What are the main factors driving growth for securities litigation globally?
In terms of securities class actions, the ability to recover investment losses through a settlement process is well established, particularly in the US. But the surge of global investor actions has largely been accelerated by a US Supreme Court decision in the 2010 Morrison v. National Australia Bank case. This decision essentially excluded US investors and non-US investors from participating in class actions in US courts, in cases where securities have been acquired on non-US exchanges.
The response from global institutional investors was to seek legal redress outside of the US, frequently in jurisdictions where the stock was primarily listed. What has followed are jurisdictions adopting mechanisms to facilitate a restitution process and, as a result, as these markets continue to mature we have seen the volume of litigation rise, notably in jurisdictions like the UK, Germany and the Netherlands.
Another factor, in terms of growth, is the implementation of the EU Representative Actions Directive, which will eventually be adopted by all 27 member states. This will provide additional avenues of shareholder protection for newer jurisdictions.
It is also worth noting that this growth and these developments are not simply limited to Europe; litigation across the APAC region continues to rise, spearheaded by Australia, which has had a class action framework in place since the mid-90s. There are several cases pending in Japan, which continues to be an active jurisdiction in APAC, while at the same time China, Singapore, and New Zealand, are all making good progress as they move towards improving legal redress options for shareholders.
We have seen a lot of legislative changes that have resulted in this growth. But I think one of the other significant reasons for growth outside the US, particularly in the last five or six years, is that investors are now becoming increasingly activist on ESG issues — aiming to protect company value and, ultimately, their long term investments.
While all securities litigation has some kind of governance failings at its core, many of the cases outside the US are not only high profile, but are often driven by some kind of ESG failing — whether that be accountancy fraud, bribery, corruption, or greenwashing. The good news from an investor perspective, is that there are now more options available to participate in some kind of litigation process, no matter what the motivation might be.
It could be a straight monetary recovery, or as I mentioned, pursuing litigation to drive corporate governance changes within a company.
The clients that we have welcomed at Broadridge have all emphasised the need to ensure that this space has comprehensive coverage, coupled with expertise, for investors to have the ability to review the litigation options from an informed standpoint.
How would you say this growth and these developments have impacted the way investors outside the US view litigation?
Because of the globalisation of investments, I think it is inevitable that investors will be impacted by securities litigation globally. We have a varied client base on both the asset owner and asset manager side. Some have historically been very active in non-US securities litigation, while others have been a little bit more cautious in their approach.
But I do think the mindset is changing slowly. For example, a conservative pension fund or asset manager who has traditionally been litigation-averse, may now be starting to consider the options put forward, and carrying out an initial due diligence on what options are available to them.
I think the more high profile the case, the more likely internal stakeholders will have an awareness. Institutional investors are certainly looking at potential litigation in more detail, and I think knowing where you will be impacted is half the battle. Having this information available well in advance of any deadline to participate is vital.
Typically, we do not tend to see just one law firm bringing a claim against a company, but a number of competing actions, not all of which are widely publicised. So having information on all the available options is really important, before that decision to participate is made — whether that be to join the litigation or indeed, not to join the litigation.
I believe there is an increased awareness of potential litigation opportunities outside the US, particularly in the more established jurisdictions like Germany, the UK, Australia, and the Netherlands.
The big driver for any investor when looking at potential participation is risk versus reward.
In terms of facilitating investor participation, a real game changer in this space has been access to litigation funding. Litigation funding is now commonplace, particularly with opportunities outside the US, whether that be US law firms establishing practices outside the US, European-based law firms offering internal funding structures, or partnering with a third-party litigation funder.
There is greater access to justice in terms of propelling these cases into real recovery opportunities, and, from an investor perspective, litigation funding reduces the risks and burdens, providing more options for investors to seek legal redress.
For litigation outside the US, what do investors need to be aware of?
Each investor will have their own internal policy of what criteria need to be satisfied in order to proceed with potential litigation or participation. For some, it could be purely based on whether an internal materiality threshold has been met.
For others, it could be a decision based on who the company is or if litigation could potentially damage, or pose a risk to, a long term relationship. Though each institutional investor decision making process is unique to them, there is a lot of commonality that we see when assisting our clients in navigating some of these complexities.
Aside from understanding the legal claim and the drivers behind the litigation, understanding the jurisdiction and the participation requirements is also essential — is litigation funding available? Is there any chance we could be on the hook for costs? How many resources and how much time do we need to allocate to this? Is litigation even the right option for us? Is there a mediation option that is available?
There are more likely to be multiple case proposals for an investor to consider, and more questions to be asked on how these proposals differ.
Participating in litigation is not a decision that is taken lightly, but I believe the opportunities that are now available to investors should be viewed as a positive step towards legal and financial restitution. By weighing up potential risks and opportunities, investors can now have the ability to make well informed decisions, echoing their internal policies and safeguarding their long term investments.
Has the role of intermediaries changed, and if so how?
Because of the evolving landscape of securities litigation, and with awareness and informed decision making becoming ever more important for investors, this active approach now being taken by some investors can be a real challenge for intermediaries to keep on top of. In the asset manager space, for example, historically a class action service was seen as ‘nice to have’. But the increased emphasis on investor stewardship has moved the needle for asset managers.
The impact for the investment community of not participating in securities litigation is more than just leaving potential money on the table. Increasingly, there is the need for the asset managers to be accountable to their internal stakeholders.
If, for example, a strong case is being presented by a law firm, it is backed by litigation funding and, on the face of it, there appears to be no downside to participating, it could be argued that active steps should be taken to ensure that at litigation that these options are at least being reviewed.
In terms of global custodians, many of which have been offering some kind of US settlement process to their clients for many years, a class action solution was seen as a value add, rather than an actual core service offering.
But now, this is not the same proposition as it was a few years ago. Most global custodians are now reviewing their internal service offering against what is required by their clients, and are looking to fully outsource to specialists like Broadridge who have the technological capabilities and industry expertise to be able to handle the entire process on their behalf.
What does the future hold for securities litigation?
Overall I think there is little chance of activity slowing down. Considering the US, for example, we are seeing a rise in the volume of cases that are being filed year-on-year, we are seeing a variety of different cases coming through the courts relating to crypto currencies, data breaches and Covid-19. We are also seeing more complex settlements, and particularly related to the non-securities cases.
If we look outside the US, the class action landscape is going to continue to expand with diverse investor involvement. The key to success in this dynamic environment is staying informed and understanding the global impact of securities litigation claims, as well as leveraging the expertise of professionals in the field.
Investors will have the ability to navigate the options available to them and, more importantly, they will be able to make decisions that align with their best interests.
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