International Securities Litigation
Federal courts in the United States have been the predominant forum for securities litigation, given the rights afforded investors under the federal securities laws, the ability to bring cases as class actions and the availability of contingent fee arrangements. In recent years, however, attention has turned increasingly to other countries as possible forums for securities litigation. This has been driven largely by two factors. First, in 2010, the United States Supreme Court, in Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010), held that the protections afforded by the general anti-fraud provisions of the federal securities laws do not extend to securities purchased or sold outside of the United States. Second, with the ever-increasing globalization of economic activities, international securities markets have assumed a greater role in corporate endeavors to raise capital.
These developments have required investors to look beyond the United States courts for a forum in which to seek recovery on losses arising from corporate misconduct. But investors face a very different legal landscape in foreign courts than they do when litigating in the United States. Both the procedural and substantive laws applicable to securities litigation vary greatly across foreign jurisdictions. The laws as to how lawsuits are funded also differ greatly from the practice and procedures in the United States. Where international securities litigation is concerned, investors cannot take a passive approach and assume that their custodians will be able to file a claim on their behalf if and when a settlement is reached. Indeed, investors will often need to make a decision about joining an international lawsuit before the case has even commenced. As a result, consideration of whether to participate in a foreign litigation is a complex and challenging process. Some general points to consider are discussed below.
Opt-Out vs. Opt-In
Many foreign jurisdictions do not have a class action procedure analogous to what exists in the United States. In class action securities litigation occurring in the United States, cases are brought by a court-appointed lead plaintiff on behalf of all investors who have similar claims, as a class. If the court certifies the case to proceed as a class action, all persons or entities who fall within the class definition are included in the class and do not need to take any affirmative steps to join the action. Class members can choose to “opt out” of the class, but, if they do, they are not entitled to share in any recovery that may be achieved on behalf of the class.
Unlike the United States, many other countries have some form of collective litigation that requires parties to “opt in” if they want to be included in the litigation. The United Kingdom, for example, has a procedure for parties to join a group through the mechanism of a Group Litigation Order (“GLO”). Under the GLO procedure, the court identifies the issues that will be heard under the GLO and maintains a register of all parties who have agreed to have their claims heard under the GLO. As such, the GLO is an opt-in procedure and is more a collection of individual cases than it is a representative action. The court, however, can select individual cases as the “lead” cases and its rulings in those cases can be binding on the parties whose claims are on the group register at the time the rulings were issued. Depending on the circumstances, the court may direct that the GLO be publicized and may set a deadline by which claims must be registered.
The Netherlands has procedures for collective actions that have attributes of both opt-in and opt-out systems. Under Dutch law, collective actions are brought by a representative organization or foundation with legal authority to sue on behalf of a group of individuals. A Dutch law commonly referred to as “WCAM” establishes a procedure for the aggregation and settlement of claims. Under WCAM, an entity such as a foundation negotiates an out-of-court settlement of mass claims. The parties then seek court-approval for a settlement that includes not just foundation members, but all persons harmed by the alleged misconduct. Dutch law provides for the issuance of notice of the proposed settlement to all aggrieved parties and such parties have the right either to object to the settlement or opt out.
In considering a proposed settlement, one of the factors a Dutch court will examine is whether the foundation seeking approval of the settlement is sufficiently representative of the group of persons that suffered damages. While the law provides little explicit guidance for determining when the foundation is sufficiently representative, one factor the courts frequently consider is the number of persons who have joined the foundation. Dutch law therefore has attributes of an opt-in system because if the number of injured parties who join the foundation is insufficiently large, a defendant will have little incentive to negotiate a settlement with it because a court could deem the foundation as insufficiently representative. Thus, a large number of aggrieved parties must “opt in” to the foundation before the foundation is in a position to negotiate a settlement and present it to the court. On the other hand, Dutch law also operates as an opt-out system because, as noted above, once the court approves a settlement, aggrieved parties are required to receive notice and can opt out of the action.
Some countries have procedures that, at first glance, appear similar to the United States class action system, but, as a practical matter, operate very differently. Australia and the Canadian Province of Ontario both have opt-out class procedures analogous to those in the United States. But, as discussed below, other aspects of the legal systems in these jurisdictions limit the use of class actions and, in the case, of Australia, actually result in litigation that is more akin to an opt-in procedure.
Litigation Funding and Potential Liability for Defense Costs
In a United States securities class action, counsel represents the lead plaintiff and the class on a contingent fee basis and assumes responsibility for all litigation costs. If the case results in a recovery for the class, then counsel applies to the court for its fee based on a percentage of the recovery and for reimbursement of its expenses incurred in prosecuting the action. Moreover, in the U.S. legal system, there is generally no obligation for the losing party to bear the costs (including lawyers’ fees) of the winning side. Thus, in U.S. securities class actions, neither the lead plaintiff nor the class will typically have any responsibility for their own lawyers’ fees or for defense costs, even if the litigation does not result in a recovery.
The legal systems of many international jurisdictions operate very differently with respect to legal fees and liability for an adversary’s costs. Many countries, including the United Kingdom, Australia, France, the Canadian provinces, and the Netherlands, prohibit the use of contingent fee arrangements. Many countries (United Kingdom, Australia, France, Germany, and the Canadian provinces) also operate on a “loser pays” model, whereby the losing party may be liable for the prevailing party’s legal costs and expenses. The absence of a contingent fee arrangement and the financial risk of a loser-pays system mean that litigants in those jurisdictions often must arrange for third-party funding of the legal expenses for the case as well as insurance to cover potential liability for an adversary’s legal costs. This, of course, diminishes the potential recovery that may ultimately be achieved. It can also mean that for the funding and insurance arrangements to be economically feasible, potential litigants must first aggregate their claims in some fashion before instituting an action.
As a consequence of the different funding and insurance arrangements, even systems that appear to operate in a fashion analogous to the class action system in the U.S. often do not do so. For example, as noted above, Australia has an opt-out system. But it does not permit contingent fees. So plaintiffs must either fund the litigation themselves or rely on a third-party funder. The requirement for litigation funding means that few litigants are willing to bring cases as class actions, since absent class members who did not participate in the funding arrangement could ultimately benefit from the recovery. To exclude such “free riders,” Australian courts have upheld the efforts of litigation funders to create a “closed” or opt-in class. This ensures that only those who affirmatively join the litigation and enter into funding arrangements are entitled to share in any recovery.
Differences in Substantive and Procedural Law
In addition to the differences in how collective actions are organized and funded, there are enormous differences across international jurisdictions concerning both the substantive law governing securities claims and the procedures governing how those claims are brought before the courts. These differences can involve, among other things, what activities give rise to a securities claim, the elements of proof required to sustain a claim, the level of factual detail required for an initial pleading, the manner and extent to which discovery is permitted, and potential limitations on damages.
For example, in some countries, claims may be viable for false or misleading statements made in connection with a public offering of securities, but not for those made in connection with securities purchased on the open market, which represent a large percentage of securities class actions in the U.S. The opportunity for discovery in some countries may be much more limited than exists in U.S. courts. Pre-trial discovery in the United Kingdom, for example, involves an exchange of relevant documents between the parties. But, typically, there is no opportunity in the U.K. to conduct depositions of fact witnesses or experts. In Denmark, there is scarcely any opportunity to conduct discovery at all. Where fraud and concealment are at the heart of a claim, the limited availability for discovery can seriously hamper the ability to prove a case in court.
Damages are another area in which there can be considerable differences in the laws of different jurisdictions. The Canadian Province of Ontario, for example, has a cap of damages in claims arising in connection with open market transactions that limits damages of an issuer of securities to CAD 1 million or five percent of its market capitalization. This cap on damages, combined with a loser-pays system, tends to limit the usefulness of class action proceedings.
When monitoring foreign securities claims, there are many factors a fund must consider in determining whether to take affirmative action with regard to those claims. What procedures does the foreign jurisdiction have for handling collective actions? What types of litigation funding arrangements are available? Does the jurisdiction provide for an adequate remedy under its substantive law and an adequate opportunity to develop the proof necessary to prove a claim? Answering these questions is a complex undertaking. When your fund is called on to decide whether to participate in an international securities case, Barrack, Rodos & Bacine can provide assistance in getting those answers.
NOTE: BR&B is not licensed to practice law outside the United States and therefore does not provide legal advice or recommendations regarding non-U.S. actions.