Coming to Terms: Clarifying Settlement Nomenclature (Part 1)

As the universe of settlement types expands in securities litigation, investors are increasingly less certain about the meaning of terms used to describe claimant eligibility and remittance processes.  In this article, we define the most common ones and explain how the causes of action alleged by plaintiffs shape the way resolutions are administered using these terms to profile the most common settlement types.  Understanding them will help investors quickly assess the ease of participation in new matters and understand how funds are distributed.

Basic Terms

Let’s start with basic terms to describe persons or entities involved in settlements as well as settlement types and payment options:

• Administrator: the entity administering settlements including determining Claimant eligibility and losses and making Distribution Payments.
• Claimants: beneficial owners entitled to Distribution Payments.
• Claim Filers: persons or entities submitting proof of claim forms for Claimants.
• Distribution Payments: amounts paid from settlements by Administrators.
• Holders: persons or entities holding instruments in their names either for themselves or for their account holder Claimants.

Note that more than one term can apply to the same person or entity. For example, investors holding shares in their own name for themselves and submitting their own proof of claim forms are simultaneously Claimants, Claim Filers, and Holders.  If custodians file claims for their account holder Claimants, they are both Claim Filers and Holders.

• Claims Made settlements: those requiring Claimants to submit information necessary to determine their eligibility and compensable losses.
• No Claim Form settlements: those not requiring information from Claimants because eligibility can be determined from defendant or third-party records, and loss calculations are not dependent on facts unique to each Claimant.
• Direct Payment: Distribution Payments that go directly from the Administrator to the Claimant.
• Indirect Payment: Distribution Payments that go from Administrators to Claimants through Claim Filers. Matters can be Indirect Payment even if the Claim Filer remits distribution amounts to Holders who, in turn, allocate funds to their account holder Claimants.

Now let’s examine settlement types using these terms.

US Securities Class Action Settlements: Claims Made – Indirect Payment

Investors are most familiar with these settlements.  They are Claims Made, meaning Claimants must submit proof of claim forms with their identification information and trade details to confirm eligibility and quantify losses.  Why?  Because corporate records can’t identify those adversely impacted by the alleged wrongdoing or the extent to which they were harmed.

Most suits allege claims for violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of classes of investors who purchased shares in secondary markets.  During the class period, share prices allegedly traded at prices artificially inflated by the defendants’ wrongdoing.  Claimants who purchased shares during this time paid too much and realized losses when they held those shares on one or more dates when the ‘truth’ was revealed and share prices partially or fully returned to “correct” levels.

Shares are fungible.  There are no corporate records showing who purchased shares in secondary markets and whether they held them through later price drops.  So, eligibility and loss amounts are unique to Claimants, who must provide the claim form the information needed to determine their compensation.

Most institutional investors use Claim Filers including custodians and third-party firms like FRT.  Distribution Payments flow from the Administrators to Claimants through the Claim Filers, making them Indirect Payment.  This is so even if the Claim Filers remit funds to Holders who further allocate amounts to their account holder Claimants.

SEC Fair Funds: Claims Made – Direct or Indirect Payment

SEC Fair Funds are also Claims Made.  The alleged causes of action and harm to investors are like those in securities class actions, so they have similar administration processes.  Indeed, if the agency resolution comes later, it re-uses the existing class action settlement claim submissions.

Until recently, Fair Funds were Indirect Payment, meaning the agency allowed Administrators to make Distribution Payments to Claimants through Claim Filers.  However, the agency has recently begun requiring Administrators to pay Claimants directly – i.e., Direct Payment – bypassing the Claim Filers and Holders of their accounts.  However, given related challenges and costs, Direct Payment has not yet been fully implemented by all Administrators for all matters.  Time will tell whether Direct Payment sticks.

Delaware Breach of Fiduciary Duty Settlements: Multiple Types

Delaware breach of fiduciary duty cases may use one or both claim and payment methods depending on the underlying causes of action and instruments involved.

• Merger/Transaction Consideration: No Claim Form – Direct Payment: These typically challenge the sufficiency of consideration, i.e. the amounts paid to shareholders, in corporate mergers, go private deals, and similar transactions.  Eligible claimants are beneficial owners who held shares on the operative date and received the consideration amount being challenged.  Corporate records can identify those holding shares on the operative date either directly or as Holders for their account holder Claimants.  Each share held is entitled to the same per share pro rata amount from the settlement.  These settlements involve Direct Payment.  Money is paid directly by the Administrator to eligible Holders including those holding shares themselves and Holders for account holder Claimants.  Challenges arise because most shares are held in street name by DTC Participants.   After receiving the per share settlement amount, these Participants must, in turn, allocate the per share amounts to the proper account holder Claimants.  The Administrator cannot identify these Claimants.  The Holders must do it.  Essentially, they must act like administrators, determining eligibility and calculating compensation amounts.
• Special Purpose Acquisition Corporations (SPACs): Both Claim & Payment Types: SPAC settlements use both claim and payment processes.  SPACs raise capital by issuing shares with $10 par values.  Organizers have two years to acquire operating companies to merge with the SPACs.  In class actions, plaintiffs allege the acquired operating company was worth less than what was represented by defendants, and that they were essentially ‘duped’ into supporting the merger rather than exercising their right to redeem shares for $10 each and walk away.  The harm they suffered is the difference between the $10 par value and the per share value of the combined company.  Claimants can be identified from corporate records, namely those who did not exercise redemption rights.  However, since shares trade in secondary markets, the full extent of harm suffered by Claimants depends on when they sold their shares.  The Administrator can only get this information from proof of claim forms.  So, these matters are both No Claim Form and Claims Made.  They also involve both Direct and Indirect Payments.  Each Claimant gets a ‘base’ amount of compensation paid without claim forms using a Direct Payment process like that described above for merger matters.  Those filing claim forms also get an additional amount based on their submitted information which gets paid Indirectly through Claim Filers.

Coming to Terms

As settlement structures continue to evolve, understanding the nuances of terms like “No Claim Form” and “Direct Payment” is essential for investors navigating the claims landscape. These distinctions are not just administrative. They reflect the nature of the alleged harm and the mechanisms available to identify and compensate affected parties. By recognizing how different causes of action shape settlement and payment processes, claimants can better anticipate their role in upcoming matters. Ultimately, clarity around these terms empowers investors to engage more efficiently and confidently in the recovery process.

Stay tuned for Part 2 as we continue examining settlement types including Wealth Investment actions and Crypto-related settlements.