To claim or not to litigate: what is the question?
The National Association of Pension Funds (NAPF) of the UK has published a paper on securities class actions, specifically aimed at pension fund trustees, entitled ‘Securities Litigation – Questions For Trustees’. (press release)
The day following the publication, The Times published an article on the paper in which it incorrectly portrayed the NAPF as a class action advocate and set it against the Association of British Insurers (ABI), which is well-known for its opposition against the use of class actions. In addition, the article contains at least two inaccuracies, namely regarding the distinction between securities and derivative actions and concerning ‘unclaimed’ monies.
From the paper’s introduction (before it answers each of ten questions):
UK investors have become more active in joining class actions, occasionally as lead plaintiff; something which was virtually unheard of until only a few years ago. It has also become noticeable that more European companies are being sued by investors in the US, so, like it or not, class actions are becoming of greater interest to UK investors, including pension funds. (WV&Z’s emphasis)
Granted, ‘joining’ may be an unfortunate choice of words, as it could be read as either ‘moving for lead plaintiff status’ in order to actively litigate a case or ‘filing a claim’ in an action once a settlement has been achieved, depending on the context (see also question 1 there). Be that as it may, the introduction continues thus:
[Notwithstanding litigation risk and cost h]owever, we should recognise that given the limited shareholder rights and protections currently available (most notably the ability to vote a director off the board), litigation will continue to be a feature of the US system. UK pension funds have a growing investment in the US and therefore should not, without careful consideration of their reasons, ignore the potential to recoup losses or encourage better governance there.
Throughout the paper the NAPF comes across as neutral, almost reluctantly stating the facts and options available. The ABI on the other hand is a vocal opponent, as it speaks of, for example, ‘[t]he cost to Europe of America’s class action addiction’ (Financial Times op-ed, by Peter Montagnon, ABI’s Director of Investment Affairs). Its solution is not to litigate but to seek the introduction of “a real system of shareholder rights” and to encourage “better dialogue between shareholders and companies” instead.
The answer is that the NAPF and ABI are actually aligned, with the difference of the NAPF being more pragmatic: both organisations seek the same solution of influence on corporate governance matters for their members, but the NAPF wants to make clear there is a (passive) benefit along the way to that goal already too.
Finally then, the inaccuracies. The NAPF paper answers questions on securities class actions, which the article refers to (as “advising” to “chase”) in its opening paragraph. Yet nearer the end, the article speaks of “compensation claims against companies” on “corporate issues such as executive remuneration”. The latter kind of action is usually a derivative action, not the separate securities class action, but this distinction is not made.
Secondly, the article states that “[m]uch of the money won goes unclaimed.” Truth is that, once a settlement has been achieved, the notice of the class action settlement will include a plan of allocation section, which describes the pro rata distribution of the settlement fund. Less claimants will result in a higher recovery per share, pro rata, but no monies will be left in the settlement fund. Some plans (for example, In re AT Cross Co Securities Litigation’s, pp.9,10) include the arrangement for an unlikely balance remaining after distribution and fees to be donated to charity.