigating factor. This mirrors wider SCA activity against domestic US companies, where total core filings fell. Filings against non-US issuers still made up over a quarter of all filings in 2021 and remains a highly exposed segment for the US plaintiff bar.
There were 21 suits against filers listed on NASDAQ, 14 suits against filers trading on the NYSE and 4 OTC listed firms. While there were cases against involving sponsored ADRs, no suits were filed against companies with unsponsored Level 1 ADRs.
It is worth noting that in January 2022, the Ninth Circuit reversed an earlier judgment by the Second Circuit in the Stoyas v Toshiba case where a suit was filed against Toshiba by holders of its unsponsored Level 1 ADRs. The Ninth Circuit held that the Toshiba case did not meet the second component of the two-stage test in Morrison v. National Australia Bank relating to domesticity of the transaction. The decision represents a further hurdle for shareholders holding Unsponsored Level 1 ADR’s wishing to pursue securities litigation in the US. The wider impact of this decision is yet to be determined and is an area of litigation we continue to monitor.
In terms of the plaintiff bar, the 2nd Circuit continues to be the venue of choice for SCA litigators by far, attracting the majority of suits filed. While California has historically been popular, its numbers dropped significantly in 2021.
As with prior years, the geographic spread of class actions in 2021 was weighted heavily towards companies headquartered in Asia, with Chinese companies representing 49%.
Historic class action trends with Chinese filers have been driven by accounting and disclosure irregularities. In 2020, a case against Luckin Coffee saw allegations of overstated revenues culminate in a settlement in October 2021 for $175m.
Chinese issuers also tend to engage in industry sectors that attract litigation, such as technology, online commerce, and financial services. Cases in 2021 were no different, with half of the cases in the technology sector. Of the 18 filings against Chinese companies, 17 were filed following enforcement actions by local regulators in relation to consumer data usage.
The second largest number of filings were against Canadian businesses, although there was a decrease in the number compared to the previous year (5 suits in 2021, compared to 12 in 2020). Notable is the drop off in Canadian actions relating to cannabis sales and distribution. Canada was followed by Bermuda, Ireland and Israel. Overall, breakdown by geography in 2021 was broadly consistent with the last 10 years of SCA activity.
Claims against non-US issuers involved companies operating in a wide range of sectors. The most frequently litigated sectors in 2021 were technology (12), services (8) and healthcare (7). This mirrors 2020. The only difference relates to the financial sector where 10 actions were filed in 2020 and only 3 were filed in 2021. The litigation these sectors attract reflect their more highly regulated nature.
A total of 26 cases were settled in 2021 for a total of $703m, with an average settlement value of $27m. The largest settlements were Luckin ($175m), Allergan ($130m) and Novo Nordisk ($130m). All these cases were settled in the discovery or early pleading phase of litigation.
A total of 39 cases were dismissed in 2021 with 12 cases dismissed without prejudice, 21 cases dismissed with prejudice and 6 cases voluntarily withdrawn by the plaintiff.
There are currently 125 active and ongoing cases against foreign filers (114 from 2018-2021) yet to be fully litigated. Based on prevailing settlement and dismissal trends, these cases may prove to be expensive to resolve.
The first quarter of 2022 has already shown similar pace to 2021, with 10 class actions against non-US filers of which 9 were core. We are cautious about speculating about what the US securities litigation landscape will look like for non-US filers for 2022 and beyond, but current indications about key exposures will focus on:
Of these exposures, two of the most interesting are SPACS and De-SPACs, and derivative litigation:
SPACs & De-SPACs
Over 600 SPACs were listed on US exchanges in 2021. SPACs have attracted heavy regulatory scrutiny and spawned growing levels of litigation commonly involving allegations of misrepresentations and fraudulent statements. SPACs accounted for nearly 15% of all SCAs in 2021 but only 2 of these SCAs involved non-US SPAC filers. This is expected to increase in 2022 as domicile changes following the 2021 Multiplan court decision, with many SPACs reverting to the Cayman Islands to avoid Delaware law and gain certain tax exemptions. Despite the number of SPAC-related SCAs filed in 2021, few cases have reached the motion to dismiss stage. It remains to be seen how these lawsuits will fare. We expect SCA filings against SPACs and de-SPACs to continue.
Derivative Shareholder Litigation
A joint paper published by AIG and Clyde & Co. in September 2021, Shareholders Increasingly Targeting D&Os Of Foreign Companies In New York Derivative Actions, highlights that over the course of 2021, there was an increase in derivative actions by shareholders involving non-US companies. At least ten derivative actions in New York State courts were filed on behalf of non-US companies, alleging violations of the companies’ home country laws. If the New York actions proceed, shareholders may pursue more derivative claims against the directors and officers of non-US companies in US courts.
Two recent dismissals in December 2021 in favor of Bayer AG and UBS Group AG cast some doubt over whether derivative actions against non-US issuers will survive in US courts. Similar derivative cases are pending.
All of the above comes at a time where we’ve seen stock market volatility in Q1 2022, amid worsening existing macro-economic challenges, such as inflation and supply chain disruption. Expect further uncertainty ahead which may affect the SCA environment.
AIG’s underwriting teams are available and eager to discuss insured’s D&O needs with their brokers. Our claims team has significant experience assisting clients in the defence and settlement of securities class actions, providing helpful insight and support when directors and officers need it most. At AIG, our strong claims expertise means we will not only offer specialist help when a claim occurs but will also assist in mitigating potential claims in the first place.
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