Once largely confined to U.S. investors and U.S. companies, shareholder litigation has gone global.
Led by institutions in Europe, with increasing interest from the Middle East and Asia, more investors are participating in securities class actions and similar legal battles in a bid to recover investment losses, according to experts who advise pension funds on legal matters.
“The financial meltdown (in 2008-2009) has left a lot of pension fund (executives in Europe) feeling like they ought to do something” to control executive compensation and to encourage better corporate governance practices, said Robin Ellison, pensions partner at law firm Pinsent Masons LLP, London.
As more class actions or similar court proceedings occur outside of the U.S., American institutions are also beginning to pay more attention to overseas litigation, said Caroline Goodman, managing director and co-founder of the London-based Institutional Protection Services Ltd. IPS provides global shareholder action services such as settlement monitoring and claims recovery services to about 30 institutions, mostly in Europe, with an aggregate of about £350 billion ($550 billion) in assets under advisement. In addition to pension funds, European money managers also are seeking to shore up their shareholder litigation policy in a bid to add returns.
“What we've seen — particularly over the past several years — is a mass internationalization of the class-action process,” Ms. Goodman said. “Wherever they are in the world, investors just can't ignore this. If you are an institutional investor with more than $1 billion in assets and you ignore shareholder litigation cases worldwide, you're simply throwing money away and the same is true if you don't have a global process for this. It's no longer enough to have something in place just for U.S. class actions.”
Recent data are not available on how much investors leave on the table by not making settlement claims in class actions worldwide, but several sources estimate it's in the billions annually. One example involved a pension fund with about $20 billion in total assets. The fund had missed out on at least $1 million annually, or between “80% and 90% of what should have been recovered,” said Ms. Goodman, who declined to name the client.
“The pension fund had put in place a strategy to collect recovery, but it was relying on its custodian who only considered the U.S., so everything outside of the U.S. was missing. Even within the U.S., they were missing out,” Ms. Goodman said. Using data from its client base, IPS estimates institutions could add between two basis points and four basis points to the investment portfolio annually by diligently recovering claims in shareholder litigation globally, without having to take an active role in litigation.
“We have seen an increase in recovery,” said Ms. Goodman, adding that the amount used to range between one basis point and three basis points several years earlier. The problem of monitoring shareholder litigation is “much more acute now for institutional investors as there are many more jurisdictions and processes to consider — and also many more relevant suits — around the world.”
Active institutional shareholder participation is also on the rise, said Robert Roseman, partner and chairman of the international and domestic securities practice at Spector Roseman Kodroff & Willis PC, Philadelphia. Mr. Roseman's firm is representing the £3.9 billion Northern Ireland Local Governmental Officers' Superannuation Committee, Belfast, as a co-lead plaintiff in the Lehman Brothers Holdings Inc. securities class action pending in the U.S. District Court for the Southern District of New York, Manhattan.
Other notable cases in which institutional investors in Europe are actively participating include a securities class action against Fortis SA/NV, Hypo Real Estate Holding AG and Vivendi. Others include the Madoff “feeder fund” litigation and various disputes surrounding mortgage-backed securities sold by banks such as Goldman Sachs & Co., J.P. Morgan Chase & Co. and Deutsche Bank, among others.
European institutions traditionally have shied away from shareholder litigation because of a variety of factors, including a preference to enact corporate governance changes through other means such as proxy voting. “In Europe, shareholders have more power” compared to their U.S. counterparts, Pinsent Masons' Mr. Ellison said.
Furthermore, contingency fees don't typically exist in Europe. Therefore, the potential cost of litigation can act as a deterrent, sources said.
In the U.K., where the cost of shareholder litigation is relatively much higher than the rest of Europe and the U.S., the loser in a lawsuit bears the winner's legal costs. Therefore, “litigation is a lot more expensive — and risky,” said Mr. Ellison, who is also chairman of the Institutional Investors Tort Recovery Association, a newly launched organization that aims to unite and advise institutional investors outside of the United States on shareholder litigation.
Some efforts have emerged to better control legal costs. For example, in the U.K. there now are after-the-event insurance products that typically cover the opponent's costs in a loss and potentially some of the claimants' own counsel‘s fees.
Elsewhere, other legal developments in shareholders' litigation are benefiting institutions engaged in shareholder disputes.
The Netherlands has been at the forefront of the movement, most recently with a precedent-setting decision that provides investors who purchased securities on stock exchanges outside of the U.S. with a venue to settle their claims on a pan-European or global basis. On Jan. 17, the Amsterdam Court of Appeal declared binding two international settlement agreements in the Converium/SCOR securities class action, which originally was filed in the U.S. in 2004. A U.S. federal court ruled in the case that non-U.S. purchasers of Converium stocks could not be included in the class action because the court didn't have jurisdiction over their claims.
“Even though there were no Dutch defendants and (the dispute) didn't occur in the Netherlands, the (Amsterdam) court ruled that there was sufficient connection with the Netherlands for it to retain jurisdiction,” Mr. Roseman said.
In its decision, the Amsterdam court specifically referenced a previous U.S. Supreme Court ruling. In 2010, the U.S. Supreme Court ruled in Morrison vs. National Bank of Australia that an investor who does not purchase securities on a U.S. stock exchange cannot file suit in the U.S. for violations of the federal securities laws or be a class member of a settled case.
As a result of the Supreme Court ruling, Mr. Roseman said, the class-action process has been exported as more investors seek non-U.S. venues to solve shareholder disputes.
“This important ruling establishes a forum for investors on a pan-European and even global basis,” said Mr. Roseman, whose firm has quadrupled the number of its European clients in the past several years and now represents at least a dozen institutions.