Crafting an Optimal Shareholder Recovery Effort
Each year FRT helps hundreds of institutional investors participate in non-US securities litigation. As a result, we have a landscape view of how suits in different countries are prosecuted by different organizers. Below we discuss four positive trends we’re seeing and encourage organizers to take advantage of them when structuring future recovery efforts.
FOUR POSITIVE TRENDS
1. Representative suits: Half of the twenty-four countries where securities cases get filed have passive participation routes to recovery. We’re seeing greater use of them by organizers, particularly in European countries like Germany, which uses KapMuG model case proceedings, and the Netherlands, with prosecutions by Foundations. In April 2020, Italy adopted class actions and we hope to see filings there soon. In Brazil, representative securities arbitrations have been filed, most recently for against IRB Brazil RE.
When representative processes are not otherwise available, they can be created using powers of attorney (POAs) and/or by assigning claims to special purpose litigation vehicles (SPVs). Organizers have used these strategies in other European countries including the Netherlands, Denmark, and Switzerland. From our survey of local counsel, most European countries and others around the world, including Brazil, permit claim assignments or something comparable.
Representative actions lower the risks and burdens of participation and increase the number of institutional investors willing to join. Ideally, over time, more countries will become passive, permitting funds to automate participation as they do in the US.
2. Claim preservation:
Court registrations: In Germany, appointment of a model claimant in KapMuG proceedings starts a six-month window for investors to register claims with the court. Registration is an administrative process that prevents claims from becoming time-barred over time without forcing claimants to become parties to litigation. It essentially permits them to sit on the sidelines, filing suit later if the KapMuG proceedings go well. While some organizers still put all claimants into group actions, others are filing enough suits to start the KapMuG process and registering the rest. In the Daimler and Bayer cases, for example, some organizers only planned registration as their strategies.
Dutch law has a similar registration process. In January 2020, a new law went into effect permitting Foundations to recover money damages. While Dutch investors are automatically covered by Foundation suits unless they opt-out, non-Dutch investors must opt-in to be bound. At some point during proceedings, the court sets a deadline for non-Dutch investors to submit their intention to be bound. Those registering have their claims preserved without being parties to suit.
Extending the time clock: Some countries have long limitations periods, making claim preservation unnecessary. In Australia, for example, there is a six-year statute of limitations that typically exceeds the time necessary for parties to reach the merits of cases.
In other jurisdictions where limitations periods are shorter, parties can create more time using other legal processes or private negotiations.
- Demand letters: In some countries, serving a demand letter tolls the limitations periods for claimants named therein. The extra time varies by country. In the Netherlands, claims can be extended in five-year increments. In Japan and Italy, letters can extend time for several months or a year.
- Protective filings: In the UK, plaintiffs can file claims in court but defer service to extend the official start of proceedings. In the US, plaintiffs move to intervene in class actions for the limited purpose of preserving opt-out claims. They file and request immediate stays to avoid active litigation.
- Tolling Agreements: In the US, after class actions are filed, defendants may enter into tolling agreements with claimants to avoid too many opt-out suits. This conserves resources and keeps the fight focused on the class action. There’s no reason why similar agreements couldn’t be employed in non-US actions.
3. Filing no more suits than necessary to resolve common issues: In a German KapMuG, common issues are resolved via the model claimant suit. Other plaintiffs remain largely passive and their claims rise or fall based on rulings in that suit. Similarly, in the UK, courts often use test cases to resolve common questions when faced with multiple litigant groups. Last year we saw at least one recovery effort in which the organizer planned to file individual suits which, if successful, could be leveraged on behalf of the broader group. It’s a spear approach: pierce with one case win and then expand.
In past cases, organizers have filed many more suits than necessary. A KapMuG only requires ten suits to begin. In the Volkswagen case, multiple organizers filed suits for thousands of claimants. As a result, the defendants’ efforts to challenge the bona fides of each plaintiff (standing, losses, etc.) delayed the court’s consideration of the merits far beyond what would likely have occurred if counsel had only filed the necessary ten suits and registered remaining claimants, putting them in the wings rather than the arena.
4. Follow-on efforts: We’ve seen these in the Netherlands, with the Fortis and Steinhoff settlements. Both were opened up at later stages to claimants not active earlier in litigations. Claimants joining after the settlements were announced received less than those previously active due, in part, to their claims being less viable due to limitations. Had these late-joining claimants preserved their claims, the defendants may not have been able to reduce their amounts.
Follow-on strategies are employed in the US, where investors prioritize participation in opt-out matters when parties appear to be trying to settle class actions. Settlement attempts can often be seen in court docket entries. In the UK, we saw a variation recently in the Tesco case, where multiple organizers organized follow-on groups as cases litigated by others for years headed to trial. They did so to make their claims known to the defendants and potentially capitalize on a positive outcome. If defendants wanted global peace, they’d have to resolve all claims.
Again, the key to successful follow-on efforts is ensuring claims of non-litigating parties do not become time-barred before those litigating reach settlement discussions or positive outcomes on the merits.
THE THREE GUIDING PRINCIPLES SUGGESTED BY THEM
The four trends above offer three guiding principles for optimal recovery efforts.
- Only file suits needed to establish liability. Forget multiple waves of complaints with large numbers of plaintiffs. When possible, file a limited number of suits with the best fact patterns and find ways to preserve the claims of other harmed investors while those suits proceed.
- Preserve the claims of others. Take advantage of claim preservation and time extension strategies whenever available. Where there isn’t a legal procedure for them, negotiate tolling agreements or file and stay claims of others. Keep as many claimants as possible on the sidelines during litigation.. Lowering the risks and burdens for them will encourage greater participation.
- Bring other claimants in at the end. The specter of a large group in the wings may accelerate settlement talks with defendants and boost recovery rates. In Australia, claims are gathered before the parties mediate rather than after, as in the US. Class recovery rates there average around 25% rather than 3%-8% in the US.
These strategies will be more or less feasible depending on the country and its laws. The pie chart below shows the geographic breakdown for those organized in 2019 and 2020. Excluding passive participation countries like Australia and Taiwan, the majority of matters are in active participation countries where these strategies will work.
In sum, we encourage organizers to optimize future recovery efforts by making the most use of their best techniques. Continuing the four trends above – and guided by the three principles flowing from them – will lower prosecution costs, increase investor participation, shorten prosecutions, and hopefully create greater recoveries, all of which will boost shareholder rights globally.
 While some countries like China and South Africa have class actions, they lack supporting structures necessary to that make them effective including legal contingency fees, developed funding sources, after-the-event insurance markets, and/or favorable legal precedent. Other countries, like the UK, have threshold hurdles like approval by the Competition Appeal Tribunal (CAT) that greatly extend proceedings.
 Registration is only an option if the six month period starts before claims expire. KapMug proceedings are notoriously slow and a court’s failure to appoint the model plaintiff in time can eliminate this option.
To learn more about how FRT can help your firm identify and monitor antitrust litigation opportunities, visit our website.
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SETTLED CLAIMS I PASSIVE GROUP I ANTITRUST I FUTURE CLAIMS I OPT-IN MONITORING I OPT-OUT MONITORING
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