As I noted in my recent round up of current trends in the world of D&O, one of the most important recent developments in the D&O claims arena has been the rise of collective investor actions outside of the U.S. I amplified on this theme in a Q&A that I also recently published on this site. In a recent blog post, Columbia Law Professor John Coffee underscored the recent significant rise in collective investor actions in Europe and Asia. In a September 19, 2016 post on the CLS Blue Sky Blog entitled “The Globalization of Securities Litigation” (here), Professor Coffee details how entrepreneurial U.S.-based plaintiffs’ law firms have managed to circumvent apparent local obstacles and succeed in pursuing collective investor actions even in otherwise inhospitable legal environments. As I have previously noted and as I discuss further below, the rise of collective investor actions outside the U.S. is one of the most significant recent developments in the global D&O claims arena.
Coffee opens his article by noted that major securities class actions have recently settled in the Netherlands and Japan for near record amounts. Coffee notes that though there are many seeming procedural barriers to securities class action litigation (absence of contingency fees; loser pays litigation model; absence of opt-out class action model), efforts led by traditional U.S.-based plaintiffs’ law firms have facilitated the development of what Coffee calls a “synthetic class action.”
The most prominent example of this development is the watershed settlement reached in March 2016 against Fortis for $1.137 billion under the Dutch collective settlement procedures (which I previously discussed at length here). Coffee notes that despite the fact that the Dutch procedures provide only for settlements but not for the filing of affirmative actions, two well-known U.S. plaintiffs’ law firms, acting in conjunction with Deminor, a Belgian firm specializing in investor protection, managed to organize a massive settlement on behalf of Fortis investors that was approved by the Netherlands courts.
According to Coffee, these U.S. plaintiffs’ firms were able to achieve this result by taking three steps: first, they organized local “stichtings” (associations), into which investors could transfer their legal claims with the expectation that any recovery would revert to each investor. As Coffee noted, this “amounts to the equivalent of an opt-in class action.” Second, to finance the litigation, the organizers went to financial firms specializing in their-party litigation financing, which allowed the attorneys’ to carry the case until its resolution. Third, the organizers used the financing to purchase insurance from a liability insurer against “loser pays” fee shifting. As Coffee emphasizes, what the U.S. plaintiffs’ firms “assumed the role of a risk-taking entrepreneur and struck the deal with the third-party funder.”
Critically, once the defendants decided they wanted to settle, the organizers could convert their initiative into what is in effect an opt-out class action under the Dutch collective settlement procedures. This feature is attractive to defendants, as it allows them to eliminate the danger that absent parties might otherwise seek to pursue their own separate claims. Although the Dutch procedures allow claimants to opt out, this right would only be exercised if there is another viable forum. Another critical aspect of the Dutch collective settlement procedure is that once a Dutch court has approved a settlement and reduced it to a judgment, under EU procedures, the judgment must be respected and enforced in all other member states.
Even though there is an open question whether a U.S. court must respect the judgment, the practical reality under the U.S. Supreme Court’s Morrison decision is that a U.S. investor who purchased shares outside the U.S. cannot proceed in U.S. court anyway. What is likelier to happen if there are shareholders who purchased shares on the U.S. exchange, is that those investors will pursue their claims in U.S. courts under U.S. law, and all other investors will seek to pursue their own claims under alternative procedures such as the Dutch collective action procedures (as in fact was the case in the Comverium and Royal Dutch Shell investor actions, about which refer here and here).
As Coffee notes, given the investors’ success in the Fortis settlement, it is hardly surprising that other groups of aggrieved investors, again being led by U.S.-based plaintiffs’ law firms, are now seeking to use the Dutch collective settlement procedures in connection with a number of high profile scandals, including for example aggrieved Volkswagen investors. As Coffee notes, other Volkswagen investors, also being led by a U.S. plaintiffs’ law firm, are seeking to pursue investor claims against Volkswagen in Germany, under the German KapMuG procedures. The existence of these potentially competing procedures sets up a possibility that when the time comes for a collective resolution of the Volkswagen investor claims, these competing actions may come to a head, perhaps in the Netherlands as competing groups seek to take advantage of the Dutch collective settlement procedures to resolve the claims within what is in effect an opt-out class action case resolution mechanism.
Coffee notes that collective investor actions have been moving ahead in Asia as well as in Europe. In particular, he notes South Korea’s adoption of opt-out class action procedures. He also notes Japan’s legal procedures involve mechanisms similar to a U.S.-style model (although opt-out class action settlements are not available). He also noted that investor claims against Olympus, again being organized by a U.S. plaintiffs’ law firm, recently resulted in an investor settlement of $92 million. (Refer here for an interesting interview with one of the U.S.-based lawyers involved in the Olympus settlement.)
As Coffee notes, global investors who find themselves denied a U.S forum in which to pursue their claims increasingly seeking to pursue their claims in foreign countries. The “common denominator” across Europe and Asia is the “entrepreneurial role played by U.S. law firms.” Whether U.S. law firms are able to continue to play this role remains to be seen, but so far at least “the American entrepreneurial spirit has overcome all obstacles.”
Coffee’s review of these issues is entirely consistent with my own analysis in several prior blog posts. One particular aspect of Coffee’s discussion that I found particularly apt is his discussion of how all of these things have come together despite what is perhaps an almost universal disdain outside the U.S. for U.S.-style litigation, particularly U.S. class action litigation. I am fortunate to have been able to travel around the world for various professional meetings in recent years. Often I am the only American in the room. I have become quite accustomed to hearing the locals express deep distain for the U.S. litigation model. But what has happened over the years is that slowly but surely despite the disdain for U.S. litigation procedures, many countries have adopted procedural reforms that reflect aspects of U.S. style litigation, even U.S. class action litigation. Often these reforms arise when local investors aggrieved by a corporate scandal push for legislative reform so that they have some procedural mechanism for redress.
Professor Coffee correctly notes that role that entrepreneurial U.S. plaintiffs’ lawyers have played in driving some of these changes and in establishing procedural pathways to be used in pursuing collective investor claims. He also alludes to the role of third-party litigation funding, but in my view the role of third-party litigation funding is even more significant than Coffee’s account suggests. Coffee’s article does not even mention the rise of securities class action litigation in Australia and Canada, the two countries other than the U.S. where class action litigation is most common. In both of those countries, third-party litigation funding has played an indispensable role in the rise of class action litigation (and U.S. plaintiffs’ law firms have not played nearly as critical of a role). Many recent litigation initiative arising out of high profile scandals have also been led by litigation funding firms (refer here, for example).
The general adoption of class action procedures outside of the U.S. is really even more pronounced than even Coffee has suggested. Thus, although he mentions South Korea’s adoption of an opt-out class action model, and he mentions the availability of collective action procedures under Japanese law, he does not mention that Thailand, for example, recently adopted class action procedures (that became effective in December 2015). India, in its Companies Act of 2013, also adopted class action procedures. Proposals to consider the adoption of class action procedures are now pending in a number of countries, including, for example, Hong Kong (about which refer here).
A recent wave of corporate scandals has accelerated this phenomenon. Investor outrage over scandals involving, for example, Petrobras, Toshiba, Tesco, Volkswagen, and other companies has led to a number of collective investor actions outside the U.S. Investors, in initiatives organized by third-party litigation funding firms and often led by U.S.-based plaintiffs’ laws firms, have filed claims in a number of jurisdictions, often including actions in the Netherlands, in an effort to seek collective redress.
The likelihood is that we will continue to see growth in the development of collective investor actions outside the U.S., as the combination of corporate scandals, third-party litigation funding and legislative reform continue to drive these procedures. As Coffee’s observations suggest, the entrepreneurial U.S.-based plaintiffs’ bar seem likely to remain in the vanguard of these developments, at least for the foreseeable future.