Unique Settlement
While investors in the Netherlands don't have the legal right to bring securities class-action lawsuits, a new law allows parties to jointly petition the Amsterdam court to approve a class-wide settlement under the auspices of a special purpose foundation.

"European investors do not have the same options to pursue securities claims that are available to U.S. investors through class actions," Eisenhofer said. "This group of trans-European investors has struck a uniquely European resolution to settling a European securities clai---it truly has never been done before."

Shell, the largest European oil company, also agreed to ask the U.S. Securities and Exchange Commission to distribute an additional $96 million to the European investors. That sum was part of a $120 million settlement that Shell reached with the agency in 2004 over the company's reporting on its reserves.

Shell, which is based in the Hague, said it reached this settlement "without admitting any wrongdoing." In a press release, Shell said it would offer the same settlement terms to investors who purchased the company's shares on U.S. exchanges. Those shareholders would receive $79.9 million.

Defense lawyer Ralph C. Ferrara of the firm of LeBoeuf, Lamb, Greene & MacRae told the ABA Journal that Shell agreed to settle with the European investors, because the company cares about its image in the world. He said the company would have prevailed in the U.S. case on the claims by European investors.

Ferrara said the collaborative approach that led to the European settlement is a better way to resolve investor disputes than traditional U.S. securities litigation. "There's a whole different model now," he said. "The European model is, if you've got claims, sit down and talk."

Among the investors that played a role in reaching the European settlement were Stichting Pensioenfonds ABP of the Netherlands; the Universities Superannuation Scheme (USS), Railpen Investments, and Morley Fund Management from the U.K.; Norway’s Norges Bank Investment Management; and German-based Deka International. The investors also included the PKA Pension Funds Administration, Swedbank Robur Fonder, and AFA Insurance. The settlement also calls for a $6.25 million payment to Vereniging Effectenbezitters, a Dutch shareholder group, and other investor associations to help individual shareholders file claims.

The investors also were represented by Schiffrin Barroway Topaz & Kessler, a Pennsylvania-based law firm, and the Dutch firm of Pels Rijcken & Droogleever Fortuijn.

One of the reasons that the Europeans negotiated their own settlement was a concern that they might be shortchanged in the U.S. litigation. In some earlier cases involving European issuers, investors who bought their shares off European exchanges were excluded from class settlements reached by U.S. shareholders or received nominal payments. Examples include the Deutsche Telekom, DaimlerChrysler, Elan, and Lernout & Hauspie settlements.

"I think this is a very significant recovery, and it's a very important step for European investors," Darren Check, a partner with Schiffrin Barroway, told the SCAS Alert.

Certification Hearing
Meanwhile, the U.S. class-action is pending before a federal judge in Trenton, New Jersey. The European settlement is contingent on the judge ruling that he doesn’t have jurisdiction over the claims by non-U.S. investors who bought shares on European exchanges. A certification hearing is set for June 15. The U.S. lead plaintiffs have sought a court order to block the European settlement.

The U.S. class action was originally filed in 2004 on behalf of Shell investors worldwide. The Pennsylvania Public School Employees' Retirement System and the Pennsylvania State Employees' Retirement System were appointed lead plaintiffs. In the summer of 2005, a judge dismissed Shell's motion to dismiss the case. In January 2006, Stichting Pensioenfonds and 25 other Dutch pension funds opted out of the U.S. class-action case.

Bernstein said the Pennsylvania pension funds have been actively litigating the case "to maximize the recovery for all investors," including the Europeans. Since the start of the case, there have been 60 depositions of witnesses, he said. The company also made a settlement offer last summer, which the lead U.S. plaintiffs did not accept, he said. Shell disclosed last July that it was prepared to pay $500 million to settle the case.

Bernstein said the European investors did not consult with the U.S. lead plaintiffs before negotiating with Shell and did not have all the information that the U.S. litigants obtained from the company during the discovery process. "This is quite troubling," he told the SCAS Alert. "They may have caused irreparable harm to our settlement prospects in the U.S. litigation."

Bernstein emphasized that the U.S. lead plaintiffs can obtain a better deal for all shareholders, because Shell faces the risk of going to trial. "The Pennsylvania funds have the ability to fight with Shell, while the other investors can only settle," he noted. "Who is going to get more for the class? Someone with a gun or someone with a white flag?"

If the U.S. judge decides to exercise jurisdiction over the European claims, the settlement will be void. The European investors would have the option to join the American class-action case and "there would be no penalty for having signed the settlement at hand," Eisenhofer noted.

The Amsterdam court won't start reviewing the settlement until after the U.S. judge rules on whether he has jurisdiction over the European claims, Eisenhofer said. Another potential issue is whether the Amsterdam court will decide to exercise jurisdiction over the settlement of claims from European institutions that are based outside the Netherlands.

The settlement also includes a "most favored nations" clause that provides that if Shell later reaches a more generous accord with U.S. investors, then the company would pay additional sums to the Europeans so that they would receive the same recovery. Eisenhofer described the settlement as a "major insurance policy" for European investors.

Historic Settlement
While the settlement is controversial, the accord is further evidence of the increasing assertiveness of European institutions, according to Keith Johnson, chairman of Reinhart Institutional Investor Services.

The settlement, he noted, also is an example of the "cross-pollination" of securities litigation that is occurring between the U.S. and European markets. Johnson, a long-time lawyer for Wisconsin's state pension fund, said this development "may be good for everyone in the long run," because European investors traditionally have sought engagement and governance changes.

"The real money is in preventing future fraud and fixing governance problems that lead to investor losses," Johnson told the SCAS Alert.

Daniel Summerfield, co-head of responsible investment at USS, which helped negotiate the European settlement, said the accord "highlights the benefits of pension funds collaborating to engage with investee companies and to resolve issues collectively ... The more European institutional investors who are supportive of the settlement the better."

Looking Ahead
While the Shell settlement is significant, Check said it doesn't mean that Europeans are ready to support legal changes to permit U.S.-style securities class actions. "There's just not an appetite for this type of litigation in Europe," he noted.

Mark Willis, a partner with Cohen, Milstein, Hausfeld & Toll who represents European institutions that are considering joining the new Shell accord, said it is a positive development because European institutions will have more options in deciding how to recover losses and engage with companies. He said his clients are particularly intrigued by the Shell investors' efforts to reach a pan-European accord.

Both Willis and Check said they expect that European investors will continue to try to serve as lead plaintiffs and participate in U.S. securities litigation in appropriate cases. That determination will depend on where the company is based, who is appointed lead plaintiff, and the percentage of the shares held outside the U.S., Willis said.

"None of us know what will happen, but it is likely that European investors will be more creative in figuring out the best venue to protect their rights, and I think that's a good thing," Willis said.

ISS will hold a special Governance Forum, Accountability Goes Global: International Investors and U.S. Securities Class Actions, on Wednesday, May 9 at 9:30 a.m. Eastern Daylight Time. To register for the forum, please visit here.