In numerous recent posts, I have noted the global rise of investor collective actions (refer for example here). These lawsuits, which take a variety of different forms according to the applicable forum laws, have been filed in a number of different countries. Among other regions that have seen a recent rise in this type of litigation is Europe. In an interesting November 16, 2016 publication entitled “Rise of European Shareholder Class Action? (here), AIG Europe takes a look at the recent rise of collective investor actions, noting among other things that these types of actions are “on the rise in Europe” as a result of “a number of converging factors.”
Among the specific factors the paper identifies as contributing to this increase is the rise of shareholder associations, the increasing availability of litigation funding, as well as precedent set by several high-profile cases working their way through the courts.
In preparing the paper, AIG reviewed its own claims portfolio, examining 50 large shareholder claims between September 1, 2008 and November 30, 2015. The report notes that 60% of the claims were filed outside the U.S. while 40% of the claims were filed in whole or in part in the U.S. The most prominent jurisdictions for these claims are Denmark, the U.K. and the Netherlands, while France, Germany, and Sweden have also experienced shareholder actions. The actions with a U.S. connection resulted in the largest claim payouts; the U.S.-connected claims represented only 40% of the number of claims but accounted for 65% of AIG’s total loss costs.
The report notes that among the factors contributing to the rise in the number of European collective investor actions is the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which closed the U.S. courts to investors who purchased their shares in a company outside of the U.S. This development came about as or shortly after a number of jurisdictions had introduced procedures or mechanisms that made it easier for aggrieved investors to proceed collectively. The report cites changes in a number of jurisdictions, including, for example, the 2005 Dutch Act on Collective Settlements Mass Damages (known as WCAM). (The report also notes that the October 2016 decision of a Netherlands court that may raise questions about the usefulness of these procedures for global resolution of collective claims, about which refer here and here.)
At the same time, the report notes, the growth in the availability of litigation funding and after-the-event insurance has been “a significant factor in encouraging groups of European shareholders to bring actions against companies and their directors for perceived wrongdoing,” as I have noted on this blog (most recently here).
The report also notes that the rise of shareholder associations has also encouraged shareholder actions, by allowing claimants to amass significant groups of shareholders to bring an action and resolving funding dilemmas that had previously stymied collective investor actions.
Increased regulatory oversight in the wake of the global financial crisis, which increasingly involves cross-border regulator collaboration, has prompted shareholder class actions in Europe in some instances. The report notes that two of the AIG Europe’s largest ongoing securities claims arose following investigations under the U.S. Foreign Corrupt Practices act.
A number of high-profile cases are now working their way through European courts. These cases are being closely watched and their progress could affect the likelihood of further future litigation. If the claims are successful, they could “pave the way” for similar shareholder actions in the future. Among these claims are the cases pending in the U.K. involving RBS and Tesco; the actions filed in Germany against Volkswagen; and the action against Danish fuel supplier OW Bunker. (The report is cautious to note that while claims are on the rise, there is no suggestion that “floodgates” are about to open.)
The most common allegations in the fifty cases that AIG examined were inadequate or untimely disclosure, which was alleged in 26% of the claims. Many of these cases also involve what the report describes as a “secondary driver,” such as an antitrust or bribery investigation. In addition to allegations of inadequate or timely disclosure, the most frequent allegations are accounting fraud/irregularities (14%), and M&A bump up claims (8%). The inadequate/untimely disclosures cases account and the accounting fraud/irregularities account for the largest share of claims payouts, representing 42.8% and 27.1% of total loss payout respectively.
The industrial sectors most frequently represented among the claims were Construction and Real Estate (14%); Manufacturing (12%); Tech & Telecom (10%); and Pharmaceutical (8%). Companies with a turnover of $20 billion or more are the most vulnerable, accounting for over one-third of AIG’s shareholder claims payouts (against a claim frequency of 10%)
The report notes that while companies without U.S. exposure remain “significantly less exposed than their U.S. counterparts,” they “should not rule out the possibility of highly complex shareholder actions in the future.”
The report notes that the range of high-profile cases currently working their way through the courts “could heighten the appetite for other shareholder groups to take a similar path.” If these lawsuits are successful, they could raise the profile of the shareholder associations, “attracting new members and eager litigation funders, creating even greater momentum for collective redress actions in the future.”
Special thanks to the several loyal readers who sent me a copy of the AIG report.