Report identifies class action case characteristics associated with opt-outs.
The percentage of securities class action settlements with at least one putative class member opting out has increased in recent years, according to a new report by Cornerstone Research in conjunction with Latham & Watkins LLP. Between 2019 and the first half of 2022, the percentage of securities class action settlements with at least one opt-out was 11.5%, up from 5.8% during 2006–2018 and around 2.9% from 1996 through 2005.
The report, Opt-Out Cases in Securities Class Action Settlements: 2019–H1 2022 Update, also presents new empirical analysis of how certain class action case characteristics—including certain simplified metrics associated with potential damages, indicators of complexity of the case, and indicators of greater issuer ability to pay—relate to opt-outs. This research finds that class settlements with larger simplified metrics of potential damages, indicators of greater complexity of allegations, or indicators of higher ability to pay by the issuer are more likely to have at least one identified opt-out, often an institutional investor.
Of the 287 securities class action settlements from 2019 to H1 2022, 33 settlements (11.5%) had at least one identified opt-out.
“This analysis suggests that potential class members carefully consider whether or not to opt out of a securities class action based on attributes of the case,” said Brendan Rudolph, a principal at Cornerstone Research and report coauthor. “Our findings are consistent with opt-outs occurring more frequently when a putative class member might see an opportunity for a greater return on an individual claim.”
Of the 287 securities class action settlements from 2019 to H1 2022, 33 settlements (11.5%) had at least one identified opt-out. Overall, 115 of the 2,061 settlements (5.6%) in 1996–H1 2022 had at least one opt-out. The report also identifies the subset of class settlements with opt-outs that involved direct action lawsuits, finding that 10 of the 33 class settlements in 2019–H1 2022 with at least one opt-out had one or more confirmed direct action lawsuit. In each of these 10 class settlements, at least one of the direct action lawsuits had been brought by an institutional investor.
The report finds that, as class settlements increase in size, the likelihood of one or more opt-outs increases. In 2019–H1 2022, 29% of cases with class action settlements valued at over $20 million had identified opt-outs, more than 2.5 times the proportion across all class action settlements. More than half of these (nine of 15) had one or more confirmed direct action lawsuit.
“We observe that putative class members are more likely to opt out of larger class action settlements, and, for the largest securities class action settlements, opt-outs often bring one or more separate direct action lawsuits,” explained Matt Osborn, a Cornerstone Research principal and report coauthor. “For a given class action settlement, the size of the class settlement tends to be positively correlated with the number of putative class members that we observe pursuing separate direct action lawsuits.”
We observe that putative class members are more likely to opt out of larger class action settlements, and, for the largest securities class action settlements, opt-outs often bring one or more separate direct action lawsuits.
“The prevalence of institutional investor opt-outs bringing direct actions is consistent with these entities being focused on securing a return on their investments through a myriad of means, and many have established relationships with plaintiff law firms that help them assess the risks and benefits of opting out of a class action,” added Christopher Turner, a partner at Latham & Watkins and report coauthor. “Some of these putative class members may decide that the anticipated return from bringing a direct action lawsuit in light of the size of the investor’s ownership interests warrants the increased litigation costs.”