The Pros and Cons of Shareholder Litigation

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.