The Overlooked Importance of US Securities Class Actions for Non-US Investors
Each year, more than 200 securities class actions are filed in US federal courts. About 20% of these are against companies domiciled outside the US. Potential recoveries from these suits are obviously important to eligible non-US investors. However, there are other important aspects of these cases that are frequently overlooked that can impact their continued investment and stewardship activities, as well as their ability to recover in individual or group recovery efforts outside the US, such as arbitrations and private resolutions.
To protect their interests, prudent non-US investors should include in their governance programs a means for identifying and monitoring key events in these class actions, from the filing of the complaint through settlement.
RELEVANCE FOR ONGOING INVESTMENT AND STEWARDSHIP ACTIVITIES
US securities class actions offer a treasure trove of information on corporate conduct. Under US law, the pleading requirement for securities fraud claims is high. To avoid dismissals, class counsel conducts in-depth investigations using public and non-public sources including interviews with former employees. Everything is then included in a detailed amended complaint. For internal investment teams, the information therein may be relevant to their continued holdings and potential further investment in defendant companies, for all securities and not just those covered by the class definition. The information can also be useful for stewardship activities, such as informal discussions with management and formal proxy efforts.
Collectively, shareholder suits and regulatory enforcement following corporate scandals can – alone or together – cost companies material amounts. For example, the combined investor compensation from class actions and SEC Fair Funds was $1.6B from Wells Fargo Bank and $560M from The Kraft Heinz Company. This doesn’t include the cost and management distraction associated with the company’s defense and there may also be further costs from enforcement efforts by non-US securities regulators and other agencies. Details on all these enforcement efforts will be gathered by class counsel and referenced in the amended complaint or case briefing.
At a minimum, the prospect of future liability from litigation and regulatory enforcement will weigh on the company’s securities prices and information from the court docket and party briefing can give a fund’s internal team valuable insight into whether a suit will have a lasting impact, or be a flash in the pan, so to speak. It can also provide context for informal or formal efforts. to influence governance issues.
RELEVANCE FOR RECOVERY EFFORTS OUTSIDE THE US
US securities class actions following corporate scandals impact all company securities, not just ADRs or US exchange traded instruments covered by the class definition. Harmed investors may contemplate or pursue efforts to recoup losses for instruments trading outside the US – particularly common stock on non-US exchanges – through private suits, arbitrations, or group opt-in litigation financed by outside funders. Information from US securities class actions can assist in these recovery efforts as well.
Support for Separate Claim Prosecution
Outside the US, legal systems in most countries do not permit discovery, the process by which one side to a dispute compels the other to disclose documents and testimony. US law permits litigants in non-US courts to initiate proceedings in US federal court to obtain discovery in furtherance of their claims from sources within the US. This can include company defendants with operations in the US.
Among other things, investors can seek access to the discovery and documents produced in US securities class actions. When those cases involve non-US issuers, parties to non-US proceedings can obtain records – from sources within or outside the US – that they cannot get directly in foreign court proceedings due to the lack of discovery powers.
Avoiding Potential Abrogation of Non-US Claims
The potential resolution of US securities class actions can unexpectedly and adversely impact the legal rights of non-US investors to assert other non-US claims. Some US class actions, like those against BP p.l.c. (UK), Teva Pharmaceuticals (Israel), and Nissan Motor Corporation (Japan), expressly covered claims for common stock traded on non-US exchanges. Non-US investors contemplating or pursuing their own recovery efforts must be aware of the scope of these US class actions and remove their claims when necessary. They must also monitor US proceedings because adverse court rulings, while not binding on foreign courts, may be cited or relied upon by defendants in defense of proceedings in foreign courts. This is particularly true for securities that are dual listed on US and non-US exchanges. In the Teva class action, for example, counsel pursuing a class action in Israel – where the company is headquartered – appeared in the US proceedings to request that Israeli investors with those claims be removed from the US class action so that they could continue in the Israeli action.
When resolved, the release language in US securities class actions may be drafted to include claims under non-US law arising from the same underlying misconduct. While many cases limit the release to the US ADRs or other US exchange traded instruments, some will be written to cover “securities” more generally or specifically reference common stock traded on non-US exchanges.
When resolving claims, corporate defendants try to make the release as broad and encompassing as possible. Class counsel has limited incentive to lessen the scope. Thus, it falls on non-US investors to ensure that the resolution of US class actions does not abridge their current or future non-US claims. When there is a pending non-US group opt-in effort, the funder or counsel may seek to intervene early in a proceeding to remove those claims from the US case or may wait until settlement when the scope of release is being negotiated. However, this does not always occur, and if there is no separate funder, non-US investors are on their own.
Recently, the Nissan securities suit covered common stock trading during the class period on the Tokyo exchange. This created risk for a pending group opt-in suit in Japan covering those same common shares during a similar time and arising from the same underlying misconduct. Investors were forced to choose between the certainty of some recovery in the US class action settlement and a prospective future recovery in Japan. Most chose the latter and have continued with their claims. However, these investors had to opt-out of the US class action by a court-ordered deadline to avoid compromising their claims in Japan by not expressly excluding themselves.
CONCLUSION
Prudent non-US investors should monitor the filing and progress of US securities class actions against non-US issuers for a number of reasons. Information in case pleadings, particularly amended complaints, can be valuable to investment teams and support stewardship efforts. For those contemplating or pursuing recovery efforts outside the US, these suits offer a wealth of information to further those efforts that in many cases cannot otherwise be obtained directly from the company defendants. Claimants must also monitor US securities class actions to ensure they know whether they encompass non-US claims, potentially threatening those efforts or yielding court decisions that may negatively impact those cases. Non-US investors must also ensure that the resolution of a US class action does not inadvertently compromise their non-US claims, checking the scope of any release language to ensure they opt-out or exclude themselves before any court ordered deadline if it implicates their non-US claims. Efforts to incorporate the tracking of US class actions into investors’ governance policies will ensure they reap the benefits from the information that such cases provide while also protecting existing and potential claims outside of the US.