The following article by ISS' Ted Allen first appeared in the June 2005 SCAS Alert. Surprisingly (to me, at least), for all of the recent sound and fury about "international securities class actions," the article found that:
"In fact, a review by SCAS Alert found just one significant securities class settlement, a 2003 accord obtained by GIO Australia Holdings investors."
Interest in Class Actions Grows Outside the U.S.
By Ted Allen, Managing Editor
Institutional investors around the world are supporting legislative efforts to allow securities class-action lawsuits in their own national courts.
However, these foreign lawsuits are rare and many legal barriers remain. In fact, a review by SCAS Alert found just one significant securities class settlement, a 2003 accord obtained by GIO Australia Holdings investors.
This growing interest in securities lawsuits outside the United States reflects a recognition by lawmakers and investors that national regulators need the help of private litigation to help ferret out and deter corporate misstatements and fraud. The accounting scandals at Parmalat Finanziara, Royal Ahold and other companies have led shareholders to ask why they can't sue these firms in their own national courts--just like American investors can.
The lack of comparable class-action laws can leave these foreign investors at a great disadvantage. For instance, Deutsche Telecom agreed in January to pay $120 million to resolve U.S. shareholder lawsuits claiming that executives made misleading statements about company assets before a share offering in 2000. According to Bloomberg News, the company has refused to settle similar claims by 15,000 investors in Germany, which doesn't permit class actions. Consequently, investors are pursuing their claims for more than 100 million Euros through 2,100 separate lawsuits that may take years to litigate.
Marc Gottridge, a securities lawyer in the New York office of Lovells who represents defendants, said the Deutsche Telecom case is a good example of the lack of leverage that investors have outside of U.S. courts. "As long as the defendant is willing to pay its legal fees, it can let these cases drag out at a bone-crushing pace and not pay a penny to investors," Gottridge told SCAS Alert.
Investors have limited rights in Australia and Canada to bring securities claims under existing laws that allow class suits over product defects, asbestos exposure and price-fixing. Dutch lawmakers are expected this month to approve legislation to allow class plaintiffs to seek monetary damages. Germany is considering draft securities legislation, while Norway, Sweden, Spain, Russia and Ukraine already allow groups to sue together. French President Jacques Chirac has called for legislation to allow consumer class-action lawsuits.
Even if all these nations adopt some form of securities class-action legislation, investors still will face financial and procedural barriers before they can start obtaining multi-billion settlements like Cendant and WorldCom investors have in the U.S. Unlike investors in American courts, they face the risk of having to pay defense legal fees if they lose and typically will have to fund litigation expenses without the help of contingency fee arrangements. For the foreseeable future, international institutional investors will continue to bring virtually all of their securities claims in U.S. courts.
Australia
Outside of the U.S., Australia has been the most accommodating nation to shareholder class lawsuits. Perhaps that is a reflection of the fact that 55 percent of Australians own shares, either directly or through managed funds. That level of stock ownership is the highest in the world, according to the Australian Stock Exchange.
Class-action lawsuits have been permitted since 1992. At first, most of the class suits focused on mass disasters or product failures. More recently, high-profile corporate scandals, such as those in the U.S. and the failure of Australia's HIH Insurance Ltd., have spurred investors to use class lawsuits to pursue corporate governance goals, according to a recent article by Jason Betts, a lawyer with Freehills, an Australian law firm.
The most notable case so far was the A$ 97 million settlement obtained by more than 22,000 GIO investors. Investors claimed that GIO executives made misleading and negligent statements in 1998 while defending against a hostile takeover bid by AMP Ltd. The settlement, the largest in Australian history, was approved by an Australian federal court in August 2003. Shareholders recovered an estimated 60 percent of their losses. Investor lawyers hailed the settlement as "a landmark for improved accountability to small investors and better corporate governance in Australia."
Investors recently filed lawsuits against Media World Communications over its market penetration predications. Last year, shareholders sued Concept Sports, alleging that the sports merchandise company issued a misleading prospectus.
As Betts noted, class-action lawsuits have been welcomed by some regulators and academic observers" to supplement the often slow-moving cogs of government enforcement with much speedier private actions."
To bring these class lawsuits, investors had to overcome a traditional Australian legal principle that the company, not shareholders, is the proper plaintiff to bring claims on behalf of investors. In recent rulings, courts have allowed shareholders to bring claims based on the loss of share value.
Australian courts have not yet embraced the American "fraud on the market" theory, which is the basis of many U.S. securities cases. This theory presumes that investors buying a company's shares rely on all available public information, including misstatements by company officials, and spares investors from the burden of showing that they specifically relied on a particular statement. However, Betts said he expects that investor lawyers will consider this theory" should proof of individual reliance remain an obstacle to class action prosecution."
Perhaps the biggest impediment to shareholder lawsuits in Australia, Canada, and other nations that derived their legal principles from England is the "loser pays" rule, also know as "English rule." Under this principle, the losing party in a lawsuit can be ordered to pay the legal costs of the winner. (In the U.S., parties generally are responsible for paying their own legal bills.)
U.S.-style contingency-fee arrangements, which allow lawyers to take a percentage of the plaintiffs' recovery, are also banned. However, Australian lawyers are allowed to enter into speculative arrangements that provide for no fee unless the client prevails. This trend is occurring elsewhere. Some British lawyers are now taking cases for a "conditional" fee (no fee if the client loses, twice the normal fee if the client wins).
Investor plaintiffs have argued, without much success, that the traditional English legal cost rules should be changed to facilitate more class-action lawsuits because of the public interest in curbing corporate fraud. But as Betts noted, "it is only a matter of time before these arguments are considered by the legislature in an effort to deal more effectively with the question of whether shareholder class actions should be encouraged as a form of what the Americans call 'private attorney general.'"
Canada
While province-wide class actions over product defects and drug pricing have flourished, particularly in Quebec, securities lawsuits in Canada have been rare. Many major Canadian companies also have U.S. securities, so it has made more sense for Canadian institutional investors to join class lawsuits in American courts. For instance, the Ontario Public Service Employees' Union Pension Plan is the lead plaintiff in a class action pending in federal court in New York that was filed on behalf of Nortel Networks Corp. investors.
Later this month, the Ontario Court of Appeal is to hear arguments in Kerr v. Danier Leather Inc., the first securities class action to go to trial in Canada. In May 2004, a judge ruled that Danier officials violated Section 130 of the Ontario Securities Act because they failed to provide an updated earnings forecast in a 1998 prospectus for an initial public offering. The judge was not swayed by the company's argument that it eventually met that earnings forecast and that the prospectus included cautionary language. The judge awarded damages and later ordered the company to pay at least $3 million for the investors' legal fees.
Canadian legal experts expect that investor lawsuits will be more common once legislation takes effect in Ontario that would allow claims by investors who purchase shares on the secondary market, rather than directly from the company through a share offering. (In the U.S., investors have had this legal right for decades under Rule 10b-5 of the Securities and Exchange Act of 1934.)
This new secondary-market provision is part of a package of legislative reforms that seek to restore investor confidence. A 2002 study commissioned by the Toronto Stock Exchange found that share ownership in Canada had declined for the first time in 20 years, in part because of Enron, Bre-X Minerals and other corporate scandals.
The legislation provides a limited right for investors to sue over a company's continuous misrepresentations, whether written or oral, or for failure to make timely disclosure. Investors would no longer have to prove they relied on the misleading statement in order to succeed with a claim. In response to corporate concerns, the bill includes caps on damages (C$1 million or 5 percent of the company's market cap, whichever is greater).
The legislation was passed in 2002, but the Ontario government has not yet issued regulations to enforce the provision on secondary-market disclosures. This delay prompted the Ontario Teachers' Pension Plan and a coalition of 28 pension funds and money managers to urge the provincial government to proceed with the legislation. As the Ontario Teachers' Pension Plan noted in an April 2003 letter, "The civil liability scheme for investors is important to us because it allows a broad group of investors to re-enforce the aspects of securities legislation that the regulator may not wish to address for various reasons."
In late 2004, lawmakers approved amendments that provide a safe harbor for statements with "forward-looking information," according to The Lawyers Weekly. The provincial government is expected to implement the legislation later this year.
British Columbia lawmakers passed secondary-market legislation in 2004, but implementation has been delayed, according to an article by Osler, Hoskin & Harcourt, a Toronto law firm.
United Kingdom
In the U.K., there haven't been any significant settlements so far, Peter Burbidge, a law professor at Westminster University, told SCAS Alert. While investors can't bring securities class actions, they can form associations to sue companies. Under U.K. law, directors owe legal duties to the company, rather than to shareholders. In April, lawmakers changed the U.K. Companies Act to allow companies to indemnify directors against claims by third parties, such as shareholders suing in U.S. courts, Burbidge said.
Like investors in Canada and Australia, shareholders face the challenge of the English "loser pays" rule. The risk of having to pay a company's legal fees can be daunting to even a large institutional investor.
According to news reports, Britain's largest-ever investor lawsuit is on hold after a High Court judge in April refused to cap shareholders' potential liability for defense legal bills at 1.35 million pounds. In that case, 55,000 former Railtrack investors claim that government officials committed "misfeasance in public office" and damaged shareholders' interests when the company collapsed in 2001. While the investors have raised 2.4 million pounds for the case, that won't be enough to cover their own expenses and the government's projected legal bills.
"It's a bit of an unfair playing field and very frustrating," lead shareholder Geoffrey Weir told the Financial Times.
France
In January, President Jacques Chirac proposed that France adopt legislation to permit U.S. style class-action lawsuits, as a part of an initiative to strengthen consumer rights.
Chirac's original proposal did not include securities cases, but shareholder activists have urged the government to consider that. Under a 1994 law, shareholders have the right to join forces in associations to make their voices heard and possibly sue management. A minority shareholder can sue a majority shareholder, but the company collects any damages in such a suit. For instance, Orange minority shareholders challenged the fairness of the price offered in a buyout by majority shareholder France Telecom.
French business groups, which have enlisted the help of U.S. and Canadian defense lawyers and business organizations, argue that any class suits should be limited to only those plaintiffs who sign up to join the class. In the U.S., securities class lawsuits, once certified by a judge, include all investors, except those who opt out.
So far, there has been little progress on Chirac's proposal. It would appear now that he has more pressing concerns after French voters rejected the European Union constitution on May 29.
The Netherlands
The Netherlands already has a limited class-action law. Class plaintiffs can seek court orders, refunds and the rescission of contracts, but they cannot seek damages.
In a notable recent settlement, Dexia SA agreed in April to pay 400 million euros to Dutch investors. The settlement was reached with a group of associations representing the investors, who claimed that Dexia's Labouchere unit failed to warn them about the risks of borrowing money to buy shares.
Later this month, the Dutch Senate is expected to approve legislation to allow the creation of classes for settlement purposes. Under that law, proposed settlements would be reviewed by the court, which would verify that the plaintiff was sufficiently representative of the class and that the proposed class would be large enough. As in the U.S., class members could opt out of a settlement. The new law would also allow plaintiffs to claim damages. Only actual damages could be sought, as the Netherlands does not recognize punitive damages.
Germany
German lawmakers and government officials are considering draft legislation that would allow the aggregation of securities claims by multiple investors, according to Daniel Busse and Silke Justen, who are lawyers in the Frankfurt office of Lovells.
The proposed legislation would not create U.S.-style class actions, but it would lower the obstacles for investors to claim damages. Under the draft law, investors could request a model proceeding to resolve common issues of fact or law concerning a company's disclosure of allegedly misleading information. Such a request would be posted in an online public litigation register and other plaintiffs would have a chance to join the model proceeding. A Higher Regional Court would select a lead investor plaintiff and then make legal and factual determinations that would be binding on all potential plaintiffs, including those who did not join the model proceeding, Busse and Justen said.
Germany does not permit contingency fees, and the draft law would not provide any additional incentives to law firms that represent investors.
The fate of this legislation is uncertain, as there are two drafts under consideration. In addition, Germany likely will have national elections this fall, and it's quite unlikely that the legislation would pass before then, Busse and Justen said.
European Legislation?
Some legal observers say that these various pieces of national legislation could eventually lead to a European-wide class-action law.
"It's not for tomorrow, but if it gets off the ground in France, and since we already have it in Sweden, then maybe we'll see something at the European level," Burbidge told the Associated Press. "The French would want others to have it if they have it."
Marc Gottridge, a securities lawyer with Lovells, said he doubts that will happen anytime soon, given all the work that European officials still have to do to harmonize their securities laws. For instance, the European Commission is considering whether to adopt legislation to facilitate the clearing of cross-border securities trades. "They still really have not created a single market for securities," he said.
Regardless of what happens in Europe, legal experts don't anticipate that foreign institutional investors will stop bringing claims in American courts against international companies with U.S. securities. Gottridge said he doubts that Europe would move away from the English "loser pays" rule and bans on contingency fees. In addition, investors would still have many procedural advantages in U.S. courts, such as more expansive pre-trial evidence gathering, jury trials and punitive damage awards.
"Even if all the proposed legislation passes in Europe, institutional investors will still find U.S. courts to be a more attractive place to bring their claims," Gottridge told SCAS Alert.
