When deciding whether to participate in non-US recovery efforts, many investors use loss thresholds: pre-set minimum loss amounts based on the risk profiles of countries where matters will be brought. If estimated losses exceed their minimum, they consider registering for the effort. If estimated losses fall below their threshold, they pass on it.

Recent litigation trends outside the US require investors to rethink this binary approach and instead use loss thresholds tailored both to the risk profiles of the countries involved and the legal strategies employed by the case organizers (lawyers and funders). This article discusses three trends we’re seeing and three ways investors can strengthen their participation process. Without evolving, investors risk missing out on advantageous low-risk opportunities or joining matters with higher than expected risks and burdens.

THREE TRENDS IN NON-US SECURITIES LITIGATION

1. More Settlement Attempts, Particularly in High-Risk Countries

A. Settlement attempts before litigation
In the past, investors have been cautious about joining recovery efforts in high-risk countries. They set high loss thresholds as litigation there involves significant risk of adverse cost awards, participation burdens, and little or no public anonymity. High thresholds limit their participation and in response, case organizers have been attempting out of court settlements rather than, or in addition to, litigation. In countries like Italy and Japan, legal processes including demand letters to defendants help facilitate these efforts. Recent examples include European Forex and Closet Index Tracking. Whether these settlement strategies prove successful remains to be seen; however, they do not involve the risks normally associated with litigation in those countries and investors continuing to apply higher thresholds may miss out. However, if litigation follows unsuccessful settlement attempts, before moving on investors should reconsider their participation using the higher loss thresholds.

B. Settlement attempts after litigation
Some cases reverse the order. They start with litigation and switch to settlement attempts. For example, in Steinhoff, recovery efforts were first pursued in three separate countries. When the company proposed a settlement, investors not previously registered had an opportunity to join those efforts. They had the option to register for settlement attempts only, or for settlement attempts followed by litigation if they proved unsuccessful.

To make things more challenging, in conjunction with settlement attempts, case organizers may file complaints in court to prevent claims from legally expiring. These protective filings do not start litigation or trigger the attendant risks. Investors should revisit participation if/when the litigation actually starts.

All of this suggests investors should have a separate loss threshold for settlement attempts. If those efforts fail, before joining litigation, they should apply their normal loss thresholds for those countries.

2. Multiple Legal Routes to Recovery in the Same Country

Some countries have multiple legal routes to recovery. In the Netherlands, for example, investors can file medium-risk direct litigation or participate in no-risk Dutch Foundations. In Italy, claims can be pursued through medium-risk direct actions or low-risk civil proceedings collateral to criminal prosecutions. Earlier this year, Italy adopted class actions, a third and low-risk option. For efforts in these countries, investors should apply loss thresholds appropriate for the specific recovery routes proposed by the case organizers. If in a given country, two organizers propose different strategies, investors may apply different loss thresholds for each.

3. Recovery Strategies In Multiple Countries

Many companies sued for securities fraud are multinationals. In these situations, case organizers may sue companies in different jurisdictions. Investors must choose among competing efforts with different country risk profiles and potentially, different legal routes to recovery in the same country. In Steinhoff, for example, claims were initially filed

• in South Africa, which uses low-risk opt-out class actions;
• in Germany, which requires medium risk direct actions; and
• in the Netherlands, where investors could choose medium risk direct actions or no-risk Dutch Foundations.

Each country has a different risk profile. Moreover, as noted above, the company’s later offer to engage in settlement talks created a settlement attempt option for investors, which had its own risk profile.

THREE WAYS TO IMPROVE LOSS THRESHOLDS

1. Understand the Litigation Strategies Being Proposed and The Attendant Risks

With traditional binary loss-thresholds, investors simply look at the country where the effort will be brought and use their pre-set amounts to consider registration. For the reasons above, investors should instead focus on both the country and the organizer’s litigation strategy if more than one is available. They should also have a separate amount for settlement attempts, regardless of jurisdiction.

2. Consider Transitions Between Lower and Higher Risk Strategies

If an organizer’s litigation strategy involves a settlement attempt (low risk) and litigation (medium or high risk), in either order, investors must understand the process by which they will transition between them. Assuming they can choose not to proceed to the other second stage, they should consider continued participation using an appropriate loss threshold. Ideally, there will be a process to affirmatively opt-in to later proceedings or, if the transition happens automatically, a process to ensure there’s sufficient notice and time to opt-out.

3. Remember the Limitations of Loss Estimates

Outside the US, in most countries, the method for measuring compensable losses is uncertain given limited statutory or judicial guidance and history of prior recoveries. Loss estimates are just that – educated guesses. Investors should set loss thresholds high enough to account for this uncertainty, as well as risks associated with the jurisdictions and organizer strategies. That way, if recoveries end up lower, the absolute dollars will still be sufficient to justify the risks.

CONCLUSION

The trend towards more complex recovery strategies outside the US warrants investors taking a more nuanced approach to loss thresholds. Investors should account for the risk profile of the country involved and the legal routes to recovery planned by the organizers. They should have a separate loss threshold for settlement efforts, and a process re-consider participation if and when matter progress to litigation with higher attendant risks. Doing so will ensure their program maximizes recoveries while minimizing risks and burdens.

Download a copy of our Jurisdiction Risk Profiles to understand the risks associated with various active jurisdictions around the world.

Learn More

To learn more about how FRT can help your firm maximize recoveries in shareholder class action settlements, contact us at learnmore@frtservices.com.

• [Webinar] Understanding Shareholder Loss Estimates in Non-U.S. Jurisdictions
• [Report] A Primer on Global Group Litigation
• [Blog] 5 Ways Loss Estimation Comes Into Play in Non-U.S. Securities Litigation

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