Collective bargaining

During the past decade, European companies that have fallen foul of corporate governance or accounting rules have increasingly been hit harder and more frequently in the US than in Europe. One has only to look at the massive US$1.1bn legal payout handed down to Dutch retailing giant Ahold in 2005 to compensate shareholders for accounting irregularities in its US subsidiary to see how punitive the US legal system can be.

According to a November 2009 Advisen report entitled "European D&O Insurance Market to Benefit from Governance and Legal Reforms", claims against European companies doing business in the US have risen sharply – up from 10 in 2005 to 37 in 2008, and to 23 in the first half of 2009 alone. Of the 113 securities suits filed against European companies in US courts since 2005, 54 are securities class action lawsuits. The average settlement is €55m. The report also found that, as a result of the increased perceived threat of US exposure, the European D&O insurance market has grown by 7.9% at a compound rate between 2004 and 2008, due to increased product take-up rather than to rate increases.

However, the report also found that Europe is gaining ground. Since 2005 there have been 32 large securities suits filed in European courts against European companies with an average settlement per case of €117m. Of these, 18 were filed in the first half of 2009 alone and 29 were collective action suits.

And there could be more if the European Commission gets its way. In November 2008 the European Commission set out its proposals for a system of collective redress for consumer complaints in a green paper. Among the proposed options, the Commission said each member state could be allowed to develop its own system of collective redress for consumers, possibly subject to a set of minimum benchmark standards and on the proviso that domestic procedures would be open to claimants from other European Union member states. Other options would include a mix of non-binding recommendations or binding European directives to expand the scope of small claims procedures to mass claims and to raise consumer awareness of collective mechanisms, or even the introduction of a “judicial collective redress procedure”. Only 14 of the 27 EU member states have procedures in place to handle collective redress. Those EU members that do not have systems for collective redress are typically the former eastern bloc countries, though both Belgium and Italy are included in that number.

Much of the detail of the proposals is still undecided. Lawyers say that the Commission is trying to form a general consensus on how to proceed. A key stumbling block is whether claimants should “opt in” to such actions, or whether – as is the practice in the US – they need to “opt out”.

The Commission’s proposals have their fair share of supporters and critics. Among the latter, the Association of British Insurers, an insurance lobby group but also a major institutional investor, says that it is “seriously concerned that the Commission is considering potential changes to the European regulatory framework based on limited evidence that a problem exists for consumers to obtain redress in cross-border cases”. The Federation of European Risk Management Associations (FERMA) is also against the move. It wrote to the Commission that “FERMA is against the introduction of consumer collective redress” and that it “remains deeply concerned that such redress would simply provoke US-style class actions with all the shortcomings such actions have given rise to.”

“Only 14 of the 27 EU member states have procedures in place to handle collective redress

Many dispute this, saying that the European Commission’s plans to enable collective redress will not result in an increase in US-style claims because, unlike in Europe, the ability of the US Plaintiff Bar to charge contingency fees (where the lawyers take a share of any damages award) and the lack of any “loser pays” rule drives class action claims. Furthermore, the likelihood of an “opt in” system rather than the “opt out” system used in the US would make it more difficult to form a large class of claimants.

“It is highly unlikely that the Commission’s proposals could result in a US class-action system,” says John Batch, senior vive-president of the Finpro practice at Marsh. “For that to happen, you need two things: legislation in place to allow a class action to be carried out, and some form of litigation funding that would enable an action to take place, and no European country has both of these in place.”

Some countries are tougher

Yet, even without the Commission’s encouragement, some EU member states are already prepared to hold company boards more readily to account on behalf of investors and consumers. Insurers and D&O experts say that Germany is one of the most challenging European jurisdictions for directors as German D&O claims account for a large proportion of European D&O claims activity. “Part of the reason for this,” says Tristan Hall, solicitor in the international risks and reinsurance team at law firm Reynolds Porter Chamberlain, “is that the German board structure means the supervisory board is under a duty to pursue claims against members of the management board where they are at fault.”

In October 2009 a group of insurers, led by Allianz, agreed to pay €100m to German electronics firm Siemens following claims against former board members involved in a bribery scandal. Weeks later insurers reached an agreement on the D&O payout with dotcom casualty Constantin Medien (formerly known as EM.TV) whose new management and insurers had been demanding millions of euros from a total of 20 former executives and supervisory board members since 2003.

The Netherlands also appears to be prepared to make greater use of collective redress. On 29 May 2009 a Dutch appeals court ordered oil giant Royal Dutch Shell to begin payment of US$381m plus interest to a foundation representing a group of institutional investors from 17 European countries, plus Canada and Australia, thereby officially approving the largest securities fraud settlement ever reached in Europe.

“In Europe class actions tend to be more consumer-oriented than investor-friendly

The binding declaration was issued by the Amsterdam Court of Appeals, which in April 2007 agreed to serve as a forum for the investor group and Shell to work together in reaching a settlement of securities fraud claims stemming from the oil giant’s inflation of its proven oil and gas reserves by more than US$100bn during the years 1997-2003. Under a relatively new statute never previously applied to a securities case, Dutch law allowed the Amsterdam appellate court to accept a collective resolution as long as both sides agreed, even in absence of a civil lawsuit.

Jay Eisenhofer, co-managing partner of Grant & Eisenhofer, the US law firm that acted on behalf of the investors, calls the settlement “historic”, adding that “it is important that investors have a proper mechanism and forum for pursuing securities claims in European courts. The Amsterdam Court of Appeals has done a tremendous service for advancing shareholder rights in its handling of the Shell case. This was a uniquely European resolution in the context of a securities fraud, but one that can present huge implications in other disputes going forward.”

The arrangement was first used in 2008 in a settlement between shareholders and Swiss insurance company SCOR Holding after the presiding US District Judge ruled that foreign investors could not be included in the class. After reaching a US$84.6m settlement in the US over claims that SCOR’s predecessor (Converium) hid financial woes from investors during an initial public offering (IPO), both SCOR and Zurich reached separate settlement agreements with foreign investors. Under the terms of the plan, SCOR agreed to pay US$32m to resolve claims by foreign investors who purchased stock on the Swiss exchange. In addition, Zurich agreed to pay US$18.4m to resolve the foreign claims case brought before the Amsterdam Court of Appeals in the Netherlands.

However, while some may welcome the growing willingness of some European courts to hear class investor action cases, several point out that punitive awards are often much less than in the US and that the costs borne by claimants are high – particularly if they lose. Furthermore, class actions in Europe are generally more geared towards consumer – rather than investor – protection.

And some are not quite worth the effort. In the UK, for example, the only consumer body able to bring class actions there has criticised the system for being costly, time-consuming and offering little reward. In 2007 Which? brought a collective action against sports retailer JJB Sports after the House of Lords upheld a claim made by the Office of Fair Trading (OFT) against the company for selling overpriced replica football shirts between 2000 and 2001. In January 2008 JJB agreed to pay out more than £18,000 to those who bought the shirts, equalling just £20 per consumer, so long as they could provide proof of purchase. Only 500 individuals were named in the action, despite a high profile media campaign. Speaking less than a year after the case in December 2008 Which? head of legal Deborah Prince said that it was unlikely that the consumer champion would pursue such a case again after dedicating 20% of her workforce to a class action against sports retailer JJB Sports and amassing significant legal costs.

“There is a realisation in the US that foreign investors can – and should – bring their cases before courts in their own countries,” says Felix Dasser, partner at Zurich-based corporate law firm Homburger. “The problem in Europe though is that class actions tend to be more consumer-oriented than investor-friendly. While it is not impossible for investors to get legal recourse in Europe, it is difficult and the rulings in these cases could make it more difficult – and less attractive – for non-US investors to bring claims in the US, or for US lawyers to include them in their own class actions.”