Investors who say, ‘See you in court’

This article is part of
Spring Investment Monitor - March 2015

In the US, institutional shareholder action is a burgeoning industry.

Claims are routinely filed by firms seeking class certification in relation to a range of alleged corporate misconducts. In Europe, the position has been markedly different until recently.

Investor action has been sporadic at best. It has often been spearheaded by retail investors who have formed action groups in desperation and attempted to use the legal system to their advantage, often on a misconceived premise. The institutional client base has stayed on the sidelines. As a consequence, with the deck very much stacked against them in terms of firepower, resources and merits, retail actions have floundered and sent out a very mixed message as to the utility of such claims.

It is erroneously thought that the English group action system is cumbersome and ill-suited to shareholder claims. Although retail actions have gone wrong for various reasons, in truth the nub of the problem has been that the law firms running the actions on behalf of retail investors have not been as well versed in the culture of the claims as their American (and Australian) contemporaries.

They have also not been as incentivised without contingency fees. Flowing from that, it is also right that the English courts have not gained a solid understanding of the legal theory underpinning investor actions and the nature of the economic claims that need to be advanced.

Concepts such as fraud on the market or the nature of stock inflation are, as yet, alien to the English courts. The key sections in the Financial Services and Markets Act – which encompass principles that are litigated almost weekly in the US – have not yet been the subject of a canon of English law.

Indeed, one or two of the key sections have not been litigated in their present form at all. It is extraordinary in many ways that some of the seminal case law in prospectus liability is more than a century old, and nothing of substance has really been developed since those times.

One of the key drivers for change in Europe has been the shift in the legal landscape and the rise of corporate governance houses and boutique litigation-only law firms that are willing to take on the establishment. These firms have certainly been aided by the developing litigation funding industry and the availability of new fee structures.

Such changes have coincided with more focused attention to the oversight agenda and a realisation that shareholder activism has many facets to it – that can include, in appropriate circumstances, litigation.

There has been a growing awareness that those in the fund management industry (who, after all, should be seen as the trustees of retail holders) have a fiduciary obligation to consider claims and to do more than sit on their hands and watch the retail investors try to do all the running.