Unbeknown to many English lawyers there is an area of the law that has matured and developed in the US over the past 80 years but which, until recently, has hardly been recognised as a separate practice area. There are flickers of light that suggest that the situation may be on the verge of changing.
In the 19th century, when English company law was, in many ways, still in its genesis, a few leading cases established the building blocks for what survived thereafter and still exists today. One of those cases, frequently referred to on day one at most law schools is Foss v Harbottle (1843), a ruling that essentially established that if a wrong is done to a company, the company itself and only the company can sue, as opposed to any individual shareholder or group of shareholders. Over the years, that harsh rule was tempered such that shareholders were not left completely without protection and gained the ability to sue in what is now a raft of different circumstances. Case law developed to create exceptions to the rule in Foss and, with the added assistance of statute, derivative actions and minority shareholder petitions became just two examples of how matters moved on from first principles. What we have never had in this country, however, is anything akin to the well-developed structures that took root in the US in the 1930s and gave rise to wide-ranging statutory shareholder rights that enabled shareholders to sue with a direct cause of action against the company in a raft of circumstances where wrongdoing has been committed by the company itself, its directors or others. In the US there is a long history of securities litigation – cases in which aggrieved shareholders have sued the company when the company’s fortunes deteriorated and the value of its shares dropped as a result. No such regime exists here and there is no clamour for us to adopt an American approach any time soon.
This said, the sands have shifted over the past few years or so and investors who once saw the US as the only jurisdiction to assert claims have turned their attention elsewhere. The reason for this has been twofold. First, as a result of the well-publicised decision in Morrison v National Australia Bank, the US decided that it would no longer play host to cases involving foreign securities that have little or no connection with their home patch. Second, other countries such as Australia, the Netherlands and England have come to the attention of investors, keen to find a credible and palatable alternative.
‘In the US there is a long history of securities litigation. No such regime exists here and there is no clamour for us to adopt an American approach any time soon.’
In England two avenues for investor protection litigation were forged by sections 90 and 90A of the Financial Services and Markets Act 2000, which created statutory causes of action that go well beyond the ambit of the rather constrained common law options that had existed for centuries beforehand. In essence, section 90 makes a company that is responsible for listing particulars and prospectuses liable to compensate a person who has acquired shares to which the listing particulars or prospectus apply; and has suffered loss as a result of either: any untrue or misleading statement or omission. No reliance by the claimant needs to be proven, as it would in, for example, a common law misrepresentation case. Section 90A creates a cause of action for persons who have suffered loss as a result of a dishonest misleading statement or omission in a wide range of published information relating to shares, or a dishonest delay in publishing such information but in this instance the claimant must prove reliance. Statutory defences exist, including a ‘reasonable belief’ defence.
Apart from the well-publicised current case brought against The Royal Bank of Scotland (RBS) by its shareholders under section 90, there have been precious few cases commenced at all (and no reported case law) that can properly be described as English securities litigation. The reasons for this are manifold but they include the following:
- Prospectuses and other published material are generally accurate and reputable companies go to great lengths employing expensive corporate lawyers to ensure that this is the case.
- There is nothing in England akin to an opt-out American-style class action system, which makes the framework of a shareholder action very difficult if there are disparate claimant shareholders.
- Bringing a shareholder claim against a substantial company is not for the faint-hearted – it is time-consuming and very expensive and requires considerable resource and expertise.
- The risk of adverse costs liability puts off many prospective claimants although there are avenues for insuring against this, nowadays these are often built into a third-party funding package.
- Whereas the US system actively encourages ‘roll-of-the-dice’ litigation with jury trials, limited adverse costs and mega-damages, ours does the very opposite.
Notwithstanding the above, there are some who believe that we are witnessing a new dawn for investor protection litigation in England and there are strong signs of new cases being developed. There would appear to be a number of reasons for this. First, there seems to be a growing mood among sophisticated institutional investors (such as pension funds and asset managers) that on one level, they have a duty at least to consider possible claims. Second, new funding and after-the-event insurance models and the permissibility of contingent fee arrangements have made feasible claims that perhaps once would not have been. Third, there is a growing awareness of investor protection generally. The Morrison case has forced institutions who historically limited their horizons to the US to look elsewhere. England has the advantage of being a well-respected and stable forum for dispute dissolution coupled with a disclosure regime which, although not as extensive and probative as that administered in the American courts, does make England a more attractive place than continental Europe where reliance discovery tends to be the order of the day. There is much talk in the media about shareholder ‘class actions’ often discussed in the context of a growing compensation culture. In reality there is little reason to believe that in the short term we are likely to see a full-blooded US-style class action system here that would make cases of this kind much easier to run and administer. That said, the mood music suggests that the times they are a changing.
Clive Zietman is a well-known commercial litigator who has been involved in a wide range of complex high-value claims, including a number of very high-profile fraud, professional negligence and banking disputes. His work regularly involves an international dimension. He has acted in several well-publicised cases, including the bankers’ bonus case against Commerzbank and the RBS shareholder litigation.
He leads the commercial litigation team at Stewarts Law and over the past few years he has been involved in several actions against banks, a task which most central London law firms are unable to undertake as a result of conflicts of interest.