A key element of ShareSoc’s mission is to ensure fair treatment for individual investors. We often campaign when investors are misled, or their funds are misappropriated.
There are two principal outcomes we look for:
1. Redress for losses that should not have happened.
2. Punishment for those that mislead investors or misappropriate funds, to deter others.
This article focuses on the first of these desired outcomes, although we are equally concerned about both.
Wherever losses are recoverable we want to see that happen. The question we face, however, is how to achieve that outcome.
Generally, legal pressure will be required to obtain redress. In many instances when we investigate the feasibility of a legal claim by shareholders, we find ourselves faced with a dilemma. What is the source of the financial redress? If the answer is “the company”, then we’re faced with a problem. Unless the company can call on insurance to cover the settlement, then any redress to shareholders comes directly from shareholders’ funds. The concept of a shareholder suing his / her own assets is circular and achieves nothing (other than a healthy return to the lawyers and funders involved).
Historic cases
ShareSoc has, so far, been involved in a number of cases of actual or potential shareholder litigation, including Globo, Sirius Minerals, Redcentric and the Woodford Equity Income Fund. In the latter two cases, the FCA intervened and sanctioned class redress schemes. Neither scheme resulted in adequate financial redress for shareholders.
The possibility of FCA intervention is a disincentive for potential litigators, as it may mean that money and effort expended on shareholder litigation is wasted. On the other hand, it is likely that without private litigation and ShareSoc campaigning, the FCA would not have been forced to act.
The Redcentric case exemplified our concerns over circularity. To meet the settlement demanded by the FCA, Redcentric placed new shares into the market, thereby diluting current shareholders for the benefit of former shareholders. A negative outcome for shareholders as a whole when legal and placing costs are taken into account. Fortunately, we had not recommended private litigation, due to our concerns about how a settlement would be met.
The Woodford case was a different story, since redress was not sought from the fund itself but from the fund’s Authorised Corporate Director, Link Financial Services Limited – a third party.
In this case, the (wholly inadequate) redress did result in a net gain to affected fund holders.
Home REIT
We have been tracking closely the sorry saga of Home REIT, where alleged malfeasance by various parties appears to have resulted in misappropriation of hundreds of millions of pounds of shareholder funds. You can read more about events at Home REIT here.
In late 2022, law firm Harcus Parker launched a no-win-no-fee claim against the company on behalf of shareholders. ShareSoc considered whether we should endorse the claim but couldn’t obtain sufficient assurance that the claim wouldn’t be met out of shareholders’ funds. We believe that the REIT’s manager, Alvarium, its directors and insurers should be the target.
Our concerns were validated by a recent statement from Home REIT, in which they say:
“Corporate costs (excluding the Investment Manager fee) paid in the period from 1 September 2023 to 16 August 2024 were approximately £17.1 million, largely attributable to exceptional levels of legal, audit and other professional fees (including in respect of the financing), and director and officer insurance. These fees include approximately £5.0 million of legal fees, a significant proportion of which has been incurred to defend threatened litigation from current and past shareholders. Corporate costs are expected to remain at elevated levels over the next 12 months.” [our bold]
And:
Shareholders should be aware, however, that the ability of the Company to make distributions to Shareholders may be constrained, in whole or in part, whilst the Company, and the Company’s directors in office at IPO, face potential shareholder group litigation and an FCA investigation.
These comments make it clear that the combination of the FCA investigation and shareholder litigation are damaging to Home REIT’s current shareholders, who are already the victims of the debacle.
Home REIT has recently announced a potentially positive initiative:
As previously announced on 5 March 2024, the Company intends to bring legal proceedings against those parties it considers are responsible for wrongdoing. To that end, the Company has issued pre-action letters of claim to Alvarium Fund Managers (UK) Limited (its former alternative investment fund manager), AlTi RE Limited (its former investment adviser’s principal) and Alvarium Home REIT Advisors Limited (in liquidation) (its former investment adviser).
Harcus Parker have now also confirmed on their website that the defendants in the negligent misrepresentation claim and statutory securities claims under FSMA 2000, include “Home REIT, the company’s directors, its former investment adviser (Alvarium Home REIT Advisors Limited), former alternative investment fund manager (or “AIFM”) (Alvarium Fund Managers (UK) Limited), and others in the AlTi Global group”. These initiatives have the potential to restore some shareholder value by targeting those alleged to be responsible for its destruction.
Argo Blockchain and DGI9
Two further cases have recently come to our attention. The first concerns Argo Blockchain, where US law firms have initiated legal action. In addition, action is being considered against Digital 9 Infrastructure (DGI9). In both these cases, we are concerned that the legal actions undertaken ostensibly in the interest of shareholders may actually harm those interests.
We would like to see the DGI9 board consider similar action to that which Home REIT’s board is undertaking against the former investment manager, on behalf of the company’s shareholders. It may be the case that the threat of legal action against companies may encourage boards to pursue their own actions against responsible parties, which would be a positive.
Conclusions
Based on these various cases, we conclude that FCA intervention may be unhelpful, even harmful, unless it encourages boards to seek redress from parties responsible for wrongdoing or incompetence.
Where the FCA is considering intervention, this should be announced ASAP, so that claimants and current shareholders are aware that the FCA may press for a settlement.
ShareSoc will continue to review each case on its merits and seek redress where it can be achieved without damaging the interests of shareholders.
We encourage boards to act themselves to seek redress for shareholders against parties responsible for illegal (?) value destruction in the unfortunate cases where this occurs.
DISCLOSURE: The authors of this article may have an interest in the Home REIT and DGI9 claims.
Post Date: September 25, 2024
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Surely Home REIT has insurance and D&O cover for this?the legal cost are a cash flow item, but I am not clear why they are a P&?L item? Surely part of costs will be recovered and at some stage the insurers may take over other running of the cas?
Hi Cliff
Home REIT published its long-delayed annual report for 2022 on 11th October this year.
In the “Principal risks” section, it mentions “Risk of potential litigation from shareholders or a group action against the Group”. In “mitigations” it mentions “The Board has appropriate D&O insurance in place”.
The company is holding a shareholder webinar on 24th October. In that webinar, I will ask whether the company expects to be able to recover some or all of the legal costs it has and will incur from the D&O insurance and if not, why not?
Best
Mark
I have just listened to Home REIT’s presentation regarding its financial results. I asked whether D&O insurance could be expected to cover legal costs. The Chair could not provide a specific answer, for commercial reasons but stated that shareholders should not expect the insurance to be a “silver bullet” against legal costs.
I conclude that Harcus Parker’s action is damaging to current shareholders. Subsequent comments by the Chair in answer to other questions reinforce this view.
The RBS Rights issue is the exception because the priginal shareholders had after the govt lent enormous amounts of money to, guaranteed even more AND bought 75% of the newly issued shares the existing rump of the original owners had gone from 100% to 25%. So their claim would be paid fmade up of 75% from the Govt and 25% from themselves.
Better to submit reasoned shareholder resolution’s to remove a swathe of board Directors which focuses their minds that the Directors might be out of a hob and unemployable in their chosen industry.
A Directors only fear is being fired and thus losing that power and money.
The proposer can always let the resolution run until the vote (they will be pressured to withdraw it at any time and at all opportunities!)
You have omitted the action of members in the case against Lloyds for the non disclosure of material information in the takeover of HBOS when as a committee member we spent £30m and lost due to Gordon Brown etc giving permission for that non disclosure. Lloyds came back and sought their £30m expenses. The Lloyds TSB share price peaked at £10.30 which equates to £1.80 after dilution, which should be compared with the current price of 54p!!!!!!!!!!!!
Good point, Tony. Note that the RBS (now NatWest) and Lloyds litigations were instigated before ShareSoc was founded. The Lloyds case further illustrates the perils of entering into a litigation.
The purpose the article was to illustrate the issues and dilemmas shareholder litigations raise. A particular issue is that when past shareholders in a company sue, current shareholders may suffer. Creative thinking is required to obtain fair redress – sadly, it’s not easy!