As I have noted in prior posts (most recently here), one of the more interesting and noteworthy developments in recent years has been the rise of collective investor actions outside the United States. A recent white paper published by Allianz Global Corporate & Specialty SE in collaboration with the Clyde & Co law firm entitled “Collective Actions and Litigation Funding and the Impact on Securities Claims: A Global Snapshot” takes a detailed look at the spread and development of collective investor actions – including, in at least some jurisdictions, securities class actions – against corporations and their directors and officers and the interrelation between this development and litigation funding. The report also includes a detailed picture of the status of collective actions and litigation funding in 28 different countries. The white paper can be found here.
The paper opens with a brief description of the various types of collective investor action approaches that have been adopted in various jurisdictions, including not only the more familiar class action form (most prominently seen in the U.S., Canada, and Australia) but also other forms, such as group litigation orders (by which a court orders the joint litigation of common or related issues of fact or law, on an opt-in basis), and representative cases (where parties with the same interest are represented by a party rather than being joined in the action). Other collective forms include joint action, test cases, and the consolidation of existing cases.
The report notes taking these various collective forms of action collective that “in all jurisdictions, there is a movement towards developing or expanding collective action mechanisms,” though “in some jurisdictions collective or class actions are only available for certain types of disputes such as consumer cases.” The risk of facing a collective action “continue to increase…across all jurisdictions.”
Securities class actions are “being filed in record numbers,” and “looking at the picture globally,” the threat of facing securities class actions “continues to grow,” with the activity most prevalent in the U.S., Australia, and Canada.
In addition to these countries were securities actions are well-established Europe has also seen a “spread of securities actions.” The landscape for collective redress in Europe has “evolved” over recent years and “collective action is a growing exposure.” The increase in collective investor actions in Europe has been due in part to the widespread losses investor suffered due to the global financial crisis. Another factor has been the U.S. Supreme Court’s ruling in the Morrison case which limited the extraterritorial reach of the U.S. securities laws which as encouraged investors to look outside the U.S. for relief. Morrison, the report suggests, as helped to shape the collective action regime outside the U.S., particularly in the Netherlands which permits court-approved class settlement on an opt-out basis, addressing the rights on a European-wide basis.
A related development has been European Commission’s directive on collective redress, under the guise of a “new deal” for consumers. As I have discussed the European Commission’s collective redress in detail in prior posts, here and here, the European Commission’s directive seeks to establish collective redress rights for consumers and allows “qualified entities” to bring representative actions. The report suggests that it is possible that the availability of these kinds of procedures “will create an environment in which super-charged claimant lawyers and litigation funders can thrive.” Though the directive does not extend to shareholder class actions, “they are likely to raise the stakes considerably for certain types of entities,” and also could create the “potential for follow-on shareholder claims.” At a minimum, the directive signifies “the gradual spread of collective action regimes” that has taken place globally over the last decade.
A significant part of the global rise of collective investor actions has been the growth of litigation funding, which, the report notes, “has been pivotal in the development of collective actions in a number of jurisdictions,” including the U.K. and Australia. The litigation funding industry is “booming globally” and it continues to evolve. Litigation funders are “actively seeking out new jurisdictions in which to fund litigation.” The report states that “we expect this activity to increase going forward,” and for this “to impact both securities claims and other types of collective action.”
The report concludes by noting that the exposure to collective actions differs widely between jurisdictions, due to differences in procedures available and other factors. This lack of uniformity “heightens the risk that shareholders, aided by an ever more entrepreneurial plaintiff bar, will engage in forum shopping, seeking to utilize the most favorable available regime,” with the added risk that the companies and their executives could be subject to “multiple (and potentially competing) shareholder class actions from different jurisdictions for the same event.” The bottom line is that as matters stand, collective actions are “here to stay, they are spreading beyond their traditional homes, and their reach and impact on businesses and directors should not be underestimated.”
The white paper’s appendix contains a detailed country guide, in which the authors have set out separate detailed reports regarding the state of play for collective actions in each country reviewed, as well as several related factors including the availability of litigation funding, whether the country’s collective action regime is available for securities claims; is opt-in or opt-out; as well as details regarding certification requirements, damages, availability of contingency fees, and provisions for costs. Each country report concludes with an overview of the current collective action landscape in the country. Some of the countries reviewed may already be quite familiar to readers (e.g., Australia, Canada) but other countries reviewed may be less so (e.g., Finland, Poland, Saudi Arabia).
The white paper echoes themes that have been sounded in prior reports (refer, for example, here). Nevertheless, the paper makes a number of interesting points and the detailed country guide is quite informative and helpful.
The white paper’s concern about the possibility of forum shopping between European jurisdictions has also previously been raised (as discussed here). The discussion of the possibility of forum shopping usually focuses on the relative attractiveness of the collective settlement procedures in the Netherlands, which have in fact been used for several very high profile and very substantial collective settlements, including the massive settlement in the Fortis case (discussed in detail here). As I have previously argued, the mere fact that these procedures are available and attractive to claimants does not mean that they are abusive or represent some kind of jurisdictional race to the bottom. They procedures do provide mechanisms for aggrieved parties to attempt to achieve redress. On the other hand, the very broad jurisdictional reach that Netherlands courts have been willing to adopt has alarmed some commentators and observers.
It is also important to remember that in many jurisdictions, the collective action procedures have developed in response to specific crises or scandals. The German KapMuG representative action procedures developed in order to address the problems presented by the massive numbers of claimants asserting claims against Deutsche Telecom. I think that experience has shown that there are certain kinds of legal circumstances where collective action mechanisms are the only rational and efficient way to proceed. Indeed, in its collective action directive, the European Commission specifically cited the Volkswagen “dieselgate” debacle as the kind of situation for which collective redress mechanisms are required. Similarly, Indian adopted its collective action procedures in the Companies Act of 2013 in response to the massive Satyam accounting scandal and the absence at the time of the scandal of mechanisms for collective action by aggrieved investors who purchased their shares on the Indian exchange.
I agree with the white paper’s authors that the availability and use of collective action procedures will continue to grow. In a complex global economy, complex legal issues arise that sometimes can affect the legal interests of large numbers of people. The availability of legal procedures to address these complex situation will increasingly be seen as indispensable. Some may view this observation as representing something detrimental to companies, but collective actions have features that are in fact beneficial to defendant companies, including in particular efficiency. A single proceeding resolving all claims in many instances will be far superior to many individual or separate claims. The more important consideration is to ensure that there are mechanisms in place to prevent abuses.