FRT FAQs: Passive Group Litigation
1. What is a Passive Group Action?
Shareholder litigation outside of the U.S. is growing while the barriers to participate are decreasing in certain jurisdictions. Passive group actions evolved after the U.S. Supreme Court’s Morrison decision (2010) forced countries outside of the U.S. to develop their own legal mechanisms to handle shareholder litigation. In the years following Morrison, some jurisdictions have shifted to implement systems that closely mirror the U.S., specifically around participation that involves minimal risk to plaintiff parties.
2. How are Passive Group Actions different than Non-U.S. cases?
Most Non-U.S. actions require claimants to “opt-in” and formally sign up to join litigation. This limits registration to investors who (a) purchased shares during the class period and suffered a loss AND (b) signed an attorney engagement, funding agreement and other necessary joining documents with the organizers.
Passive Group actions, however, typically involve either a class registration process or claims submission process, now or in the future. This means that claimants are not obligated to serve as an active litigant or as a lead/representative member of the litigation and often does not involved signing complex legal contracts.
3. What are the risks of joining a Passive Group Action?
Joining passive cases does not carry any risk to the claimants. These cases are similar to U.S. actions where class members can proceed as exclusively passive registrants where by:
- There is no adverse cost shifting (a loser pays system)
- They do not involve any discovery or additional participation from claimants outside of providing impacted transaction history
- There is no risk of identity exposure
For these reasons, investors have the ability to automate their involvement in these types of cases – similar to how they would participate in settled U.S. class actions.
4. What jurisdictions are considered passive?
The global shareholder litigation landscape is very fluid. While the Morrison decision was 10 years ago, most jurisdictions are still in the beginning stages when it comes to litigation for group actions of this magnitude. As the market continues to grow, jurisdictions will continue to evolve and possibly create new mechanisms providing easier access to justice in shareholder class actions. The most active passive jurisdictions to date would be:
- Australia (click here to download the jurisdiction profile): Australian cases meet FRT’s criteria for passive registration once the case has reached a class closure stage. At this point in the litigation lifecycle, prior to mediation, the courts will establish a class closure deadline effectively closing the case to any further involvement. If potential class members do not register at this point, they will still be bound by any outcome of the case – as impacted class members – but would be precluded from participating in and recovering from any potential settlement proceeds. Registration at this stage only involves registering as part of the class and does not involve signing participation documents with the litigation funder or the plaintiff’s firm. Claimants are not bound by any terms of the funding agreement and remain entirely passive members of the class.
- Dutch Foundations (click here to read our blog): A Dutch Foundation, called a Stichting, is a legal entity created under Netherlands law as a voluntary settlement vehicle offering a venue for resolution if defendants eventually decide they want to settle across the global market of impacted investors. Separate from its underlying members the Foundation can prosecute and settle claims in its own name and at its own cost. Once a Foundation has settled, it has met FRT’s criteria for passive claims filing, as it goes through a third-party claims administration process similar to the U.S.
- International Regulatory Actions: Regulatory Actions, like the Tesco Compensation Scheme (read the case spotlight), are set up similarly to an SEC Fair Funds Filing. These actions involve a Regulatory Agency establishing a settlement fund to distribute payments to defrauded investors that suffered an economic loss as a result of corporate wrongdoing. These actions involve claims filing rather than active litigation.
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