Commentators in the UK have expressed concern that the advent of substantive securities litigation in this jurisdiction may not be wholly in the interest of investors. They fear that it may lead to an American-style class action system and the type of unmeritorious claims that are perceived to dog the US system. This, they say, could result in an ‘overhead’ on the general conduct of business by publicly listed companies.
In fact, the statutory causes of action through which listed companies can be held to account by their shareholders (section 90 and 90A of the Financial Services and Markets Act 2000) have been on the UK statute books for some time. It is only as a result of case law in the Supreme Court of the United States, which restricts the actions that can be brought in the US, that securities litigation is now taking place in a substantive way in the UK.
Further, section 90 implements the European Prospectus Directive, which gives investors a right to compensation where they have lost money as a result of investing pursuant to a prospectus that is misleading or omits necessary facts. Likewise, section 90A implements the European Transparency Directive. This gives investors a right to compensation for losses arising from relying on publications by listed companies (such as annual accounts and interim statements), which dishonestly contain misleading statements or omissions. It has never been seriously suggested that investors should not have these rights to compensation or that listed companies should not be held to account for these kinds of wrongdoing.
Of course, the availability of securities actions only serves to promote good corporate governance. It is inevitable that where there are grounds for securities actions there will be related corporate governance failures within the company itself.
The volume and merits of claims
Unlike in a US securities class action, all of the group litigation procedures available in the UK (outside of the collective redress procedures in follow-on competition claims) are ‘opt in’. They require each claimant to issue proceedings in its own name and to bear the risk of having to pay the defendant’s legal costs if the action fails.
This means that every claimant will carefully consider the costs and risks of the claim and is unlikely to enter into any litigation that is merely speculative. Further, the scale of securities actions means they will often be funded by third party funders and have the benefit of insurance against having to pay the defendant’s costs. Third party funders and providers of after-the-event costs insurance carefully consider the merits and risks of any litigation they become involved in. They will not support unmeritorious or speculative actions, not least as it would be damaging to their business to do so. Therefore, even where the claimants bear no direct cost or risk themselves, the proliferation of unmeritorious claims perceived in the US system will not occur in the UK.
Securities litigation will inevitably involve large numbers of claimants, as wrongdoing by publicly listed companies is likely to affect a large number of investors. Each of them will have the same cause of action, which should be tried in one piece of litigation. The volume of claimants does not bear any relationship to the merits of the claim being brought.
The group litigation procedures that the courts have put in place, (which are also used outside of the securities litigation context), help to provide access to justice for investors with smaller losses who would not otherwise be in a position to risk the potential downsides of litigation. They also give a measure of certainty for the defendant as to the scope of its liability, by requiring all claimants to issue their claims within one proceeding. This allows the defendant to resolve the issue in one proceeding and avoid a proliferation of different claims in different courts. Group litigation also allows a significant number of cases to be managed in a time and cost efficient way, which is a benefit for both the claimants and defendants.
Shareholders “suing themselves”
It is often argued that the bringing of securities litigation inevitably results in the devaluation of the shares in the listed company and is therefore self-defeating for a claimant. This view is misconceived for a number of reasons:
- Many claimants will have sold the relevant shareholdings, thereby both crystallising their loss and putting them in a position where they are not exposed to future movements in the company’s share price. Institutional investors with a fiduciary duty to their beneficiaries can only gain from the recompense for their losses available from securities actions.
- Where there has been wrongdoing in a company, there is frequently additional money available other than from the company’s assets that may be used to compensate investors, typically from directors’ and officers’ insurance policies.
- Experience in the US and in Australia suggests that it is market knowledge of the wrongdoing and likelihood of litigation that negatively impacts share price. Shareholders’ losses are therefore effectively priced in by the disclosure of the harmful events within the company. Once the securities litigation is concluded, frequently by settlement agreed by the company, there is often a positive moment in the share price. This reflects the certainty brought about by the conclusion of the litigation, management time and effort being focused on the company’s core business and the elimination of the risk which was brought about by the wrongdoing that was the subject of the litigation.
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