The topic of shareholder class actions is a controversial one. Before ShareSoc participates in any such actions, on behalf of its members, we therefore wish to obtain the views of our membership on this subject. We will shortly poll all our members, including associates, to ask your views. If you would like to cast a vote, and receive the other benefits that ShareSoc offers, but are not already a member, you can join us here: www.sharesoc.org/membership/ The poll will be e-mailed to our members on 18th July, so please ensure you are signed up before then if you wish to have your say. We also welcome your comments on this blog post.
If the result of this poll is supportive of participation, ShareSoc’s board will decide on any particular actions that we feel it is in the interests of our members and good corporate governance to pursue, usually together with international partners and/or institutional shareholders.
What is a class action?
A shareholder class action is a legal suit where a number of shareholders join together to seek compensation for losses incurred as a result of actions or inaction by a company they are or have been invested in. Most often the legal action is taken in the USA, where a) legislation protecting shareholders is more rigorous; b) more lawyers are prepared and able to pursue such cases on a “no win, no fee” basis, meaning plaintiffs take no financial risk themselves; c) defendants costs are not recoverable from plaintiffs, so plaintiffs do not run the risks of being liable for those costs. Hence such cases most usually concern multinational companies. NB: there is no such thing as a “class action” in English law, but there is a rarely used concept of “Group Litigation Orders”.
Arguments in favour of pursuing class actions
The primary argument in favour of pursuing such actions is that they are one of the few ways of holding errant managements to account and improving corporate governance. Clearly they can also result in current and previous shareholders that participate gaining some restitution. ShareSoc itself may benefit financially too, by taking any small share of any awards that are made. Any such financial gains would improve our ability to support and broaden our membership – remember that ShareSoc is a not-for-profit organisation. Details of any such financial participation by ShareSoc would be provided to participating members in each such case.
Another argument in favour is that if we do not participate our members might lose out if other shareholders do pursue such an action and succeed.
Arguments against shareholder class actions
There are two principal ethical & practical arguments against pursing such actions:
1. Effectively, such suits could be considered as shareholders suing themselves, as any restitution must come mainly from company funds! It is possible that some recompense can be obtained directly from management, but in most cases settlement of such claims is likely to be covered by insurance against such an eventuality that their employer provides. Nevertheless, simply the fact of having to account for their behaviour in court, and the reputational impact thereof can act as a deterrent against bad behaviour.
What actually makes matters worse for current shareholders is that previous shareholders may participate to recoup historic losses, meaning that funds can be transferred from the company which existing shareholders own, to past shareholders.
2. Inevitably legal fees in such cases will be high, and some proportion of any settlement obtained will end up in lawyers’ pockets. Of course, this means that US legal firms in particular are keen to encourage such actions. Hence, rather than shareholders solely benefiting from any company funds they succeed in extracting, some proportion of those funds end up with the lawyers, whilst the value of the company assets that shareholders own may be reduced by the full amount of the settlement.
I’ m supportive of Share Soc participating in class actions, however I have some reservations . Firstly , it should have members that are shareholders and agree to Share Soc taking action , preferably it should take action on their behalf . There may be situations where there are members both for and against taking action and while following the majority vote may seem more opportune , I think the principle of Share Soc supporting the small shareholder should be followed and supported, even if some members may disagree ..
I support class actions by groups of individual shareholders against Auditers or diectors who are not indemified. I do not support class actions against the company in which a share is held.
Re Paul Greenwood’s comment, it is unfortunately rarely possible to take legal action against the directors of a company while not including the company in the action. This question has come up repeatedly in the past in my involvement in shareholder actions such as the RBS one.
Roger Lawson
Generally speaking class actions are a deterrent to sloppy or wrongful corporate behavior and should be pursued vigously
The article states “Hence such cases most usually concern multinational companies”. This is not the case in my view.
A Class Actions is available against any company who has shares or bonds or Options etc i.e. a security or derivative listed on any US Exchange. It could be a small US company or a foreign company but not necessarily a multinational – see below. (A foreign company would typically have a ADR listed.)
Class Action compensation can come from the auditors – see below.
For example Lernout & Hauspie, a Belgian company and not a multinational, collapsed in late 2000. A Class Actions was instigated against its auditors KPMG and in late 2004 $115,000,000 was awarded as a result of court action to those damaged who had bought shares or traded options in the company.
Some other points:
– it can take years to get a result
– typical Class Action compensation is a small percentage of the loss
– those damaged can make a claim for a period eg 6 months after the Court has awarded a sum in damages.In the above case judgement seems to have been made in October 2004 and anyone eligible could participate if acting before 31 March 2005.
– the application process to join a Class Action is very simple. No significant costs should be incurred by anyone participating in my view and anyone with their contract notes or trade confirmation can do the paperwork oneself
– compensation is only available to those who traded the security within a court-defined period, but this often covers several years.
– it may be possible to make a Class Action claim on Canadian companies in a parallel situation
regards
Michael Stern
If against directors yes,if against the company of which you are a shareholder,no.
Let me declare an interest. I am a solicitor who conducts litigation, including group litiigation, for the private investor and SME.
Broadly speaking the purpose of civil litigation is to redistribute assets according law, rather than the way the defendant wants them distributed. This is true of all kinds of suit, not just class actions. The volume of litigation in the Uk has declined dramatically over the last 20 years, and continues to fall because our system is tilted against the small business and private citizen. The result is that banks, insurers and other big defendants have ignored their legal responsibilities with impunity.
In a world where the party with the deep pocket has the upper hand, a class action is a way to redress the balance. So yes – go for it!
Robert Morfee
I agree in principle, but see some problems:
1. Enough shareholders must be involved to pursue the action without excess individual cost
2. ShareSoc must have someone to ‘take charge’, able to devote quite a bit of time.
On further consideration,I would say I am only in favour of it where it is against the directors or possibly senior employees who were thought responsible for the actions that lost shareholders value. Eg.In the case of RBS and the other banks that collapsed in 2008 the directors could surely have been sued for trading whilst insolvent,which they clearly were at the time.This,could have resulted in getting repaid the bonuses that were paid out on false profits,at least ,amounting to 100s of £millions.
I would be strongly against suing companies for losses incurred,and although on occasions it might be a profitable gamble.Overall it will be very bad for us as shareholders,it will make companies risk averse,it will make them easy targets of unscrupulous lawyers,presumably we’ll get the pests texting and cold calling us day and night,it will take up large amounts of management time and money which will all be paid for by us shareholders.
I agree with Barry. Ideally a group should form itself into an entity which has a committee, good leadership and pooled funding. They should agree to act together, to prevent the fainter hearted being picked off by the defendant and so as to be able to do a single deal to settle the whole claim (well over 90% of claims in the High Court settle out of court on agreed and often confidential terms). Personally, I like to set them up into a Special Purpose Vehicle, independent of the legal team, to run the case on a businesslike basis. I find that works.
Robert Morfee
Yes, Sharesoc should participate. Firstly, it is central to the objective of Sharesoc in representing and supporting personal investors;
Secondly, it will add credibility and weight to Sharesoc’s views and stance on issues; Thirdly, I would expect it to help drive recruitment.
Regards, Maddox