On January 17, 2012, in a development with important implications for the evolution of post-Morrison remedies for non-U.S. investors, a Dutch court has held for the first time that a collective securities settlement is legally binding. Of even greater significance, the decision arose in a circumstance where none of the liable parties and few of the claimants were domiciled in the Netherlands. The court’s action suggests the possibility of a potentially important mechanism for aggrieved investors who bought shares outside the U.S. to obtain compensation.
A January 18, 2012 memorandum from the De Brauw, Blackstone and Westbroek law firm describing the Dutch court’s ruling can be found here. A January 18, 2012 memo from the Deminor Group about the ruling can be found here.
The Non-U.S. investor proceedings in the Netherlands follow the settlement of related proceedings the U.S. As discussed at length here, Converium investors first filed a securities class action in the Southern District of New York in October 2004. The plaintiffs alleged Converium and certain of its officers and directors, as well its corporate parent, Zurich Financial Services, had made misleading statements about Converium’s financial condition, including the adequacy of its loss reserves for its North American business during the class period. (Converium had spun out of Zurich in a 2001 IPO.)
In 2007, while the U.S. case was pending, SCOR Holding (Switzerland) acquired the voting rights of Converium pursuant to a tender offer.
In rulings dated March 6 and March 19, 2008 (refer here and here, respectively) Southern District of New York Judge Denise Cote, applying pre-Morrison standards for determining the reach of the U.S. Securities laws, certified a class consisting of all persons who purchased Converium American Depositary Shares on the NYSE, and all U.S residents who purchased their Converium Shares on a non-U.S. exchange. Excluded from the class were investors who had purchased their shares on any non-U.S. exchange who were not U.S. residents at the time of their purchased.
The U.S. action ultimately settled for a total of $84.6 million, consisting of $75 million from SCOR and $9.6 million from Zurich. The Southern District of New York approved this settlement and entered final judgment on December 22, 2008.
As detailed here, in July 2010, two groups acting on behalf of the non-U.S. Converium investors entered settlement agreements with Scor and Zurich. The total amount of the two settlements is $58.4 million, of which $40 million is to come from SCOR and $18.4 million is to come from Zurich. The SCOR settlement agreement can be found here and the Zurich settlement agreement can be found here. The two groups acting on the investors’ behalf were Stichting Converium Securities Compensation Foundation, Dutch foundation formed for the purpose of seeking recoveries on behalf of the Non-U.S. Converium investors. Dutch investors in particular were represented by Vereniging VEB NCVB.
Pursuant to the Dutch Collective Settlement of Mass Damages Claims Act (known as WCAM), enacted in 2005, the parties then petitioned the Amsterdam Court of Appeals for approval of the settlement. An English translation of the parties’ petition, as amended, can be found here. The Act basically allows parties to seek court approval for collective settlement of mass actions entered for the benefit of class members who do not opt out.
On November 12, 2010, the Amsterdam Court of Appeals entered a provisional judgment acknowledging its right to recognize the settlements and scheduling a hearing for interested parties to appear and present their arguments with respect to the petition. Interestingly, the November 12 order specifically references the U.S. Supreme Court’s Morrison decision and the impact the decision has on the ability of Non-U.S. investors to pursue securities claims in U.S. courts. The hearing to determine whether the settlement agreements will be binding was held on October 3, 2011.
On January 17, 2012, the Amsterdam Court of Appeals issued its ruling holding the settlements to be binding. As discussed in the De Brauw law firm memo, there two principal objections to the non-U.S. settlements. First, the objectors contended that the amount of the settlement was unreasonable because the benefit amount under the U.S. settlement was relatively greater than was the case under the non-U.S. settlement. The objectors also took exception to the amount of fees awarded to U.S. counsel was unreasonable.
In its January 17 ruling the Amsterdam Court rejected these objections. The rejected the objection about the settlement amount because the legal position of the non-U.S. investors was weaker than that of U.S. investors because the non-U.S. investors had been rejected from the U.S. class action. In dismissing the objection about the U.S. lawyers’ plaintiffs’ fees, the Court noted that much of the work in support of the settlement had been carried out in the U.S. by U.S. law firms, and that what was considered customary in the U.S. could be taken into account by the Dutch court.
The significance of the Amsterdam court’s decision to accept the settlements as binding is that it represents the first time that the Amsterdam Court has approved a settlement “regarding the securities of a company which is not based in the Netherlands and whose securities are not traded on an exchange in the Netherlands.” At least in principle all EU member states, as well as Switzerland, Iceland and Norway will have to recognize the Amsterdam court’s ruling as binding.
The Court’s acceptance of the settlement, particularly given the limited connection of the settlement to the Netherlands, is particularly significant in light of the fact that the Netherlands is “the only European country where a collective settlement can be declared binding on an entire class on an ‘opt out’ basis.” As the DeBrouw law firm’s memo states, the Dutch courts not only have the power to declare the settlement to be binding but “it has the appetite to facilitate such settlements even if the parties to the settlement and the class members only have a limited connection to the Netherlands.” The decision confirms that the Netherlands is “Europe’s most attractive venue for facilitating international settlements.”
As a more general level, as the Deminor memo notes, the settlement also shows that “there is a legally binding settlement mechanism available in Europe that can help to solve complex securities litigation in Europe in an orderly way.”
These settlements represent the latest occasion when the new Dutch procedures have been used to reach settlements on behalf of non-U.S. investors in connection with securities claims that were also the subject of U.S. securities class action lawsuit claims and settlements.
The first and highest profile of these prior settlements was the $381 million settlement on behalf of non-U.S. Royal Dutch Shell investors. As discussed here, in May 2009, the Amsterdam Court of Appeals approved the settlement and authorized payment to Non-U.S. investors. The Dutch settlement followed an earlier settlement of a parallel U.S. securities class action lawsuit settlement on behalf of U.S. investors and arising out of the same factual allegations.
The Royal Dutch and the Converium settlements illustrate possible means by which, even in the wake of Morrison, non-U.S. investors can obtain recoveries for their investment losses. As plaintiffs’ attorneys cast about for alternatives for non-U.S. investors to pursue in the wake of Morrison, the use of settlements under the Dutch procedures may provide a possible remedy.
On the other hand, there are limitations on the usefulness of the Dutch procedure for investors. Only court authorized representatives can pursue claims on behalf of investors, and representatives cannot seek damages. Instead, the Dutch courts can only certify the class and approve out of court settlements. In addition, while the judgment of the Dutch court is in principle enforceable in courts outside the Netherlands, it remains to be seen whether or not other courts will in fact recognize the judgment.
But those limitations notwithstanding, the decision of the Dutch court to recognize the settlements as binding represents a significant step in the evolution of remedies for non-U.S. investors in the wake of Morrison. There is some irony that one of Morrison’s consequences is that has spurred investors to seek remedies elsewhere and thereby advance the development of remedial mechanisms outside the U.S Indeed in its preliminary ruling in the case the Dutch court specifically cited the advent of the Morrison decision as one reason that it should provide relief. In the one of Morrison’s consequences may be the encouragement of the process for developing investor remedies outside the U.S.
Special thanks to the several good friends who alerted me to this development and who sent me links to the law firms’ memos.