The recent revelation that Volkswagen had been using a sophisticated software “defeat device” to rig the emissions performance of some of its diesel-engine base vehicles devastated the price of the company’s shares, leading to the filing of a securities class action lawsuit in the U.S. on behalf of purchasers of the company’s ADRs, as well the initiation of efforts to launch procedures in the Netherlands on behalf of VW shareholders who purchased the company’s shares through a Dutch bank or broker.
In my recent post discussing these VW-related securities litigation developments, I raised the question whether investors might also try to file a separate action against VW in Germany, under German law, on behalf of shareholders who purchased their VW shares in Germany. It now appears that a litigation funding firm’s effort to organize a German shareholder action is already underway.
According to its October 1, 2015 press release (here), Bentham Europe Limited announced that it is “coordinating a German shareholder action against Volkswagen AG.” Bentham Europe Limited is a joint venture between IMF Bentham and subsidiary entities of funds managed by Elliot Management Corporation, a U.S.-based advisory firm. IMF Bentham is a publicly listed company whose shares trade on the Australian Securities Exchange (ticker symbol IMF).
In its press release, the firm announced that “it is in discussions with institutional investors worldwide to fund a shareholder action in Germany against Volkswagen.” The action, to be filed on behalf of shareholders who purchased shares in Volkswagen on German exchanges, will allege breaches of the German Securities Trading Act over an eight year period between 2007 and 2015. The action is “proposed to be conducted in Germany by a leading international commercial litigation law firm.” The press release does not identify the law firm.
The funding firm’s intention, the press release states, is to “instruct lawyers to commence the necessary proceedings as soon as possible.” The action will alleged be based upon the Company’s “apparent failure to inform the market, over a long period of time, about its suspected practice of installing and using ‘defeat device’ software in a very significant number of vehicles it manufactured and sold in the United States and other world car markets.”
The press release carefully states that in order for claims to proceed, a sufficient number of shareholders will need to agree to be funded by the finding firm, which will in turn need to resolve to fund the claim.
Readers will note that the litigation funding firm leading these efforts is affiliated with the related firm that is funding the efforts in the U.K. to organize a securities lawsuit on behalf of investors who purchased their Tesco shares on the London stock exchange, as discussed here. While the Bentham firm’s effort appears to be the first to organize efforts in Germany on behalf of VW investors who purchased their shares in Germany, there could well be other efforts on behalf of others, perhaps financed by other funding firms.
The advent of the litigation funding firm’s efforts on behalf of home-country investors in the Tesco and Volkswagen cases underscores how significant the involvement of these litigation funding firms has become. Clearly, the funding firms are financing efforts to develop investor-focused legal remedies for those claiming to be aggrieved by alleged disclosure violations. To the extent shareholder remedies in the U.K. and in Europe (as well as in Canada and Australia) develop and become more robust, it will largely because of the efforts and investments of the various funding firms.
Anyone who is skeptical about the extent and effects of litigation funding efforts in the current environment will want to take a look at the recently released report entitled Third Party Litigation Funding in the United Kingdom: A Market Analysis, a publication of an organization called Justice Not Profit, an advocacy group affiliated with the U.S. Chamber of Commerce. The report reflects a number of interesting observations and findings and is worth reading at length and in full. Among other things, the report notes that litigation funders’ assets under management in the U.K. have grown by an astonishing 743% since 2009. The report also notes that the litigation funding industry is a truly global business, so the growth of investment assets in the U.K. and elsewhere means increased funding for litigation not just in the U.K. but also in places like, for example, Germany.
Anyone wondering why litigation funding is taking off so dramatically will want to review my recent post on the topic. The reason, simply put, is that litigation funding has proven to be enormously profitable for the investors involved, as I detail in the blog post.
In my September 2015 survey of issues to watch in the world of D&O, I identified the growth in the presence and importance of litigation funding as one of the key developments to monitor. Clearly, the involvement of litigation funding in the Tesco and VW cases underscores the importance of litigation funding in the current litigation environment, particularly in the U.K. and Europe. Without a doubt the availability of litigation funding is, at a minimum, helping to facilitate securities litigation in these countries. It also arguably is driving the development of litigation remedies for aggrieved shareholders in those countries, and elsewhere.
These developments clearly should concern corporate managers around the world. D&O insurers also will want to carefully note these developments as well, as they could have significant implications for present and future litigation frequency – and, arguably, severity as well, as investors seek to maximize their returns on litigation investments.
In any event, the initiation of these litigation efforts on behalf of Tesco and VW raise interesting questions about the ability of aggrieved shareholders to seek redress under the laws of the U.K. and Germany, respectively. It will be interesting to see how these efforts develop as well as whether and to what extent the efforts succeed.
On a separate but related note, it is also very interesting to see how — as a result of the U.S. Supreme Court’s decision in Morrison v. National Bank of Australia — the unavailability in the U.S. of remedies for investors who purchased their shares outside the U.S. is driving developments and even innovation in other countries. Prior to Morrison, the investors who purchased their VW shares in Germany might have tried to participate in a U.S. shareholder class action lawsuit filed in a U.S. court. With that avenue no longer available, the VW shareholders, like the U.K. Tesco shareholders, are forced to try to seek redress in their own countries. I have long those that Morrison would spur litigation innovation in other countries. That development now seems to be taking place.