Navigating Securities Class Action Settlements with Stock Consideration
Although no two securities class action settlements are identical, there are some general consistencies among them, including how class members are compensated.
In a traditional securities settlement, payouts are most often cash-funded and distributed via paper check or wire transfer to class members’ accounts. In some matters, however, a cash-funded settlement may not be realistic, and parties may propose funding the settlement with common stock, or an equity ownership share in the defendant company.
Common stock can be deemed by courts to be fair, reasonable, and adequate, particularly when damages are significant and the financial condition of the defendant or limits of liability under the defendant’s insurance policies prohibit the defendant from funding the settlement in cash to the satisfaction of the class or court.
Stock-funded settlements pose a perceived risk for parties unfamiliar with how they influence the scope of the settlement administration. Here we discuss how to navigate the stipulation of settlement, noticing and claims processing, and settlement distribution for stock-funded securities settlements.
Stipulation of Settlement
When parties are negotiating a stock-funded settlement, all variables that could impact the value of the common stock should be identified and necessary provisions included in the stipulation of settlement.
For example, a provision should give discretion to lead counsel sell the stock if at any point they believe a sale would be more appropriate or valuable than the stock itself. This is particularly important for when the defendant corporation’s stock price is volatile. Additionally, parties should also include in the stipulation details about how the distribution of stock is likely to affect equity value, as well as reasonable caps on the sale of shares within a given timeframe.
Precise timing for the transfer of securities to the plaintiffs’ designee, and which party will bear the cost of said transfer, should also be outlined in the stipulation. Parties may also consider how to address stock splits, reverse stock splits, stock dividends, stock conversions due to mergers or acquisitions, and any other variables that could potentially impact stock value.
Finally, it is prudent to outline all parties that may become involved in the settlement distribution, and the cost of their involvement in the administration, in the stipulation.
Noticing + Claims Processing
Stock-funded settlements tend to raise more questions, even among the most seasoned investors and investment managers. Counsel and administrators can minimize confusion – and the cost of class member noticing and claims processing – by being detailed and transparent in the settlement notice.
When securities are involved, all information pertaining to the stipulation of settlement, plan of allocation, and settlement distribution must be disclosed in the settlement notice sent to class members. Counsel should outline when and how stock value was calculated; under what circumstances stock may be liquidated; how partial shares will be treated; what, if any, distribution minimums exist; and how claims that do not meet the minimum distribution threshold for a stock transfer will be handled.
Disclaimers within both the notice and claim form should reinforce that stock may be liquidated prior to distribution and address the potential for appeals or delays, pursuant to which revised claim forms may be requested or distribution delayed. Finally, in settlements that include a stock component, claimants may be asked to complete a more detailed registration page with specific brokerage and investment account information to which shares should be directed.
Due to the cost of administering stock-funded settlements, it is rare that stock is distributed as part of a final settlement.
When it is, the distribution is a complex process requiring coordination among lead counsel, settlement administrator, and transfer agents to ensure the successful transfer of equity shares from the defendant corporation to class members. Counsel can help effectuate the distribution of stock in a structured and cost-effective manner by reinforcing to class members their responsibility as recipients of a stock-funded settlement.
Investment accounts must be open and current, and account details must be conveyed precisely to the settlement administrator. Class members should be aware of their responsibility to affirmatively accept stock transfers, which do not process automatically like electronic funds transfers (EFTs). However, no matter how clear the communication to the class prior to distribution, lead counsel and the administrator should be prepared to field more post-distribution inquiries from class members than in a standard cash settlement.
While cash-funded settlements remain the most prevalent settlement consideration, liquidity concerns and insurance limitations may prevent parties from reaching cash settlements in some cases. When cash-funded settlements are not feasible, a nontraditional approach may help companies avoid costly litigation and potentially damaging verdicts, while helping lead counsel return losses to harmed investors. Counsel and administrators may find the practices detailed herein beneficial as they navigate their next nontraditional securities class action settlement.