Investors lose right to damages
September 27 2010, 3:26 pmBy Sophia Grene
Published by The Financial Times: September 26, 2010
Foreign investors in companies sued for corporate misbehaviour in the US could be penalised by a recent Supreme Court ruling.
Pension funds in Europe, for example, will no longer be entitled to compensation ordered by the US courts from companies found to have misled investors – if their shares were bought outside the US.
The June ruling in Morrison v National Australia Bank established that claims brought in the US courts by foreign investors who purchased securities in foreign companies on foreign exchanges (known as F-cubed actions) would not be allowed to proceed.
Class actions services specialist Goal Group predicts £1.4bn ($2.2bn) will be recouped by UK pension funds through US class action lawsuits connected to 2008 credit crunch losses.
Investors who bought shares on US exchanges will still be able to claim their share, but otherwise they may find they are debarred from receiving compensation. If they still hold the shares of the delinquent company, they will effectively be bearing the cost of compensating other shareholders.
“Over the past 10 years, US plaintiff firms have been coming to the UK to try and drum up interest” in joining US class actions, said David Greene, a partner at Edwin Coe, a London law firm that pursues security class actions. In many cases, these were F-cubed actions, where it was not clear they could be heard in US courts. “A lot of people were saying ‘why are you doing that?’ [of the F-cubed actions] and the result was that the Supreme Court has effectively chucked them out,” he said.
UK pension funds based outside London led the trend for participating in class actions, said Mr Greene. The West Midlands Pension Fund, for example, has recovered more than $900,000 to date through its involvement in class actions against Cable & Wireless, AT&T and Royal Ahold, among others.
Similar redress for investment losses attributable to corporate misbehaviour will no longer be available unless the pension funds have bought their shares in the US.
“The point is now being made that if you want to get the protection of the American litigation system, you have to buy on a US exchange,” said Mr Greene.
The long-term effects of the ruling are not yet clear, with some commentators predicting a rush of litigation in European courts.
“European investors have become accustomed to being able to recover under US law when they have lost money. Having had a mechanism of recovery, they are going to be more frustrated now that it has been removed,” said Jay Eisenhofer, managing director of Grant & Eisenhofer, a US law firm specialising in securities litigation.
Turning to European courts may be hard work, however, as many jurisdictions are not particularly shareholder-friendly, and litigants are not entitled to pick and choose which jurisdiction they sue in, he cautioned.
The UK and German legal systems, for example, are less attractive to claimants than the Netherlands, he said.
Investors in various jurisdictions around the world have historically been reluctant to use litigation for this purpose, but this attitude is changing, according to Stephen Everard, managing director of Goal Group.
“Litigation is becoming a really global phenomenon. I do a lot of work in Singapore and Hong Kong, for example, which are not typically litigious societies.”
Copyright The Financial Times Limited 2010.
