The Rise Of Global Securities Class Actions
The U.S. continues to dominate securities class action activity, with robust securities laws and well-established processes providing a means for investors to recover losses. In parallel, however, a changing legal landscape and more complex securities are making class actions increasingly common in more than 35 jurisdictions outside of the U.S.
Over the last five years, we have seen filings outside of the U.S. increase year on year, with around 250 cases filed or investigated collectively on average at this point, and we expect this trend to continue.
One of the key developments we saw in November 2021, was the first ever securities class action settlement in China, after a court found that a pharmaceutical company inflated its financials and failed to disclose material information to its investors. As China becomes yet another jurisdiction primed for securities class action activity, it’s harder than ever to ignore the expanding scope of the global landscape and the increased recovery opportunities now open to investors.
Whether you are an asset owner or asset manager, it is highly likely you will be an eligible participant in class actions globally. Investors are now looking more closely at these opportunities not only from an investment recovery perspective but also with an Environmental, Social and Governance (ESG) lens.
But global securities class action monitoring and recovery is challenging. With different jurisdictions, come different legal procedures, which requires unique experience and expertise to navigate.
Three factors fuelling global class action activity
In 2010, the U.S. Supreme Court decided in Morrison v National Australia Bank LTD that non-U.S./foreign investors cannot seek redress related to foreign securities on foreign exchanges. When this ruling closed the door to some class action litigation in the United States, it opened the door for other jurisdictions to fill the vacuum.
Consequently, each year since 2010, we’ve seen increasing securities class action activity outside of North America. There are many reasons for the growth, but underpinning it are three key factors:
1. An Evolving legal landscape
Several countries and jurisdictions have passed new legislation to facilitate collective redress. Most notably, in 2020, the EU Collective Redress Directive established a legal framework for mass claims for both consumers and investors of the 27 member states.
The Netherlands, meanwhile, passed its own Collective Damages Act in 2020, allowing for damages claims to be brought on behalf of affected investors. Other jurisdictions include Scotland, with the 2020 Civil Litigation Bill and Germany extending its the Capital Investor Model Proceedings Act through to 2023. And, as noted above, China saw its first-securities class action settlement in late 2021.
All these legal developments are creating fertile ground for more class action filings in Europe and the Asia-Pacific region.
2. ESG disclosure practices and regulations
Many investors now recognize the link between ESG factors and the long-term financial health of a corporation.
So, to attract investors, corporations now regularly include ESG disclosures in their regulatory filings and in ancillary reports, such as the corporate sustainability statement.
For many of the cases brought outside of the U.S., overstating ESG performance or material ESG failures have been the main catalyst for bringing these types of actions against corporations. As more corporations participate in ESG disclosure, it is likely that more litigation will follow.
Compounding these issues are the evolving regulations around ESG disclosure. In November 2021, the International Financial Reporting Standards Foundation (IFRS) announced the creation of the International Sustainability Standards Board (ISSB), introducing new global ESG disclosure standards. These pending regulations and international standards are likely to create uncertainty, and where there’s uncertainty around material disclosure, there’s the potential for increased securities class action activity.
3. Increasing funding
Finally, there has been greater investment in securities class action filings outside of North America. For example, U.S.-based law firms are establishing practices in the E.U. to advance class action cases. Unlike E.U.-based law firms, U.S. law firms are more likely to assume the upfront cost and risks that may be associated with some jurisdictions.
The E.U., by contrast, typically practices a litigation funding model where third-party investors finance the legal costs of filing and litigation in exchange for a percentage of the settlement. These practices reduce the risks and burden on claimants, which provides greater opportunities for investors to seek legal redress and potentially drive corporate governance changes within the corporation. In addition, the likelihood of bringing spurious litigation is reduced due to the risk and financial investment assumed by the litigation funder.
We expect these trends to continue indefinitely. As such, there’s growing opportunity for investors to capitalise on recoveries outside of the U.S. But navigating global securities class actions is challenging.
Global class action recovery is complex
In the US, the adopted model is opt-out, which means you, as an investor, are deemed to be part of the class unless you actively opt-out of the settlement; the litigation completes, a settlement fund is established and you, as a passive investor, must file a claim form to recoup investment losses. This process can largely be automated for all but the most complex cases and is aided by centralised reporting databases for settlement notices and claim forms. And, because of the maturity of the U.S. class action legal landscape, the cases usually follow standard, robust, and well-defined procedures.
By contrast, outside of the U.S., most of the jurisdictions adopt an opt-in model, whereby you must actively opt-in to the litigation to recover your investment losses. Each jurisdiction has its own procedures for registration, with various levels of participation requirements. As a result, there is no automated process that can be followed, so the considerations for an investor are very different.
For some jurisdictions, there are also additional risks to consider, particularly for those jurisdictions that do not allow litigation funding or employ an adverse costs rule – all of which may put extra burden on claimants. In addition, the rise of competing actions begs an obvious question – ‘Which one do I join?’ Opting into the right case for the investor is of paramount importance - simply selecting an option where loss figures appear to be materially higher than others or a case that appears to have a much larger marketing budget may not always be the best option.
Having the ability to navigate the complexities of the global landscape is vital, and with that, there’s tremendous opportunity to capitalise on investment recovery opportunities. Outside of the U.S., successful registration in class action lawsuits and recovery of a settlement requires not just expertise, but also local knowledge and deep strategic relationships with law firms and litigation funders who work with investors to recover losses.
Trip Chong is Director of Business Development, Securities Class Actions Services, at Broadridge
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