In a development with significant implications both for Petrobras investor claims and for the global pursuit of investor claims generally, a Dutch court has accepted jurisdiction for a securities fraud action filed in the Netherlands against Petrobras, and also ruled that the arbitration clause in Petrobras’s bylaws do not preclude the Dutch proceeding. As discussed below, the court’s rulings could have important global ramifications for the viability of Dutch procedures for investors seeking collective redress, even (as is the case in the Petrobras action) with respect to companies based outside of the Netherlands.
The Dutch proceeding arises out of and relates to the long-running Operação Lava Jato investigation (Operation Car Wash), which began as a money-laundering and corruption investigation of the state-controlled oil company Petrobras. As revelations involving the company mounted, investors initiated a number of actions against the company. Investors who purchased Petrobras securities on U.S. exchanges filed a securities class action lawsuit against the company, as discussed here. Earlier this year, the parties to the U.S. securities suit announced a $3 billion settlement.
Consistent with the requirements of the U.S. Supreme Court in the Morrison v. National Australia Bank case, the U.S. settlement resolved the claims only of Petrobras investors who purchased company securities on the U.S. exchanges. Indeed, as discussed here, Southern District of New York Judge Jed Rakoff ruled in the U.S. action in July 2015 that the U.S. claims of investors who purchased Petrobras securities on Brazilian exchanges were both precluded by Morrison and barred by the mandatory arbitration provisions in Petrobras’s bylaws. Judge Rakoff expressly held that the mandatory arbitration provision bound all investors who purchased Petrobras securities after the clause was adopted.
As a result of Judge Rakoff’s ruling, the general view (as discussed, for example, here) is that the sole remedy of investors who purchased their Petrobras shares on the Brazilian exchange was to pursue arbitration in the Market Arbitration Chamber of the Bovespa (the São Paulo stock exchange).
Notwithstanding these developments and constraints, a number of Petrobras investors sought to pursue their claims under in the Netherlands under Dutch procedures. Among other Petrobras investor groups pursuing claims under Dutch laws, in January 2017, the Stichting Petrobras Compensation Foundation (the “Foundation,” about which refer here) initiated a collective action in the Netherlands against Petrobras and its Dutch subsidiary on behalf of investors who purchased Petrobras securities outside the United States. Petrobras sought to have the Dutch proceedings dismissed, arguing, among other things, that the Dutch court lacked jurisdiction and that the Dutch action was precluded by the mandatory arbitration clause in Petrobras’s bylaws.
The September 19, 2018 Ruling
On September 19, 2018, the District Court in Rotterdam ruled in favor of the Foundation, accepting jurisdiction for the Foundation’s action, and ruling further that the mandatory arbitration clause in Petrobras’s bylaws cannot preclude the Foundation’s claim against Petrobras. The Foundation’s September 19, 2018 press release discussing the Rotterdam court’s ruling can be found here.
As noted in a September 21, 2018 Law 360 article about the Rotterdam court’s ruling (here), an English-language translation of the decision is not yet available. However, according to a September 19, 2018 summary of the Dutch court’s decision prepared by Battea Global Litigation Research (here), the mandatory arbitration clause in Petrobras’s bylaws “did not meet the standard for which Dutch courts determine to be valid ground to deny the investors and the Foundation constitutional access to bring litigation and claims against Petrobras in the Netherlands.” UPDATE: An English language translation of the Rotterdam Court’s September 19, 2018 Judgment can be found here.
In a September 19, 2018 press release with respect to the Dutch court’s ruling (here), Petrobras noted that “there was no decision on the merits,” noting that “the court ruled only on procedural issues and the class action will proceed to the next stages.” The company added that it “denies all allegations presented by the Foundation and continues taking the necessary measures to defend its interests.” The company also noted that Brazilian authorities have recognized that Petrobras “has been a victim of the acts revealed by Operation Lava Jato,” and that the company has already recovered over R$ 2.5 billion from companies and individuals that have caused the company’s damages.
The International Securities Association & Foundations Management Company (ISAF), which is collaborating with the Foundation in connection with the Dutch action, issued a September 19, 2018 press release (here) quoting a ISAF official as saying that “The ruling in Rotterdam should be encouraging to investors, who originally believed that their recovery options were limited to arbitration in Brazil, and were thus rightly discouraged by the probably unfavorable outcome for investors in a ‘home court’ jurisdiction for Petrobras.”
According to a September 19, 2018 Reuters article about the ruling (here), the Rotterdam court has scheduled a December 18, 2018 date for a preliminary hearing in the case.
The Rotterdam court’s ruling that the mandatory arbitration provision in Petrobras’s bylaws does not preclude the Foundation’s Dutch court action is interesting and stands in contrast to Judge Rakoff’s 2015 ruling in the U.S. class action proceeding that the arbitration provision is binding on all Petrobras investors who purchased company securities after the provision was adopted (in 2002).
The ruling obviously provides a significant boost for the investors pursuing their claims against the company in Dutch courts. Indeed, in its press release, the ISAF quotes a spokesperson’s statement encouraging investors to contact the organization now that the jurisdiction has been established, appealing specifically to investors who had considered arbitration in Brazil, and encouraging them to register a claim in the Netherlands.
All of this is both interesting and unexpected. Since the Dutch proceeding was first filed, I have spoken to a number of different claimants’ attorneys about the prospects for the Dutch proceedings, filed in the face of the arbitration clause; the consensus view seemed to be that the Dutch proceeding wasn’t going anywhere. By the same token, an important part of Petrobras’s own strategy in response to investor claims seems to have been to try to force all claims outside the U.S. into arbitration in Brazil. The Dutch court’s ruling seems to have thrown a monkey wrench into these plans and assumptions. Indeed, at least one observer noted with respect to the Rotterdam court’s ruling that the “ruling is definitely a big blow to Petrobras’ arbitration strategy.”
The Dutch court’s ruling is clearly a very significant development in the Petrobras investors’ efforts to seek redress for their alleged losses, even though they were foreclosed from participating in the U.S. class action settlement.
The Dutch court’s ruling, if it stands, could also represent something of a milestone event in the development of the Netherlands as a preferred global forum for collective investor actions. In recent months, there has been a certain amount of hand-wringing in some quarters about the global rise of collective investor actions. Among other concerns voiced as part of this discussion is the worry that the “open” approach to collective investor actions in certain jurisdictions (including, for example, the Netherlands) has led to a kind of global forum shopping. As discussed here, among the specific concerns voiced with respect to the Netherlands are fears Dutch courts are allowing “ad-hoc litigation vehicles or foundations” to proceed as representative of large numbers of claimants, often with little nexus to the Netherlands.
The Rotterdam court’s ruling will likely add fuel to the fire about these kinds of concerns. However, it should be noted in that regard that in its press release about the Court’s ruling, the Foundation took pains to emphasize Petrobras’s “strong nexus with the Dutch jurisdiction.” For example, the Foundation noted that one of the entities issuing Petrobras securities (Petrobras Global Finance B.V.) is based in Rotterdam. The press release also noted that Petrobras benefits from the Dutch tax environment and Dutch investment protection treaties. From the perspective of commentators critical of “investor claim tourism,” these various supposed connections are not nearly enough to obscure the fact that claimants are utilizing Dutch courts to pursue claims against a company based outside the Netherlands and in many cases relating to securities transactions that took place outside the country.
Ever since the U.S. Supreme Court’s 2010 ruling in the Morrison case and the elimination in many cases of the availability of a U.S. forum for global investor claims, there has been an ongoing discussion whether the courts of another jurisdiction would emerge as the preferred forum for the resolution of collective investor actions. For example, as discussed here, some observers have questioned whether or not Australia might emerge as the preferred global forum for investor claims.
Even as the relative merits of other possible jurisdictions have been discussed, I have consistently thought that the Netherlands represented the likeliest jurisdiction to emerge as a preferred forum. My views in this regard were reinforced by the recent action by the Amsterdam Court of Appeals to declare binding the massive €1.3 billion settlement in the Fortis action – the largest collective investor settlement ever in Europe.
As is demonstrated by this action filed under the Dutch procedures on behalf of Petrobras investors, and further illustrated by the action under the Dutch procedures filed by VW investors claiming damages relating to the company’s diesel testing scandal, the existence of the Dutch procedures and the apparent openness of Dutch courts to collective investor claims could encourage 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.
Columbia Law School Professor John Coffee noted in his recent article about the global rise of collective investor actions (discussed here) noted that one factor in the rise of these kinds of actions – particularly in Dutch courts – is the entrepreneurial efforts of U.S. plaintiffs’ class action attorneys. Indeed, on its website, the Foundation pursuing the Petrobras investor claims acknowledges that its efforts represent the joint collaboration of a number of parties, including several U.S.-based plaintiffs’ law firms (identified by name here). These law firms’ efforts are one of many factors that suggest that there will be further efforts to try to use procedures – including procedures in the Netherlands – to pursue collective actions on behalf of investors.
In numerous forums around the world in recent years, I have said that I think that by far the most significant development in the D&O claims arena is the global rise of collective investor actions, a view that I continue to hold. The ruling of the Dutch court in the Petrobras investors’ action is another significant development reinforcing that view.