Investors in the scandal-hit German carmaker must make a choice between collective or individual action, or sitting out for the time being, according to Johan Polet and Jonathan Bakkers
The Volkswagen emissions scandal has hit many parties, from consumers to institutional investors. A similar situation arose following the recent Suzuki and Mitsubishi emissions scandals. With Volkswagen, a large number of affected investors have taken individual legal action against the German carmaker. A similar number of investors are trying to recover their losses by bringing class actions against Volkswagen.
It can hardly come as a surprise, then, that over the past few months Volkswagen class-action suits have mushroomed all over the world. Obviously, there are substantial differences between class actions and individual actions against Volkswagen. In fact, even class actions come in different varieties. As a result, there are more than a few litigation options available to, in particular, large investors duped by scandals. They are free to act entirely alone or to start – or join – a class action lawsuit.
Conversely, they may also opt to take a passive role for the time being. Pension funds would do well first to chart the numerous options open to them before setting sail or giving their asset managers free rein to join a class-action suit on their behalf.
Pension funds – more specifically, their administrators or asset managers – first need to decide whether they want to set out on a solo journey or join a cruise. In making that decision, they should ask themselves the more concrete question whether they really need to take any action immediately and, if so, where they have to, or can, take such action to seek compensation for their damages.
• Limitations of the US legal system. Most people will be familiar with the US system of class actions. Little surprise, then, that several class actions targeting Volkswagen have already begun in the US. As the American courts are reluctant to rule on mass damages which have a relatively limited connection with the US – one example is that the company’s stocks were not traded on a US exchange – most of these actions offer little solace to non-US investors.
• European alternatives. As a result, alternative solutions for handling global mass damages have sprung up to compete with the US class-action system. Many of these solutions are complementary to the US system. One well-known alternative is the Dutch Collective Action (Financial Settlement) Act (in Dutch: Wet collectieve afwikkeling massaschade or WCAM). The WCAM makes it possible for a settlement between Volkswagen and one or more parties representing the interests of injured investors to be declared binding on all parties.
Over the past few years, this system has proved instrumental in reaching worldwide settlements in similar cases. Two cases that come to mind in this context are the Shell Oil Reserves Settlement and the Financial Reserves Settlement relating to Converium, a Swiss reinsurer. Investors affected by the Volkswagen scandal in the Netherlands can enlist the aid of the Volkswagen Investor Settlement Foundation, which is seeking a settlement with Volkswagen.
The WCAM is complemented in the Netherlands by the option of bringing a ‘collective’ action before a civil court, as the Vereniging van Effectenbezitters (Shareholders’ Lobby Association) has done for the benefit of private investors affected by the Volkswagen emissions scandal. We should add that, for now, a collective action cannot lead to the award of damages. As a result, it can only be a first step towards compensation, which tends to take the form of a group settlement. Of course, this requires a separate action.
“Pension funds… first need to decide whether they want to set out on a solo journey or join a cruise. In making that decision, they should ask themselves the more concrete question whether they really need to take any action right now and, if so, where they have to, or can, take such action to seek compensation for their damages”
In Germany, too, a range of organisations have taken action; only recently a group of Volkswagen investors affected by the scandal, including the largest Dutch pension administrator APG, filed a claim with the Braunschweig court.
• Proactive or passive stance? What is the best approach for institutional Volkswagen investors to adopt? It important to know that in many legal systems there is no need for the injured investor to take proactive action by joining a class lawsuit in order to reap its benefits. Naturally, most class lawsuits will require the support of a sufficient number of injured parties for them to stand any chance of success, if only to provide enough funds to conduct the procedure.
Dutch law provides for an opt-out right in collective actions. This means that a group of injured investors are bound by the court ruling or collective settlement but that individuals can opt out of the class action, which removes any entitlement they have to a settlement or court award and renders them unbound by any court orders. Theoretically, any affected investor is free under Dutch law to await the outcome of the lawsuit. The WCAM regime also allows parties to opt out of a settlement declared binding by the Amsterdam Court of Appeal if the amount of the settlement is not to their liking. Naturally they will need to opt out in a timely fashion but, until they do, they are not required to actively participate.
• Conditions and restrictions. Many other countries have set up different regimes for class actions. Germany has an opt-in system to claim compensation for losses incurred by investors owing to incorrect or misleading information. As its name suggests, the opt-in regime requires investors to take action to participate in a lawsuit. In addition, participation essentially implies being bound to the outcome: all participants are bound by whatever settlement or ruling follows.
The only option to escape this fate is for more than 30% of the participants to sign an opt-out statement. In Germany, opting out does not mean individuals forfeit their rights against Volkswagen, but it does mean that they cannot participate in the group claim, causing them to lose out on any benefits (of scale) a group claim brings. In general, opting out and waiting for the outcome of a class action carries the risk of the right of action becoming time-barred. There is the additional risk that essential information about, for example, the progress of the settlement action could be overlooked.
Taking these possibilities and risks into account, any group of duped investors wishing to bring legal action would do well to seek advice on the various types of collective action, their differences and similarities and whether it might be more advisable to bring an ordinary lawsuit.
Each option requires thorough consideration. Pension funds should ensure that their administrators or asset managers study the following four key criteria in depth:
• How flexible is a particular type of action and if I opt for it, what alternatives do I lose?
• What is the expected time path of the proceedings?
• What expertise does the dispute settler in question have?
• What are the costs involved?
One may come to the (valid) decision not to take any action for now at all. Still, pension funds affected by the scandal will eventually have to make a choice: do we set sail alone, do we join a group cruise we may or may not opt out of along the way, or do we remain seated in our comfy chair for the time being?
Johan Polet and Jonathan Bakker are lawyers with Simmons & Simmons LLP in Amsterdam
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