The Strategist

M&A growth prompts a surge in collective action in the US

04/08/2019 - 15:59

In 2017–2018, the number of lawsuits that shareholders filed against their companies increased sharply in the United States. There were an average of 200 collective claims from shareholders from 1997 to 2017, but in 2017 and 2018 there were more than 400 of them. Experts point out that the growth could be prompted by claims about violation of rights of shareholders during mergers and acquisitions that have risen to the maximum in the USA. The negative reaction of the stock market to the claims led to the fact that in 2018 the market capitalization of companies fell in total by $ 1.3 trillion, which is a record.

According to estimates by Cornerstone Research, a consulting company, in 2018 in the USA, shareholders of companies filed 403 collective claims, which is the second highest indicator in the entire history of such observations. The record was set a year earlier, in 2017, when shareholders filed 412 lawsuits. Even despite a slight decrease (2%) compared with 2017, the number of shareholders' court claims over the past two years is twice the annual average for the previous 20 years. From 1997 to 2017, on average, 203 collective claims were filed from shareholders.

Cornerstone Research states the main increase in lawsuits was provided by claims related to mergers and acquisitions. Over the past two years, the global M&A market has grown significantly. In 2018 it amounted to $ 4 trillion, the market has previously reached this level only twice since 1980. Most of all mergers and acquisitions with total volume of $ 1.7 trillion in 2018 were made in the United States, and this number is 32% more than a year earlier.

Most often, lawsuits in 2018 were filed against the largest public companies in the United States included in the S&P 500 index. Almost every tenth of them (9.4%) became the object of court claims on the part of shareholders.

Among the market sectors, the pharmaceutical sector bears the maximum risk of becoming a defendant in the claims. In 2018, 16% of claims were filed against pharmaceutical companies, telecommunications and high-tech companies ranked second with a share of 12.7%, and consumer goods manufacturers ranked third with 11.8%.

The researchers note that the combination of two factors - a large number of lawsuits and the frequency of filing lawsuits against companies with large market capitalization - led to a significant decrease in total capitalization due to the negative impact of litigation on company quotes. The DDL (Disclosure Dollar Loss) indicator, which shows how much a company's quotes fell the next day after filing a lawsuit, increased by 152% in 2018 to $ 330 billion. This is an absolute record for the entire observation period. The previous record - $ 221 billion - was noted in 2008, at the height of the credit crisis. This can be explained by a surge of claims on credit losses of companies from shareholders. DDL in 2018 was 174% more than the average annual rate from 1997 to 2017 ($ 120 billion).

At the same time, another indicator, MDL (Maximum Dollar Loss), shows how much a company's quotes were reduced during the trial (the difference between the day when the quotes were at the maximum level and the day when the court ended), was $ 1.3 trillion in 2018, which is 150% more than in 2017. Thus, the maximum dollar capitalization losses exceeded $ 1 trillion for the first time since 2002. Over the past ten years, the most significant peak of such losses - $ 816 billion - was recorded in the same 2008. In the period from 1997 to 2017, the maximum dollar capitalization loss was $ 602 billion.

Due to lawsuits in 2018, the maximum capitalization losses of companies were almost twice as high as the average for the year during the previous decade.

Experts note other new trends in relations between shareholders and companies. Cornerstone Research notes the growing number of lawsuits related to cryptocurrencies and initial offerings of assets denominated in cryptocurrencies. The sharp growth of the cryptocurrency market in 2017 and its decline in 2018 resulted in the fact that in 2018 American shareholders filed nine such lawsuits compared to five in 2017. Previously there were no such claims, although the first cryptocurrency, Bitcoin, was created back in 2009.