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Large shareholders are choosing to opt out of class-action settlements at a rate approximately twice as frequently as in recent years. This trend, observed from 2019 through the first half of 2022, marks a significant departure from the preceding 12-year trajectory, as reported by Cornerstone Research. The surge in opt-out settlements follows a pivotal US Supreme Court ruling that recalibrated the timing considerations for such decisions.
Changing Dynamics in Settlements
According to the Cornerstone Research report, investors initiated individual or direct actions during the specified period in approximately one-third of settling cases involving opt-outs. A lawsuit against Boeing Co. on December 6 exemplifies this trend. The legal action, centered on statements related to the safety of Boeing’s 737 Max aircraft, was brought by a firm specializing in acquiring shareholder litigation rights. The case’s complexity may complicate its integration into an existing proposed class, underscoring the increasing preference for opting out.
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Institutional Investors Driving the Trend
Cornerstone’s findings suggest that cases involving opt-outs by pension funds and other institutional investors often include defendants with a greater capacity to settle or pay judgments. These cases also tend to exhibit more straightforward damages calculations but more intricate allegations than cases without opt-outs.
James Beha II of Baker Botts LLP notes a growing sophistication among institutional investors in evaluating federal securities claims. He suggests that institutional investors and the plaintiffs’ bar strategically identify cases where opting out could yield a higher return. The motivation behind this trend appears to be rooted in the pursuit of more significant financial gains, particularly when facing defendants or insurers with substantial resources.
Supreme Court Decision and Its Impact
The report also points to the Supreme Court’s 2017 decision in California Public Employees’ Retirement System v. ANZ Securities, Inc. This decision clarified that the suspension or tolling of the statute of limitations during a class action does not apply to statutes of repose under securities laws. Statutes of repose establish strict deadlines for filing suits after alleged violations—three years for Securities Act claims and five years for Exchange Act claims.
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As a result, settlements in many securities cases may be announced after the expiration of the deadlines for individual claims. This limitation could contribute to the increasing prevalence of opting out.
Assessing the Upsides and Downsides
Despite the growing trend of opting out, assessing the advantages of pursuing individual actions over class settlements remains challenging. The potential for a recovery “premium” for investors opting out is difficult to quantify. Comparing returns from class settlements to opt-out payments is complex and not a straightforward comparison.
Christopher “Topher” Turner of Latham & Watkins LLP acknowledges the difficulty in tracking the “upside” of opting out, as many resolutions of direct actions by opt-outs remain private. There are also challenges related to defendants’ tools to limit exposure to direct activities, including provisions in class settlements that allow termination if too many investors opt-out.
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