LIKE the ghosts that haunted Ebenezer Scrooge, the scandals of years past—summoned up by angry shareholders—will not let companies rest. In Britain this year, the Royal Bank of Scotland (RBS) paid £900m ($1.2bn) to settle a long-running investor lawsuit related to the bank’s behaviour at the time of the financial crisis of 2007-08. Also in Britain, Lloyds Banking Group faces litigation. And it is not just banks. Investors in Britain sued Tesco, a supermarket chain, for losses caused by an accounting scandal in 2014. In Germany and the Netherlands investors are seeking compensation from Volkswagen (VW), a carmaker, for failing to disclose its manipulation of diesel-emissions tests.
Securities litigation is on the rise in Europe for two main reasons. The first is that America is less hospitable than it was to such cases. Until 2010 harm suffered by foreign investors could be included in American lawsuits. That changed with a Supreme Court ruling on Morrison v National Australia Bank, which held that the losses of so-called “f-cubed” plaintiffs—foreign investors who bought shares in a foreign company on foreign exchanges—would have to be excluded.
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Once, all the shareholder litigation against VW would have taken place in America, says Jay Eisenhofer of Grant & Eisenhofer, an American law firm. The Morrison ruling, however, meant that the current American class-action suit has largely been limited to municipal pension funds that held VW’s American depository receipts (a proxy for its shares).
The second reason for the increased popularity of Europe as a venue for litigation is a proliferation of financing options. In Europe, claimants must shoulder legal costs for both sides if they lose. These can be astronomical: RBS is said to have spent £100m on its shareholder lawsuit, which was settled before it even went to trial.
Financing from litigation-funding specialists is an increasingly common way to cover the costs of a lawsuit. According to research by RPC, a London law firm, the 20 largest funders ploughed £723m into British lawsuits in 2016, up from £437m in 2011. Both the action in Germany against VW and the British Tesco lawsuit are being financed by Innsworth, a funding specialist, backed by an American hedge fund. Another option is to buy insurance against the risk of adverse costs. Premiums can either be paid upfront (often by funders) or be contingent on a successful settlement.
Funders and specialist law firms often act as co-ordinators for suits brought by investors. That is important in countries such as Britain and Germany, where collective cases generally require investors to opt in to legal action. The American system, in contrast, binds all potential claimants unless they explicitly opt out.
That is one reason why the Netherlands has become something of a magnet in Europe for disgruntled investors. Since 2005, it has allowed collective settlements on an opt-out basis. A common model is for shareholders, including foreign institutions, to be represented by a foundation which sues the company on their behalf in return for a share of any settlement. Such arrangements won payouts of $353m from Shell in 2007, following a write-down of its oil reserves. But for cases involving foreign companies the Netherlands may have little to offer. A case against BP after the Deepwater Horizon spill was thrown out in 2016. An investor case against VW might fail the jurisdiction test, too.
Practical obstacles to taking action remain, says Harry Edwards, a partner at Herbert Smith Freehills, a London law firm. Outside the Netherlands, opt-in systems mean investor interest has to be drummed up. Adverse-cost insurance and funding may be available, but the litigation will secure backing only if the expected returns are high enough. And in continental Europe, unlike Britain and America, plaintiffs cannot force companies to disclose all relevant facts—so cases are harder to win. Nor in Europe is there access to trials by jury. This may favour companies, which see such trials as unpredictable, and sometimes settle cases to avoid them. Despite the rise in litigation, it is hardly open season in Europe for nuisance claims from disgruntled shareholders.