June 23, 2021

Will Mandatory ESG Disclosure Reduce Event-Driven Securities Litigation?

There are two great questions of our time:

1. Is everything securities fraud?

2. Is ESG the answer to everything?

A recent study from Duke Law prof Emily Strauss attempts to answer both of these queries. She first finds that event-based securities litigation – and the big settlements that often result from it – is being driven by institutional investors who piggyback on regulatory investigations into big companies. This Cooley blog summarizes the study and highlights some surprising stats:

In a conclusion that may seem counter-intuitive, the author found that regular securities cases, where shareholders are the primary victims, are almost 20 percentage points more likely to be dismissed (55%) than event-driven securities cases (36%). What’s more, the average shareholder settlement in event-driven securities litigation (where the misconduct most directly harms victims other than shareholders) is $24.3 million compared to $7.2 million for regular securities litigation where the primary victims are shareholders.

The author noted that these correlations “persist even when controlling for firm size, class period duration, court expertise, and indicia of merits of the lawsuit, such as institutional investors as lead plaintiffs, earnings restatements within the class period, and whether the complaint cited an SEC investigation.” In addition, defendant companies in event-driven securities cases are larger on average ($29.6 billion in total assets), compared to regular securities class actions on average ($8 billion in total assets).

And, almost 70% of event-driven securities cases were brought by pension funds and other institutional investors, compared with only 42% of regular securities litigation. That’s notable because “institutional investor lead plaintiffs are associated with lower dismissal probability and dramatically higher settlement values. They also generally appear to sue much larger firms.”

Professor Strauss suggests that mandatory ESG disclosures may dampen opportunities for this type of litigation. The logic is that companies would be more likely to disclose (and address) the underlying issues that lead to the types of incidents likely to set off the chain reaction of investigations, stock drops, and lawsuits – and shareholders would be better able to monitor them along the way. Others believe that additional ESG disclosure will just provide fodder for different types of opportunists, at least during the “transition phase.”

Liz Dunshee