On The Case

U.S. Chamber wants Congress to restrict securities class actions

(Reuters) - Prompted by a dramatic rise in the number of securities class action filings in federal court, the U.S. Chamber of Commerce’s Institute for Legal Reform launched a campaign Wednesday to push Congress to pass laws designed to discourage meritless securities litigation.

In 1995, when Congress passed the Private Securities Litigation Reform Act (PSLRA) in response to a proliferation of so-called strike suits afflicting companies with volatile share prices, securities class actions were filed at a rate of about 300 cases a year in federal court, according to a new Chamber report written by Andrew Pincus of Mayer Brown. In 2017 – after Delaware’s Chancery Court cracked down on reflexive shareholder class actions challenging M&A transactions – there were more than 400 securities class actions filed in federal court. That number looks like it will hold in 2018 as well, which means, according to the Chamber, that more than 8 percent of all public companies in the U.S. will be targeted in a securities class action this year.

The Chamber’s report argues that this “skyrocketing” filing rate presents a material cost to public companies, even though it also contends that the vast majority of these class actions are meritless. For that proposition, it cites research from last summer by the insurer Chubb, which found that the average cost of defending an M&A class action that was subsequently dismissed – in other words, a weak case – was $2.3 million in 2016. For all securities class actions between 2012 and 2016, the average cost per case was nearly $12 million, of which plaintiffs’ lawyers received an average $2.3 million and defense lawyers $2.9 million. The Chamber called that “deadweight loss to shareholders.”

The Chamber report attributes the rise in securities class action filings to two phenomena. First, as I mentioned above (and have written about repeatedly in the past two years), is the migration of suits challenging M&A transactions from Delaware Chancery Court to federal courts, after Delaware judges made it clear that they would no longer approve big fees for shareholders’ lawyers who obtained only amplified disclosures in class action settlements. And second is the rise of securities class actions based on corporate disasters like, for example, the BP Deepwater Horizon oil spill or Johnson & Johnson’s tort exposure in baby powder litigation or a data breach at Yahoo.

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Virtually none of the suits in these categories end up paying cash to shareholders, according to the Chamber, yet companies sometimes opt to settle even meritless suits when it would cost less to settle than to defend the class actions. The Chamber contends that’s the business model of plaintiffs’ lawyers in the M&A suits, which, in the main, end up being dismissed with hardly any litigation, after the defendant agrees to rote additional disclosures and to mootness fees for plaintiffs’ lawyers. Such outcomes, as I’ve told you, needn’t even be reviewed by judges because they’re structured as dismissals by an individual plaintiff rather than class action settlements.

I have to give the Chamber credit for pulling together disparate strands of data and news reporting to illustrate what’s actually happening in the federal-court class actions challenging M&A cases. We can debate whether there’s value to the disclosures obtained in these suits and whether plaintiffs’ lawyers who use the leverage of a class action filing but have little intention of actually litigating class claims ought to be rewarded with mootness fees of $100,000 or more. Shareholders’ lawyers have told me they’re forcing corporations to be transparent with shareholders. The Chamber, of course, says the cases are an abusive “racket.” Either way, the report reflects a deep-rooted understanding of how the cases are litigated.

So what does the Chamber want from Congress? The report is long on goals but short on how to reach them. It asks for reforms that will: deter meritless filings (but encourage suits when corporations engage in “real fraud”); assure that class actions are being driven by investors, not by plaintiffs’ lawyers looking for quick settlements; and prohibit litigation tactics that stymie defendants and judges from evaluating the merits of purported class action claims. It’s hard to argue with any of those ambitions in the abstract – they significantly overlap with the ambitions that Congress thought it was advancing in its 1995 securities reform bill – but the Chamber does not offer suggestions for specific new laws or rules to accomplish its ends.

A Chamber spokesperson told me the report is a first step, with more specific proposals yet to come. One idea, for instance, might be to channel securities class actions to jurisdictions where corporations are headquartered.

This is a long game for securities class action defendants and the U.S. Chamber. The PSLRA, after all, was the subject of congressional hearing and long debate before it finally passed in 1995, over a veto by President Bill Clinton. The Chamber has been railing about asbestos trusts for decades – and its campaign has just now gotten traction from the Justice Department.

Wednesday’s report, in other words, means the shareholder bar had better gird itself. If plaintiffs’ lawyers are determined to make a living by representing small-time investors in M&A class actions, they’re going to have to fight for that right.