Emerging Markets Law

Supreme Court Makes it Easier for Corporations to Defeat Securities Class Actions

In its decision in Halliburton v. Erica P. John Fund the Supreme court made it easier for corporations to avoid the expense of litigating certain types of class actions brought by unhappy investors.

As I wrote in Out of Balance, one of the key drivers in litigation is the cost of litigation itself.  Litigation is expensive and the U.S. is one of the few industrialized countries where each party bears its own attorneys' fees, even if it prevails in the case.  As a result, a corporate defendant will almost always have to pay its own attorneys' fees, even if the case against is eventually determined to have no merit.

This phenomenon often drives corporate defendants to settle meritless cases.

In the securities litigation arena, because of a case called Basic v. Levinson, potential classes of plaintiffs are able to sue publicly-traded corporations in which the plaintiffs are stockholders based upon a "fraud upon the market" theory.  That legal tactic allows the plaintiffs' lawyers to organize and initiate a class action against a corporation that has suffered a significant decline in stock price without having to prove that any of the potential class members actually relied upon an alleged falsehood or misleading statement made by the defendant corporation.

Defending against a class action lawsuit is difficult and expensive.  Once the lawyers initiating the suit achieve "class certification" the case moves into the discovery stage in which the plaintiffs' lawyers are able to require the defendant corporation to disclose tons of documents and submit to having their officers and directors deposed and so on.  Until now, plaintiffs' lawyers in such cases were not required to show that any of their individual stockholder clients actually relied on the alleged falsehood or misleading statement until after the class certification stage.  Likewise, corporate defendants were not allowed to rebut the presumption that their alleged misstatements were "material" to the price of their stock.

In its ruling in Halliburton this month, the Supreme Court held that corporate defendants could prove - prior to class certification - that any alleged misstatement that might have occurred would not have been "material" and would therefore not have had an effect on the price of the corporation's stock.  Proving that point would allow the trial court to dismiss the case at an early stage, before the expensive and distracting discovery phase would have begun.

While the Halliburton ruling still allows aggrieved investors to sue, it raises the bar for plaintiffs and will likely result in fewer early settlements (and therefore fewer lawsuits overall).

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