Issues for institutional investors when considering shareholder litigation outside the US

Issues for institutional investors when considering shareholder litigation outside the US

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By Caroline Goodman, chief executive officer of Institutional Protection

Institutional investors are affected by a growing range of class and group investor actions around the world, which are designed to recover investment losses specifically arising from corporate or adviser fraud, misrepresentation, or mis-selling.

In the last twenty years, over $110 billion (£86.6bn) has been distributed to investors through such processes, but billions are still missed by those who do not have sufficiently robust systems around case monitoring and recovery.

At the same time, the landscape for shareholder litigation has evolved dramatically as the availability of jurisdictions and variety of cases has expanded considerably.  This is a huge shift from a space previously dominated by US class actions. Europe has been particularly active.

The vast majority of non-US jurisdictions, unlike the US, have an opt-in litigation process.  So rather than being part of a class action passively and sharing in any financial recovery accordingly, investors must choose whether or not to participate in any given group litigation before it commences. If institutions don’t participate, they forego any financial recovery, a stance not generally now considered acceptable. 

Increasingly investors also need to choose which, if any, of the competing cases on offer to join.  This is an active, legal, decision that requires careful consideration and due diligence - and one that responsible investors cannot take lightly. It is not straightforward, with increasing competition amongst law firms and litigation funders generating a proliferation of cases and with no easy comparison to be made.

There is no doubt that navigating the investor action landscape outside the US is more complex and requires a very different approach to US actions.  However, it can be worth the extra effort.  Financial recoveries from opt-in cases that have resolved often return a much more significant part of investor loss than the average US securities class action.  And increasingly we are seeing responsible investors use litigation to deliver long-term value. 

As the number of opt-in cases being brought across multiple jurisdictions continues to grow, it is vital therefore that investors have a robust plan in place to manage non-US, as well as US investor actions.  The expertise required to manage this new responsibility is likely to be very different and more specialist.

So, what are five key areas that institutional investors should consider when participating in shareholder litigation outside in US? 

  1. Know your options

One of the features of opt-in litigation is that multiple actions are often brought against the same defendant over the same grievance. For example, there were five different Glencore cases available for institutional investors to join recently and eight Wirecard cases. These cases effectively compete for investor support to enable each case to be commercially viable and can vary significantly.

Different jurisdictions, strategies, legal teams, costs structures and risks are inherent in different cases which can and will produce different results.  This means it is vital to pick the right case and not just join any case.  And sometimes it may be best not to join any case at all.

With cases being marketed actively – sometimes even aggressively – by litigation funders, law firms and other providers with a commercial interest, it can be hard for investors to ensure they have a full and unbiased view of all the options available to them.  The recent Credit Suisse AT1 controversy, for example, saw a flurry of activity with ten law firms actively looking to assist institutions recoup their losses immediately following the write-down.

Some providers make this harder for institutions to manage by imposing early or false case deadlines or bringing cases at the last minute, which can make investors feel pressured to join before having a chance to conduct thorough due diligence. Meanwhile, better cases may be missed if their strategy is not to advertise far and wide.

The key is to ensure you have a system that has the requisite expertise in non-US actions and lets you know about all the available options, not just those that are widely disseminated for example through custodian channels.  Don’t join the first case that you see and don’t be pressured into joining one you haven’t had the opportunity to properly assess.

  1. Due diligence is key

Opt-in cases are not all created equal and it does matter which case you join. 

Fees and risks associated with any given action will differ, often significantly, and can affect both your end recovery and what is required of you in terms of participation.  Risks can vary significantly across cases, depending for example on the structure, strategy and position on adverse costs.  Legal teams can have very different knowledge and approaches to cases.

All of this needs analysis, modelling and consideration before signing the legal participation documents – which also need vetting, as these too can vary considerably and commit you to terms you need to ensure you are happy with.

As the opt-in litigation landscape grows more competitive and investors have a greater choice of cases, this decision becomes more important still.  Not all cases will succeed, not all cases will even proceed and investors will want to ensure they have backed the right group.

  1. Don’t be swayed by the highest estimated loss

Unlike in the US, in most opt-in jurisdictions the method for assessing investor losses is not yet fixed.  Rather, law firms and litigation funders – often in conjunction with loss experts – base estimates on loss principles and their own proposed methodologies. This means that loss estimates can vary significantly between cases and can be skewed markedly by factors such as longer proposed class periods.

These should therefore be treated for what they are – estimates.

A higher loss estimate is unlikely to translate into a higher recovery.  Through the litigation, class periods will generally be brought in line and investor loss is likely to be assessed in the same way across cases.  Investors’ focus should, therefore, be on factors such as associated fees (primarily those of the litigation funder, legal team and adverse costs insurance, where relevant) as well as other important factors such as jurisdiction, strategy, experience and so on as these are more likely to impact the outcome and your actual recovery. 

  1. Ensure independence of advice

The huge growth in investor litigation has likewise spurned a huge rise in service providers offering opt-in litigation services alongside class action services.  But there can be an enormous difference between the various providers, their expertise outside the US and the commercial relationships that drive them. 

If you receive advice from a third party in relation to joining opt-in cases, or a third party is making these decisions for you, it is imperative to understand how your service provider is being remunerated and whether there are any success or referral fees being paid in relation to your participation in a case. These referral fees are surprisingly common but are not always transparent. 

Understanding the commercial proposition of your litigation partner is important as it could motivate the decisions they make on your behalf or encourage you to make.

  1. Meeting your long-term objectives

Investor actions are designed to recover investment losses. They are also part of the governance framework that enables responsible long-term investors to hold companies to account where there is evidence of systemic wrongdoing.

Increasingly, cases are being marketed with a strong ESG angle to them. While we wholly believe asset owners should be empowered to see shareholder action as part of being a responsible long-term investor, the merits of these claims can vary wildly and need evaluation.

It is therefore important to take your own view on each case (or have a provider that can do this) and consider whether it meets your long-term responsible investment objectives.

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