One of the most interesting and significant developments in the corporate and securities litigation arena has been the rise of collective investor litigation outside the United States, as I have discussed in prior posts. This rising tide of litigation has not only included increased numbers of legal actions in a number of different jurisdictions but also has included several substantial settlements, including among others the massive settlements in the Fortis case and in the RBS case. In an updated report July 2019 report entitled “Global Securities Litigation Trends: July 2019 Update” (here), the Dechert law firm takes a detailed look at the “sea change” that has taken place in collective investor litigation in recent years, as a result of which, according to the report, we have entered “a new era of global securities litigation.”
The authors present their analysis in the form of a survey of a number of countries where the most significant developments in collective investor litigation have taken place. The report notes that differences between various countries’ collective active mechanisms continue to result in certain jurisdictions being favored over other countries, “increasing the potential for forum shopping.” A factor in the rise of collective investor actions has been the growth of third-party litigation funding. The report notes that “without proper restrictions on how much control third party funders may have over the conduct of litigation, the practice continues to be susceptible to abuse.” In any event, the report notes, corporate legal and compliance departments need to be aware that their companies may face substantial litigation risk not just at home but abroad.
As detailed below, the report analyzes this litigation risk in a variety of different jurisdictions, including the following.
The United States: While the overall scope of the report is to focus on the rise of collective investor litigation outside the U.S., the report begins its survey of specific countries with a look at the U.S. As noted in the report, the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd. in many ways set the stage for the more recent developments. The Morrison decision “extinguished access to U.S. courts” for many types of litigants who might otherwise pursued securities claims in U.S. courts against non-U.S. companies.
The report correctly notes that lower courts continue to struggle with some of the specific implications of the Morrison decision, particularly with respect to non-U.S. companies that have American Depositary Receipts (ADRs) trading in the U.S. (Refer here and here to my recent discussion of issues under the U.S. securities laws with respect to ADR companies.) The bottom line is that non-U.S. companies with securities trading on U.S. exchanges or that otherwise have ADRs trading in the U.S. continue to be subject to U.S. securities litigation and to the risk in cases that survive dismissal motions of substantial settlements.
While the scope of jurisdiction post-Morrison is still developing, “shareholders continue to find alternative jurisdictions in which to bring their claims.” Moreover, U.S. securities litigation plaintiffs’ firms “continue to be at the forefront in forming foundations of international investors bringing shareholder actions in non-U.S. jurisdictions.”
The European Union: The report also discusses the initiative in the EU over recent years to require member states to adopt collective redress mechanisms for consumers. As discussed here, in April 2018, as the latest in a series of steps toward the Union-wide adopting of collective redress mechanisms, the EU launched its “New Deal for Consumers,” which provided a general framework for collective injunctions and redress. Though these measures are directed at actions to benefit consumers, the EU directive “could have wide-reaching effects on member states’ practices relating to investor class actions.” As discussed here, the draft directive was agreed to by the European Parliament in April 2019, and final adoption is expected in Fall 2019.
Under the EU directive, member states will continue to develop their own version of the collective redress mechanism. Differences between the various EU members’ collective redress mechanisms “continue to be a risk for issuers, as enterprising plaintiffs have the opportunity to engage in forum shipping.” Great availability of litigation financing in some jurisdictions may provide the “incentive” for shareholders to “pursue more claims.”
Netherlands: Netherlands is a jurisdiction that is “at the forefront” of the recent significant rise in collective investor actions. In several prominent cases, litigants have used the country’s class settlement procedure to create and enter legally binding multinational settlements in class actions alleging securities fraud. The $1.3 billion Fortis settlement is the highest profile example of this development; indeed, it is one of the largest investor settlements ever, in any jurisdiction. The Fortis settlement ultimately received court approval, but only after the initial settlement was revised to provide that both active and inactive shareholder claimants would receive the same recovery under the settlement. After the settlement was revised, some shareholder attorneys argued that the equivalent recoveries could “dis-incentivize” institutional investors from becoming actively involved because “there is no reward for the effort and cost of bringing the claims in the first place, creating a free rider problem.”
In addition to the country’s collective settlement procedures, the Netherlands has recently adopted legislation allowing for collective actions seeking money damages. According to the report, the Dutch Senate approved the bill earlier this year, and the legislation is expected to go into effect this month. In anticipation that the new legislation might attract even more claimants to Netherlands courts, the bill contains various provisions designed to discourage forum shopping. The legislation envisions a form of representative litigation in which prospective claimants join a “foundation” to pursue a claim. The foundation can bring a collective action only if the legal claim has a “sufficiently close relationship with the Netherlands.” A claimant can show a “sufficiently close relationship” only if the majority of persons whose interests the foundation represents are Netherlands residents; if the party against who the claim is directed is Netherland resident and circumstances suggest a sufficient relationship with the Netherlands; or if the event to which the claim relates took place in the Netherlands.
The United Kingdom: The authors describe the U.K. as “currently one of the preferred jurisdictions for collective action proceedings,” noting the existence of alternative procedures for claimants to use in pursuing collective securities litigation actions” and the track record of successful claims in the RBS and Tesco litigation. These settlements, the report notes, have “set the stage for investor collective actions in the U.K., perhaps signaling that collective securities litigation actions will become more commonplace in the future.”
The report also notes the £14 billion damages action under the Consumer Rights Act on behalf of all U.K. consumers under the Consumer Rights Act. (The MasterCard action is discussed at length here). The Competition Appeal Tribunal had initially dismissed the case, finding that the claims were not suitable for resolution under the collective proceeding framework because of the presence of several issues that are not common among all members of the class. However in April 2019, the Court of Appeal concluded the Competition Appeal Tribunal erred, and the case was returned to the Competition Appeal Tribunal will now reconsider whether to certify a class and the recovery claims will go forward. As I noted at the time the MasterCard action was initially filed, the action represents the convergence of a number of global trends in corporate and securities litigation.
Germany: Germany does not have a class action procedure as such, but its court procedures include a process by which decisions can be made on common elements of multiple claims. The model action procedure (generally known by its German acronym, KapMuG) allows claimants to opt in and allow their claim to be tried under a model proceeding for groups of claimants. The KapMuG procedures are currently being used in connection with the more than 1,400 investor claims filed against Volkswagen following the company’s emissions cheating scandal. In an early stage of the proceedings, the presiding judge ruled to include Porsche as a defendant in the proceedings. The model trial in the Volkswagen action began in September 2018. According to the report, a decision in the proceeding is expected in 2019.
Italy: According to the report, Italy amended its judicial procedures in 2010 to provide for a class action procedure. A number of proposed revisions to the procedure are pending. In 2015, the procedure was used in an action brought by investors against the Italian oil company Saipem. The investors alleged that the company had issued misleading statements about its financial condition. In November 2018, the court of Milan dismissed the case, for failure to demonstrate ownership of Saipem shares throughout the class period. The report notes that “given the obstacles and risks associated with bringing class actions in Italy, the country will likely continue to lag behind other European nations” in terms of the number of suits “until Italian law develops further and becomes more accommodating to litigating pursuing collective actions.”
Canada: Canada is of course one of the countries where there has been active securities class action litigation for several years. The report notes that as things stand, each Canadian province has its own securities laws, securities litigation, and relevant civil procedures for proceedings within their jurisdiction. Currently there are calls and a number of initiatives to centralize the Canadian system. A number of recent developments “could open the door” to a coordinate approach to securities regulation between the provincial and territorial government and the federal government.
For many years, Canada was viewed as a possible preferred forum for securities litigation. However, as discussed in a prior post (here), a 2018 decision by the Court of Appeals of Canada concluded it had no jurisdiction in a case involving a shareholder who bought shares on a Hong Kong exchange using a Hong bank account, because it had “no real and substantial connection to Ontario.” The Court expressly noted that would not “become the default jurisdiction for issuers around the world whose securities are purchased by residents of Ontario.”
The number of securities lawsuits filed in Canada have “lagged” in recent years; there were only eight new securities lawsuits filed in Canada in 2018, the fourth year in a row when the number of filings has fallen below the average of nine new cases each year during the period 2008 to 2014. Of the eight cases filed in 2018, five had parallel cases in the U.S., which is consistent with longer term trends; during the period 2011-2017, about half of the Canadian cases involved a parallel U.S. action.
Australia: Australia is another country with a track record of active securities class action litigation, largely because of the country’s recognition of third party litigation financing. More recently, and as discussed here, the Australian Federal Court for the first time approved a “common fund” class action, to include even class members that did not sign the litigation funding agreement. However, the recognition of open classes without a mechanism for consolidating cases seems to have had the effect of multiplying proceedings, with the need for defendants to fight a multi-front war and risking overlapping recoveries. It at least one instance, the Federal Court has stayed duplicative proceedings while allowing one open class proceeding to go forward. The current state of securities class action litigation in Australia is discussed in greater detail here.
Japan: Japan only recently adopted a formal collective action procedure, and only a few cases have been litigated under the recently adopted system, most notably in the Japanese case pending against Toshiba. According to the report, a total of 26 investor cases have been brought against Toshiba. The Toshiba actions in Japan remain pending.
Discussion
I believe the authors are correct that the rising tide of collective investor actions outside the U.S. represents “a new era of global securities litigation.” Indeed, I think there is even more evidence than the authors cite that supports this proposition.
First, the authors do not mention some other countries that have a very active securities litigation practice. As discussed here, among these other countries are Israel and Taiwan. Indeed, Taiwan has the third highest number of securities class action settlements of any country outside the U.S. (75), after only Canada (80) and Australia (79). In addition, several other countries have seen significant collective investor action activity in recent years, most notably Denmark (including actions against Danske Bank and Novo Nordisk); and Greece (in connection with the Folli Follie SA scandal). Even Saudi Arabia has a collective investor action pending, against Mohammad al-Mojil Group.
Second, a number of countries have recently amended their laws to expressly allow for investor class actions, including Thailand and India, and Slovenia amended its laws in 2018 to allow for collective actions for financial harm. While there have not yet been any collective investor actions in these countries, the statutory amendments show the possibility for future actions and for the rise of collective investor actions to spread to other countries.
Third, a number of the countries the report specifically mentions have even more active collective investor action track record than the report discusses. Japan for instance has had significant collective investor action activity over the years. The case in Japan against Olympus settled for the equivalent of USD 90 million. In addition to the pending case in Japan against Toshiba that the report notes, there are actions pending or planned in Japan against a number of other companies including Kobe Steel and Mitsubishi. By the same token, there are a number of other high profile collective investor actions pending in Germany in addition to the actions mentioned in the report, including actions against Daimler AG and Wirecard AG. Similarly, there are a number of other actions pending or planned in the U.K., including actions against Petrofac Ltd. and Serco Group plc.
Fourth, there have been a number of interesting developments that may point the way to even more significant cross-border litigation. The most interesting example of this is the collective investor actions pending against Steinhoff International. There are collective investor actions pending against the company in three different countries, including South Africa, Germany and Netherlands. In at least one instance, these actions are not competing actions; instead, the claimants’ attorneys in each of these cases are collaborating, under the coordination of a U.S. plaintiffs’ law firm. This model represents the opposite of forum shopping, and also provides a mechanism to try to achieve a coordinated recovery without running afoul of various measures some jurisdictions have put in place to try to prevent their courts from becoming the default forum for the world’s aggrieved investors. (It should be noted that there are also competing cases against Steinhoff in various of the countries, in addition to the set of coordinated cases. There are, for example, multiple other cases pending in the Netherlands against Steinhoff).
The way you feel about these trends may depend on where you sit in the process. I know these are unwelcome developments for the companies involved and for companies who understand that they now face a greater risk of investor litigation than in the past. Among these companies and their advisors, these developments are often described using medical terms such as “contagion,” “infection” and “virus.” I can certainly understand this point of view.
However, at the same time, I think it is important for everyone, especially those adversely affected by these developments to understand that these things are happening not because there is some germ that is spreading. These lawsuits are being filed and the changes are being made to the law and to judicial procedures because that is what investors want. Investors – including, these days, large institutional investors – who are aggrieved want and indeed even expect redress. That is the reason that the trends and changes described in the report are likely to continue: because that is what the large institutional investors want. That does not mean that these developments are not without their problems. There are legitimate concerns, particularly in certain jurisdictions. However, the problems and concerns do not mean the changes will not continue.
The bottom line is that the risk exposures that companies face with respect to the possibility of collective investor actions has changed and will continue to change. While these changes vary widely between jurisdictions, the reality is many companies – and their D&O insurers – now face a very different litigation risk environment.