Global class actions, ESG and investor stewardship principles have been developing on parallel tracks, but in the months and years to come they are likely to intersect with increasing frequency.
Partner Andrew Hill, together with NRW Consulting LLC’s Noah Wortman and Goal Group’s Tom Grande discuss this and more.
The Q&A was originally published in Issue 271 of Asset Servicing Times.
What are the key drivers of change in global securities litigation?
Tom Grande: For many years, there has been a steady rise in global interest for shareholder litigation, but it has been over the last five years where we have reached a turning point in awareness, attitude and motivation within the investment community. As a principle of active ownership, shareholders have become far more engaged, especially with environmental, social and governance (ESG) considerations, and are displaying an increasing willingness to push for change in the companies they have invested in. Participation in collective actions is not just a matter of recouping financial losses; it is being implemented as a corporate governance tool.
Fund managers, custodians and trustees are under pressure to adapt their service propositions in response to the shareholder’s growing appetite for legal redress — and it is clear that they also have a fiduciary duty to recoup investment losses. To meet these requirements, they are leveraging the latest monitoring, filing and recovery services, based on innovative fintech, to provide a cost-effective and comprehensive service to investors, drive up participation levels and maximise fund returns.
In several of our recent mandates for trustees and superannuation funds, it is the board who have specified the need for a smarter, tech-driven approach to class actions participation. This indicates just how far this issue has climbed up on the agenda.
Noah Wortman: There are several factors that continue to drive the growth of global securities litigation. The US Supreme Court’s 2010 decision in Morrison v National Australia Bank ostensibly closed the door on plaintiffs bringing ‘F-cubed’ cases in the US (whereby foreign investors sue a foreign issuer based upon a security traded on a foreign exchange).
This marked a first step for many global institutional investors that had purchased their shares on non-US stock exchanges to consider where they might be able to seek legal redress outside the US, frequently in jurisdictions home to where the stock is listed. It is no coincidence that in the intervening years, class action and related collective redress regimes are maturing and have gained traction in the UK, Europe and other jurisdictions across the world.
Several high-profile instances of corporate fraud, notably Wirecard and Luckin Coffee, were exposed in 2020, and that trend is likely to continue. Meanwhile, The Economist estimates a decade’s worth of corporate fraud will be exposed as a result of the market fallout from the COVID-19 pandemic.
It is also true that litigation funding is common in both consumer and shareholder collective redress actions. In a number of jurisdictions, it has acted as a catalyst for the use of collective actions as well as a mechanism to bring access to justice.
Andrew Hill: The increasingly globalised and digital economy, and the slow demise of small ‘high street’ privately-owned businesses, is resulting in consumers buying from, or using, the services of mega global firms such as Amazon, Google, and Apple. This results in consumers, in multiple jurisdictions, being impacted by the same corporate behaviour. Where that corporate behaviour is bad, or transgresses contractual or statutory duties, there needs to be mechanisms available to level the playing field and provide access to justice for individual consumers. One of the most effective ways of doing that is through collective redress or class actions.
Governments and legislators around the world are responding to this trend and are realising that the old private forms of civil redress (single plaintiff v single defendant) are not fit for purpose in the modern era. This is especially the case where the disparity between the individual consumer and the global corporation can be so large. Therefore, new forms of collective redress are being introduced or developed.
As consumer class actions increase, so too can the impact on the share price of the misbehaving corporation if it is publicly listed and, potentially, global securities litigation or shareholder class actions can result. In this sense the necessary ingredients that drive an increase in consumer class actions also drive an increase in global securities litigation.
In other respects, the fragility of global supply chains, governance structures and finances of certain large multinational corporations have also been exposed during the pandemic, but sometimes too late to prevent significant loss of value in the company. Certain corporations faced with these challenging circumstances unfortunately decide to present an untrue or misleading picture of their business model, financial health or plan for sustainable growth to the market. All such conduct leaves corporations open to the risk of litigation.
For securities litigation in particular, a further key driver for change is the recognition of the importance of ESG factors by institutional investors, public corporations, and by the wider investing public, who are responding to global events such as climate change and the impacts of the pandemic.
How is the non-US collective actions scene developing?
Wortman:The US has long been the centre of the class action world. For example, in 2020, more than 300 cases were filed in the securities class action realm alone. However, the rest of the world has been making strides in catching up. This is especially true for Europe, which, over the last few years, has brought significant development and ongoing debate in the collective redress arena and the best way to deliver collective redress rights to investors and consumers.
“Globalisation and digitalisation have increased the risk of a large number of consumers being harmed by the same unlawful practice” and “[w]ithout effective means to bring unlawful practices to an end and to obtain redress for consumers, consumer confidence in the internal market [of the EU] is reduced”. The Collective Redress Directive was formally endorsed on 24 November 2020, and provided the potential for collective consumer lawsuits to the EU.
By the end of 2022, the 27 EU member states must translate the Collective Redress Directive into national law and implement an effective procedural mechanism that will allow “qualified entities’’ to commence representative lawsuits on behalf of consumers. The EU member states must then begin to enforce the Collective Redress Directive by the end of June 2023. The Collective Redress Directive’s rules explicitly allow consumer cases and “cases involving trader violations in areas such as data protection, financial services, travel and tourism, energy, telecommunications, environment and health, as well as air and rain passenger rights’’.
The development of collective redress mechanisms is not limited to the EU’s Collective Redress Directive, but individual countries have also been making great strides in their own initiatives. Examples of note include Scotland and The Netherlands.
On 1 January 2020, the Collective Damages Act (Wet Afwikkeling Massaschade in Collectieve Actie, ‘WAMCA’) came into effect in the Netherlands. WAMCA enables representative entities to bring damages claims on behalf of international parties in a class action in any district court in the Netherlands. The court can then award damages in its judgment, which was only possible under the prior regime under three conditions: first, if parties had reached a collective settlement under the Act on the Collective Settlement of Mass Damages (Wet Collectieve Massaschade Actie, ‘WCAM’); second, by initiating individual damages claims after the representative entity had obtained a declaratory judgment; third, when the litigation was structured through a special purpose vehicle.
Meanwhile, as of 31 July 2020, the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 came into effect. This set out a framework for bringing “group proceedings” in Scotland.
In 2015, English law was amended to allow, for the first time, an opt out of collective proceedings to address certain breaches of competition law. In limited circumstances, the Competition Appeal Tribunal (CAT) can hear such group claims provided they pass an initial filter and are considered to be eligible for a Collective Proceedings Order (CPO). It is anticipated that the number of claims filed is likely to increase in the coming years. This is, in part, due to the UK Supreme Court’s decision in Merricks v Mastercard of December 2020, which confirmed a low threshold for certifying class actions brought under this regime.
These are only a few examples of the types of collective redress areas that continue to expand. These examples also show that jurisdictions are continuing to mature in the way their legal systems have answered the call to find ways to provide redress and protection for investors and consumers.
Grande: Most non-US collective actions are filed in Canada and Australia, but momentum is gathering across Asia and Europe where growing numbers of jurisdictions are creating legal frameworks that open the doors to group litigation. According to law firm Dechert, 17 of the 25 largest non-US settlements were in Australia and the rest were in the UK, the Netherlands, Japan and Israel.
We actively monitor 37 jurisdictions for class and collective actions. In the last decade, we have successfully processed around 17,000 class action claims in 1,400 cases worldwide and recovered over half a billion US dollars for our clients. This includes more than 100 cases in Australia, 60 in Taiwan, 27 in Germany, 24 in the UK, 13 in the Netherlands and a handful of cases in Japan, Brazil and various other European markets.
The rising volume of non-US cases (most of which are not publicised), combined with ever-changing local procedures, makes it almost impossible to handle the necessary monitoring, filing, tracking and payments for clients without specialist support. Leading custodians — who traditionally do not ensure client participation in international cases — are also recognising the need to invest in outsourcing services to deliver an effective worldwide securities litigation service for their clients.
Hill: There have been many major developments around the class actions world. One example is the developed and dynamic class action regime in Australia (or set of regimes, both state and federal, which compete for business). Recent innovations in the State of Victoria now permit solicitors to work on a contingency basis and apply to the court for group costs orders, which permit the solicitors to be paid a percentage of any damages awarded instead of any fees. This has never before been permitted in Australian litigation.
Meanwhile, the UK’s collective actions scene has been notably dynamic over the last 12 months. We have had an ‘opt out’ class action regime for cases alleging breaches of competition law for about five years (the only such class action regime in the UK), but only since December 2020 (as a result of a watershed decision of the UK Supreme Court in Merricks v Mastercard) have we had clear guidance from the highest court in the kingdom on the criteria for obtaining a collective proceedings order, the crucial first step in that regime.
This has cleared the way for a backlog of cases which were awaiting the decision, and for further cases to be brought.
Outside competition cases, there is one established and one completely different potential mechanism for bringing collective actions. The established mechanism is known as the group litigation order (GLO). The court might grant this when there are common issues of fact and law among a group of claimants. But the important feature of the GLO regime is that it is ‘opt in’, not opt out, which therefore requires the huge cost and effort of a ‘bookbuild’ process.
Whether we might have an exciting completely different potential mechanism for collective redress outside the competition space hangs in the balance, as we await the decision of the UK Supreme Court in Lloyd v Google, which was heard by the court in April.
If the Supreme Court agrees with the Court of Appeal below it, we may have the beginnings of the first opt out or representative proceedings mechanism for collective actions outside of the competition space, where one person (the representative) can bring an action on behalf of all persons with the same interest. I am aware that many consumer cases, such as those involving data breaches, have been launched or are waiting to launch using this mechanism once the judgment is forthcoming. Watch this space!
What litigation trends have been in evidence during the COVID-19 crisis?
Hill: The pandemic has been another shock to the global community, emphasising how interconnected our economies are and how dependent we all are on what is really only a handful of corporations, in this instance in the pharmaceutical industry.
Understandably, given the increase in unemployment during the pandemic, there has been a renewed interest in litigation focusing on workers’ rights in the context of the gig economy.
For example, the recent judgement in the claim against Uber from the UK Supreme Court found that Uber drivers should be classified as workers (not independent contractors) who are entitled to holiday pay and the National Minimum Wage.
In contrast, an even more recent decision of the UK Court of Appeal (one level below the Supreme Court) found that Deliveroo drivers were not workers.
Tom Grande: Despite the inevitable disruption to the courts during the pandemic, securities litigation continues on a long-term growth trajectory. In its 2020 review of Securities Class Actions and Settlements, Cornerstone Research states: “Any disruption in settlement rates as a result of the COVID-19 pandemic appears to have been temporary…”. To illustrate this point, we actually grew our processing volumes over the year.
A wave of Covid-related lawsuits are being filed, but it remains to be seen how many will be successful. One legacy of the pandemic may be closer scrutiny of a company’s disaster preparedness, crisis response capabilities and commitment to transparency. It is also likely that the financial pressure facing companies in the wake of the pandemic will result in rising levels of misconduct and subsequent litigation. Stringent oversight will certainly be necessary to maintain standards in corporate governance.
More widely, the crisis brought communities together, reminded us of the interconnectedness of our world and sharpened the focus on personal and corporate social responsibility. Societies and businesses are resolving to ‘build back better’ with ESG at their heart. This will undoubtedly be reflected in the litigation space as companies face growing exposure to ESG risk — particularly the ‘social’ component.
On a procedural level, we have seen the class action ecosystem accept digital documents and signatures more widely than before, and it will be interesting to see how this trend develops post-COVID-19.
What is the impact of non-participation on the investment community?
Wortman:Members of the investment community that choose not to participate in, or educate themselves about, global securities class actions and other forms of collective action or legal redress in its active or passive capacities, could be leaving money on the table — or even forfeiting legal rights under certain circumstances. It is the responsibility of investors to engage with their investee companies, to consider seeking legal redress and to target recovery of lost funds wherever and however available. Institutional investors are typically long-term investors. Therefore, seeking to hold corporate wrongdoers accountable is not only in their long-term interest, but also acts to strengthen the company going forward. Moreover, if nobody steps forward to fight corporate malfeasance, then the long-term impact in the global markets could also have a ripple effect in the long run as well.
Hill:With ever increasing emphasis on governance and investor stewardship, especially with respect to ESG factors, the impact of non-participation in securities litigation on the investment community is more than just the potential for leaving money on the table. Increasingly, there is a need for the investment community to report to their own stakeholders on their level of engagement. They must comply with the reporting requirements or explain why they have not done so.
Similarly, the investment community needs to realise (if it has not done so already) that the question will soon be not “why did you participate in that securities litigation case”, but “why did you not?”. This is particularly the case when law firms, with or without the assistance of third-party funding, are able to present securities litigation as recovery opportunities with no downside risk. This enables the investment community to participate with no ‘adverse cost’ risk and no ‘own-side cost’ risk.
The adverse cost risk in England, and similar jurisdictions like Canada and Australia, is that the loser pays the winner’s legal costs (which does not occur in Continental Europe or the US). Additionally, it enables the investment community to have no ‘own-side’ cost risk. Hence, investors can participate without the cash flow impact of having to pay the lawyers because they are acting on the case either on a contingent basis or with the support of a third-party funder (or some combination of both).
Grande: We estimate that around a quarter of admissible claims are not being filed in US securities class actions and that non-participation rates are likely to be considerably higher on the international scene, despite fiduciaries having a duty to recover investors’ losses. This results in substantial amounts of money being left on the table, impacting all institutional investors from UK local authorities to US state pension funds, Australian superannuation funds and hedge funds. Those that participate in securities litigation add an average of 25 basis points to their returns.
When we cross-check prospective clients’ assets against our database, the results usually take them by surprise. For instance, for one UK-based asset management firm, it transpired that 23 per cent of the portfolio’s assets were eligible for a class action lawsuit, amounting to recoveries of several million pounds.
How are institutional investors and their intermediaries responding to the evolving landscape?
Hill: We are finding that institutional investors and their intermediaries are increasingly engaging with us when we present them with recovery opportunities via securities litigation, especially those cases that address ESG factors. This is to be applauded as the investment community can have real power for positive change, which is of benefit to the wider community, if they pursue these cases.
In the UK, we are finding that the regulatory obligation for institutional investors to report on their ESG-related stewardship activity constitutes a key driver for investors to consider all options available to increase the value of their shareholdings in the long-term.
One such option is securities litigation, which is now referred to in institutional investors’ annual stewardship reports as a form of engagement with investee companies. We have recently responded to a call for evidence from the UK Department for Work and Pensions which elaborates on the regulatory landscape relating to pension trustees’ (and other institutional investors’) ESG reporting obligations.
Grande: In the past, custodians, trustees and fund managers sometimes argued that the effort and cost to participate was disproportionate to the likely pay-out that might be achieved. However, this is no longer the case. Participation is playing a more central role in their governance responsibilities, with advanced technology, expertise and monitoring capabilities all readily available.
It is clear that automating as much as possible within the complex, multi-stage participation process is the key to boosting filing rates across the industry. Pension funds in particular have made great strides in participation, with European pension funds now frequently driving US cases and embracing outsourced solutions to ensure clients claim their share of damages as efficiently as possible.
Noah Wortman: Institutional investors and their intermediaries have embraced the landscape of evolving collective redress regimes across the globe. As investors’ portfolios and asset allocation continue to become more international in nature, the ability to recover losses resulting from alleged wrongdoing has also increased. This has led to greater participation in global class and collective redress actions in both an active and passive capacity by institutional investors.
Global class actions, ESG and investor stewardship principles have been developing on parallel tracks, but in the months and years to come these are likely to intersect with increasing frequency. Empowered by evolving collective redress regimes, classes of claimants may bring a wide range of new cases against defendants who have acted unlawfully in matters related to ESG issues.
Investor stewardship principles and practices are being adopted in many markets around the world, since the development of stewardship codes for investors complements the development of codes of corporate governance that have been established for companies.
Indeed, the International Corporate Governance Network (ICGN) defines stewardship as: “The responsible management of something entrusted to one’s care. This suggests a fiduciary duty of care on the part of those agents entrusted with management responsibility to act on behalf of the end beneficiaries”. The ICGN further defines stewardship at the individual company level as helping to “promote high standards of corporate governance which contributes to sustainable value creation, thereby increasing the long-term risk-adjusted rate of return to investors and their beneficiaries or clients”.
This new crop of ESG class actions is likely to be large and complex, travelling across borders in some cases and encompassing issues like the #MeToo movement, board diversity and inclusion, climate change, pollution, and COVID-19. Due to the breadth of possible claims, ESG cases may join securities, consumer, products liability, privacy and data breach, and anti-trust class actions on the list of the most typical matters for collective redress. Indeed, section 4.3(g) of the ICGN’s 2020 Global Stewardship Principles lists the “seeking [of] governance improvements and/or damages through legal remedies or arbitration” as one of methods available to investors to engage and collaborate with investee companies.
The growth of ESG-related disclosures has prompted a number of corporate law specialists to advise clients to exercise caution. A recent client briefing by the global law firm Clifford Chance is indicative of the kind of warnings firms are offering: “Investors are increasingly considering the [ESG] credentials of publicly-listed issuers when making investments. This has put ESG disclosures (including climate change-related disclosures) in annual reports and prospect uses under intense scrutiny, meaning issuers are at risk of investor and activist claims if those disclosures are inaccurate”.
The briefing continues: “Experience from other jurisdictions (in particular the US) shows that investors are willing to pursue large-scale group claims against companies for inaccurately representing their ESG credentials…”. ESG is no longer only a moral issue, but it is a financial one, as well.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.
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