Large shareholders are increasingly choosing to opt out of class-action settlements in favor of pursuing their own potential recoveries, a trend that has seen a significant increase in the past few years. The shift in investor strategy has been attributed to a pivotal US Supreme Court ruling which has altered the timing calculus.
The frequency of opt-outs from settlements marked a noticeable increase from 2019 through the first half of 2022, disrupting a more gradual 12-year trajectory, as highlighted in a recent report by Cornerstone Research. Approximately a third of recent settling cases involving opt-outs saw investors initiate individual, or direct actions, Cornerstone found.
The surge in opt-outs can be seen in a recent lawsuit initiated against Boeing Co. over statements related to the safety of its 737 Max aircraft. This case aligns with those where pension funds and other institutional investors have opted out, often characterized by defendants with the capacity to pay a settlement or judgment, simpler damages calculations, and more complex allegations.
As per James Beha II of Baker Botts LLP in New York, sophistication among institutional investors regarding the potential value of federal securities claims has fueled this shift. He states that more institutional investors are critically evaluating cases to assess the value of filing an opt-out, particularly when significant amounts are at stake or the defendant or insurer has ample resources.
The Supreme Court’s 2017 ruling in California Public Employees’ Retirement System v. ANZ Securities, Inc. has been identified as a key driver of this trend. The decision stipulated that a suspension, or tolling, of the statute of limitations during the pendency of a class action does not apply to statutes of repose under securities laws, effectively setting concrete deadlines for filing suit after the alleged violations.
However, according to the attorneys, determining whether investors who launch their own actions achieve a recovery “premium” over what they would have received in the class settlement is complex. As Christopher “Topher” Turner, one of the authors of the Cornerstone report, notes, many resolutions of direct actions filed by opt-outs are not public, rendering tracking the “upside” of opting out challenging.
Institutional investors and other plaintiffs must also carefully consider the costs and risks associated with opting out, as Michael Canty of Labaton Sucharow LLP highlights. Many opt-out cases are still in litigation after several years, making the pursuit of a quick, premium settlement less feasible than originally envisaged.