Pension funds and other institutional investors face an uphill challenge when it comes to managing their investor action responsibilities.
With cases continuing to proliferate across an ever-growing number of jurisdictions, European institutions have their work cut out in the rapidly changing world of securities litigation.
It is no longer a landscape entirely dominated by US class actions and US firms. Since the landmark Morrison ruling over a decade ago, there has been a steady stream of jurisdictions outside the US implementing their own procedures for collective redress, all of which are relevant to internationally investing institutions.
Each jurisdiction has naturally taken its own path to investor restitution. Each with its own expert bar, approach to funding and costs, loss methodologies and legal procedures. And although US reports talk about “an explosion of US-style class actions in Europe”, this is not what we are seeing on the ground for investor claims.
Instead, most jurisdictions have followed an opt-in, rather than an opt-out collective redress model. So rather than already being part of the class action passively through historic investments, investors must choose whether or not to participate before an action commences. Increasingly they must also choose between multiple competing actions. This is fundamentally different to the US class action process and requires a new approach to assess whether participation and recovery is appropriate.
This choice to participate is legal, rather than administrative. Whereas an institution may have relied on a custodian or notification provider to manage US class action reclaims, the approach required outside the US is entirely different. Understanding the particular risks in each jurisdiction and how to mitigate these is vital.
All this is to say that the due diligence required to assess and join opt-in cases needs a whole new skillset and level of commitment, but both the level of likely recovery and the potential to improve the long-term prospects of investments means participation can absolutely be worth the extra effort.
An evolving approach
I have spent most of my career working with asset owners and managers and, during that time, I have observed two key things. First, they are not afraid to adapt. But crucially, they want to be in the driving seat on anything that may impact the long-term interests of their beneficiaries.
Pension funds were quick to recognise the value of class and collective actions. Back in 2004, our first clients were very much ‘early adopter’ pension funds, keen to recoup any losses from corporate mis-selling and fraud. They are still with us today, having recovered many tens of millions for their beneficiaries.
Their experience has directly led to this becoming mainstream. In the last five years, we have seen the more responsible asset managers become active in this space. Initially encouraged by their asset owner clients, many now recognise that investor litigation, though not the first choice, is an inherent part of responsible investment and stewardship.
There has been a notable shift in the reputational dynamic too through this period; where a decade ago US class action participation was termed by some as ambulance chasing, participation in collective redress internationally today is seen as part of operational good governance.
To be clear, this is not to say that investors should join every case. One feature of the new landscape is that many cases are on offer, some marketed widely, others not. There is no public notice requirement for most jurisdictions and the best cases are often not the highly marketed. Understanding all options and proper examination of all proposed offerings is crucial.
With this in mind, an ever-growing number of investors are looking beyond the US and seeking out specialist, non-US litigation support with an in-depth knowledge of jurisdictions to equip themselves to make well-informed judgements on which cases to join. Across the board, there is now clear recognition of the need for institutions to understand where they are impacted by opt-in actions and have an appropriate response – be that participation or not.
We have also observed more investors interrogating headline loss estimates for cases, recognising that a higher loss estimate may not necessarily mean a higher recovery.
The other dynamic that continues to grow is the collective power of investors as a force for good.
A key part of fiduciary duty is engaging with companies to encourage good corporate behaviour and strong governance practices, alongside seeking restitution for investment losses from previous malpractice.
There have been numerous examples recently where institutions have come together to challenge certain information being withheld from shareholders (Wirecard), allegations of bribery and corruption (Rolls Royce and Glencore) or the withholding of material information to investors (Volkswagen).
It should be stressed that the majority of these institutional shareholders are not ‘activist investors’, short-sellers or hedge funds, but conservative, cautious asset owners and managers with long-term investment strategies in what they were led to believe were honest and reliable companies.
In this sense, investor litigation presents a vital means for investors to hold companies to account and drive the quality of their investments in the long term. Being able to challenge poor corporate behaviour in this way truly underlines the power held by institutional investors when they come together to instigate positive change. But this trend also brings new considerations to light.
More recently, we have seen some participants branding a large number – if not all – cases as ESG, to make them more appealing to responsible investors.
Law firms and funders market a case as ESG-related based on their own proposed methodologies. Since ESG as a term is rather abstract, meaning different things to different people, detailed scrutiny needs to be undertaken in the context of an investor’s specific ESG beliefs and values, as well as other important factors such as jurisdiction, strategy and experience discussed previously.
But how do investors ensure that a case is ESG in more than just name only and fits with their stewardship goals? A robust and thorough due diligence process is the only way to be certain that a case has a clear purpose that is both simple, unconflicted and fits their broader responsible investment objectives.
The last 10 years have seen dramatic changes to the investor-action landscape and institutional investors’ response – and we don’t see any let up in the pace of development. Investors can expect more complexity, for sure. But with many opt-in claims already under way and likely to resolve, they will also increasingly reap the benefits of a much broader international system of investor restitution.
See the Class Actions guide with this issue of IPE
Caroline Goodman is founder and CEO of Institutional Protection