Should I Stay or Should I Go?

In 2017, Supreme Court Justice Anthony Kennedy suggested in the ANZ Securities case that “[t]he emergence of individual suits . . . may increase a defendant’s financial liability . . . [because] plaintiffs who opt out have considerable leverage and, as a result, may obtain outsized recoveries.” In making that statement, Justice Kennedy relied on 10- and 20-year-old law review articles, each of which provides theoretical discussion of the advantage of opting out of a securities class action, but offers little data to support the position that opt-out plaintiffs are likely to “obtain a disproportionately large portion of [the defendant’s] assets.” See Coffee, “Accountability and Competition in Securities Class Actions: Why ‘Exit’ Works Better Than ‘Voice,’” 30 Cardozo L. Rev. 407, 417, 432–33 (2008); Perino, “Class Action Chaos? The Theory of the Core and an Analysis of Opt-Out Rights in Mass Tort Class Actions,” 46 Emory L.J. 85, 97 (1997). But individual settlements achieved by opt-out plaintiffs are largely unknown and are typically required to be kept confidential, unlike class action settlements.

A small data set of recent cases, however, including the high-profile Petrobras case, provides some insight into whether opt-out plaintiffs do better than class members. This article examines some examples where opt-out plaintiffs appear to have fared worse than they would have had they opted to stay in the class action, in a manner that suggests how the conventional wisdom may not be entirely accurate.

Opt-out plaintiffs and their law firms regularly publicize the fact that they have been able to achieve settlements with values greater than those of class members. See Coffee, supra, at 427–29. Plaintiffs’ firms (and plaintiffs, themselves) certainly have an interest in promoting any settlements that they secure that provides for a greater recovery for their client than if their client had remained in the class. But because opt-out settlements are usually subject to a confidentiality agreement or provision, it is impossible to conduct a complete study on how opt-out plaintiffs fare.

Indeed, according to Cornerstone Research, between 1996 and 2018, the results of opt-out cases were publicly available in a small fraction of securities class actions. Further, compared with the premiums of more than 300 percent that plaintiffs themselves sometimes announce, Cornerstone Research found that, based on the limited publicly available data, opt-out plaintiffs recover, on average, only about 13 percent more than class plaintiffs.

Of course, by filing an opt-out complaint, the institutional investor will subject itself to some burdens and costs that are not associated with remaining as class members. First, as an opt-out plaintiff, the institutional investor’s portfolio managers and analysts have a much higher likelihood of being subject to discovery concerning their investment decisions, than they do as class members. Indeed, class member discovery is exceptionally rare. Second, opt-out cases do not always settle as quickly as the class settles. Third, opt-outs may settle for less than the class on a per-share basis, which appears to have happened in the Petroleo Brasileiro (Petrobras) American Depository Shares Securities Litigation, No. 14-cv-09662 (S.D.N.Y.), and in the American Realty Capital Properties Securities Litigation, No. 15-MC-00040 (S.D.N.Y.).

Does the potential for an average 13 percent premium justify the added costs and risks an institution must bear by filing an opt-out complaint? As Petrobras illustrates, the answer may be no, especially where institutional investors are able to navigate the class action settlement claims administration process.

In Petrobras, the opt-out plaintiffs constituted roughly 16 percent of the overall class. While the terms of each of the opt-out settlements remain confidential, Petrobras’s public disclosures reported just under $500 million in litigation expenses in 2018. Taking that figure together with calculations made by class counsel as to the number of shares at issue in the underlying dispute, opt-out plaintiffs appear to have recovered roughly 20 percent less per share than class members, who settled with Petrobras for $2.95 billion.

Another advantage that opt-out plaintiffs do not necessarily enjoy: Class members who are able to navigate the claims administration process may earn a premium because so many shareholders (who would otherwise potentially be entitled to a claim) submit defective proofs of claim. This has the result of lowering the number of shareholders that need to be paid out and increasing the recovery to investors who are able to manage the claims process.

The Petrobras decision is a perfect example of this type of outcome. In September 2019, the claims administrator filed an affidavit in support of the plan of distribution (Petrobras, No. 14-cv-09662, ECF No. 970). It notes that the administrator received 264,587 proofs of claim. The affidavit further states that 253,801 of these proofs of claim (95.9 percent) were deemed partially or wholly ineligible for recovery and subject to a deficiency process. After the deficiency process ran its course, the claims administrator rejected about 246,000 claims in their entirety. Thus, almost 93 percent of claims filed in Petrobras did not result in a distribution, meaning that those institutional investors that had their claims accepted received the lion’s share of the almost $3 billion settlement. So, not only did the class do better on a per-share basis, but many shareholders may not have perfected their proofs of claim, resulting in an even higher per-share recovery for institutions with accepted claims.

In closing, contrary to conventional wisdom, investors should not assume that enduring potentially burdensome individual litigation will ultimately result in an outcome more favorable than that which would have been achieved by being an unnamed class member. Each case and opt-out opportunity should be carefully evaluated and assessed on its merits before an institutional investor decides to opt-out.