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The trend of securities class action lawsuits and implication on D&O pricing

There has been a spike in securities class action lawsuits; be it event-driven lawsuits or merger-objection lawsuit. I can understand a surge in class action lawsuits that are event-driven because these events can be many and #risk exposure is high by nature. For example; there has been a surge in litigation related to Metoo movement, cyber breaches, and ESG issues. However, interesting to see that merger-objection lawsuits is also rising at pace.

According to Cornerstone research report “85% of M&A deals which were greater than $100Mn were challenged with a merger–objection lawsuit in 2018.” Of these; 70% is voluntarily dismissed, 2% is dismissed by court, and 8% is settled. Interesting fact is that the amount shareholders received in 85% of settled merger objection claims in the past five years was $0.

The number of lawsuits that M&A deal of Finisar Corp and II-IV Inc faced in 2018 was 9; Pandora media and Sirius XM was 9 again. If shareholders are not receiving the amount of settled merger-objection claims, who is benefiting out of it? The industries that were mostly impacted by securities class action lawsuits were financial services, Healthcare, and Technology.

When Aon- WTW merger news came up, I was thinking if this can be considered as a juicy lawsuit by lawyers (remember 85% of M&A deals >$100 million challenged with a merger–objection lawsuit in 2018). Looking at trends of Securities Class Action, I was thinking if someone would come-up with SCA. And because it is now a norm, it happened! So it is a class action against WTW alleging investors were given inaccurate picture of financial implication of tie-up with Aon.

I am wondering had it not been for Trulia decision in Delaware, we would have seen almost 100% merger-objection lawsuits today. After Trulia decision in 2016, the number of merger-objection lawsuits fell back to the level of 2014, but there was definitely a steep rise from 2016.

Rising numbers of lawsuits, coupled with social inflation and type of exposure is resulting in the high premium for D&O. This premium increase is sharpest in Australia and USA. The steep price increase forcing some of the companies to opt for high deductibles. On the extreme end of this high deductible trend is Tesla’s Elon Musk who cancelled D&O insurance altogether citing high premium and pledged to provide coverage personally to board members. Some are questioning the prudence of this decision.

However, it is expected looking at the trend, that continued rate hikes and narrow coverage will stay for next few years. The newer complex risk exposure like inadequate information about climate change impact, cyber etc, and rising defense cost are being considered more closely by underwriters which would impact price.

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