After U.K.-based Tesco PLC’s announcements of accounting “irregularities” and the subsequent departure of the company’s Board chair, investor lawsuits soon followed. But as discussed here, these lawsuits were filed in the United States, on behalf of investors who had purchased American Depositary Receipts in the United States. In light of the U.S. Supreme Court’s holding in Morrison v, National Australia Bank – which held that the U.S. securities laws do not apply to securities transactions that take place outside the U.S. – the class of investors on whose behalf the U.S. lawsuits were filed did not include investors who had purchased Tesco shares on London Stock Exchange.
The fact that investors who purchased their Tesco shares on the LSE are closed out of the U.S. litigation raised the question of what these investors could do to seek redress. (Indeed, I received emails from several of these investors who were wondering what they could do after they had learned they could not be a part of the U.S. lawsuits.)
It was in this context that on November 25, 2014, a London-based law firm announced that it is preparing to file a separate legal action in the U.K. against Tesco. The law firm’s press release can be found here. A post of Tristan Hall of the Sedgwick law firm on the firm’s Insurance Law Blog discussing the lawsuit announcement can be found here.
The law firm’s lawsuit press release states that the prospective U.K. lawsuit on behalf of Tesco investors “relates to compensation for shareholders who suffered a loss as a result of the overstatements of profit recently revealed by Tesco.” The claim will allege that “directors and senior management knew or were reckless as to whether Tesco’s statements to the market were untrue or misleading and/or dishonestly concealed the true position, in breach of the Financial Services and Markets Act.”
The law firm’s press release quotes one of the firm’s partners as saying that “We expect to issue proceedings against Tesco in the High Court in London within 6 months. We do not intend to await the outcome of the SFO investigation which may take some years.”
There are a number of interesting things about the law firm’s announcement of this prospective law suit. The first is that the law firm that made the announcement is already presently involved in the pending group action brought by investors against RBS and certain of its directors and officers (about which refer here). Indeed, the law firm’s own press release states that the firm is “currently acting for over 300 institutional shareholders in the multi-billion pound RBS Rights Issue litigation.” The suggestion is that at least one law firm is committed to exploring the existing U.K. law and attempting to establish that the law supports the rights of aggrieved investors to seek to recover damages for investment losses based on alleged misrepresentations.
The second interesting thing about the law firm’s press release is that it includes the disclosure that the initiative to pursue litigation in the U.K. against Tesco is being financed by a litigation funding firm, Bentham Ventures B.V. Indeed, the funding firm itself published its own press release about the lawsuit, which can be found here. According to the funding firm’s press release and associated documents, Bentham Ventures B.V. is a Netherlands-based joint venture company involving Australia-based IMF Bentham Ltd and subsidiary entities of funds managed by Elliot Management Corporation, a US based advisory firm. The press release states that the funding firm has “agreed to fund legal action on behalf of shareholders.”
The press release also notes that ”in order for the claim to proceed a sufficient number of shareholders will need to join the action.” The funding firm describes those eligible to participate as “”those who acquired at least 10,000 Tesco shares during the period 17 April 2013 to 22 October 2014 (inclusive) and who had not sold all of those shares prior to the market announcements made by Tesco on 29 August, 22 September or 23 October 2014.” In addition, information on the funding firm’s website states that the funding firm will only fund proceedings on behalf of those investors that enter into the a Tesco Funding Agreement, Stewarts Retainer Agreement and Litigation Funding Agreement Guarantee before the cut-off date of Friday 23 January 2015. The referenced documents are described in an FAQ page on the funding firms website.
The funding firm’s involvement is interesting. It shows how the increasing involvement of litigation funding (in the U.K. and elsewhere) is supporting efforts to develop litigation remedies. While there are going to many differences between the UK litigation and the parallel U.S. litigation (for example, the U.K. litigation will not involved a class action procedure and will proceed on the U.K. “loser pays” model), the U.K. litigation does represent a development to try to afford investors outside the U.S. access to remedies of the type available to U.S. investors.
Whether or not the remedies will be viable for U.K. investors remains to be seen. As the Sedgwick law firm’s blog post notes, the existing RBS litigation is based on Section 90 of the Financial Services and Markets Act 2000. It seems likely, the blog post notes, that the Tesco claim will also proceed under Section 90 of the SFMA, which covers misstatements or omissions in an issuer’s periodic financial disclosures or in information published in the market by means of a recognized information service. (Indeed, the funding firm’s overview of the prospective claim, here, expressly references Section 90.) The existing RBS case and the projected Tesco case represent the first attempts to test the remedies afforded to investors by the FMSA.
As the blog post notes, the outcome of the RBS and Tesco cases will be of significant interest to UK publicly traded companies, their directors and their D&O insurers, as they cases represent significant efforts to determine the viability of the remedies available under Section 90. If one or both of these two lawsuits succeed, other investors in other cases may be encouraged to try to pursue their own claims for redress.
It is significant that these efforts to test the viability of these statutory remedies are being financed by the litigation funding firms. The involvement of the funding firm in these cases underscores how the growth of litigation funding is shaping and driving legal developments, in the U.K. and elsewhere. To the extent the RBS and the Tesco cases succeed, they could encourage future litigation funding opportunities for the firms that financed these litigation efforts (and for the funding firms’ own investors as well).
As interesting as is the prospective Tesco litigation in the UK courts, the role of the investment funding firm arguably is even more interesting. The growing involvement of and importance of litigation funding in corporate and securities litigation is one of those behind-the-scenes that has great potential significance for future developments in the corporate and securities litigation arena.
D&O Diary Named to American Bar Association Journal’s List of Top 100 Law Blogs: I am pleased to report that once again The D&O Diary has been voted onto the American Bar Association Journal’s list of the top 100 law blogs, as detailed here. I am very honored to be included on this list once again as the list includes many of the blogs that I regularly follow. It is quite privilege to be included in the same list as all of the other fine blogs.
Now that the 2014 top law blawg list has been decided, what comes next is the voting for the best in category. The D&O Diary is contending for the title of best in the Niche blog category (for some reason the ABA Journal’s editors seem to think that D&O liability and insurance is niche topic). I would be grateful for any readers who would be willing to take the time to vote for my blog as the best of the Niche category. Best in category voting ends at the close of business on December 19, 2014. TO vote, please refer here.
Thanks to everyone who already voted for my blog to be included in the ABA Top 100 Blawg list for 2014. Congrats to all of the 2014 honorees.