Large corporations are facing increased scrutiny as a result of the growth in group litigation, particularly claims by shareholders and bondholders, seeking damages for losses on investments made in reliance on public statements such as prospectuses and financial reports.
Institutional investors are necessarily following these cases closely in order to consider their position, both in respect of their own investments and recoveries they may be obliged to pursue on behalf of investors. These cases present difficult issues for shareholders and the wider investment industry.
A positive commitment is often required as many proceedings in Europe currently require prospective claimants to 'opt-in'. However, this may change over time. The collective settlement process in the Netherlands provides a form of ‘class-action’ which is becoming increasingly popular. Similarly, in the UK, the Consumer Rights Act 2015 has made 'opt out' class actions available in competition cases for the first time increasing the prospect of substantial 'follow on' claims.
The RBS, Lloyds, Fortis and Tesco actions have hit the headlines recently and, given that shares in these companies are held within many equity portfolios, the outcome of these cases will have an impact across the investment industry.
Group claims against VW in relation to the emissions scandal and against investment banks arising from alleged manipulation of the foreign exchange markets are also being actively pursued and the various action groups now appear to be in a position to launch the claims.
Other similar cases are likely to follow and there is also a growing level of less public discussion between boards, shareholders and other stakeholders across the corporate spectrum on the issues of financial reporting, corporate governance, executive remuneration, strategy and value, which may themselves be the subject of significant group litigation in due course.
The key issues that should be considered in these cases include the following:
- Legal basis for claims – It is important to understand the precise legal basis for the proposed claims. The availability of damages and the level of potential exposure will depend in each case not only on the facts but also the particular law that applies and the forum in which claims are brought.
- Strategy and team – There are often multiple claimant groups in these cases, some of whom will inevitably pursue a more effective strategy than others. Understanding the motivations, strategy and composition of the claimant groups, including the legal advisers, funding team and group committee members, is essential both for those considering joining a group and those faced with defending such claims.
- Resources – Group claims invariably come with significant legal costs and a lack of funding or willingness to commit capital can lead to otherwise strong claims falling away. Action groups may appear well-funded but it is essential to understand the level of commitment and resources of the funding party (including the precise corporate structure and any parent guarantees or indemnities). Defence costs can also be significant and, whilst adverse costs represent a significant risk to claimants in many jurisdictions, the burden this places on a defendant can itself have a material impact on its business.
- Adverse costs risk – Action groups will invariably seek to present claims as risk free for claimants and in many cases the funding package or the lawyers' terms of engagement will provide claimants with an indemnity in respect of adverse costs. There may also be litigation insurance in place. However, the indemnities provided are often subject to detailed conditions and there is an inevitable counterparty risk that must be taken into account.
- 'Opt in' or 'Opt out' – In Europe, claimants are often required to join a group action in order to benefit from any judgment in those proceedings. Funders are necessarily concerned to ensure that their group is formed early in order to create the 'critical mass' required before significant costs are incurred and will often set deadlines for joining the action group. However, there are a wide range of factors that may affect the timing and composition of an action group including the commercial terms, the possibility of pursuing claims separately (with another group or as a stand-alone action) and actual deadlines set by the court or under relevant limitation laws.
There are a growing number of law firms, funders and quasi-legal consultants pursuing strategies based on such claims in Europe. Whether as the target of claims or other stakeholder action, a potential claimant, asset manager, trustee or market intermediary, navigating the various options, funding proposals, risks and obligations in this area requires a detailed understanding of the legal, procedural and commercial issues on each side.
We guide our clients through these difficult issues with clear advice that allows risks to be properly assessed so that an informed decision can be made.