Shareholder Class Actions

15th Jul '14 by ShareSoc

2 comments 14375 reads

The topic of shareholder class actions is a controversial one. Before ShareSoc participates in any such actions, on behalf of its members, we therefore wish to obtain the views of our membership on this subject. We will shortly poll all our members, including associates, to ask your views. If you would like to cast a vote, and receive the other benefits that ShareSoc offers, but are not already a member, you can join us here: http://www.sharesoc.org/membership.html The poll will be e-mailed to our members on 18^th July, so please ensure you are signed up before then if you wish to have your say. We also welcome your comments on this blog post.

If the result of this poll is supportive of participation, ShareSoc’s board will decide on any particular actions that we feel it is in the interests of our members and good corporate governance to pursue, usually together with international partners and/or institutional shareholders.

What is a class action?

A shareholder class action is a legal suit where a number of shareholders join together to seek compensation for losses incurred as a result of actions or inaction by a company they are or have been invested in. Most often the legal action is taken in the USA, where a) legislation protecting shareholders is more rigorous; b) more lawyers are prepared and able to pursue such cases on a “no win, no fee” basis, meaning plaintiffs take no financial risk themselves; c) defendants costs are not recoverable from plaintiffs, so plaintiffs do not run the risks of being liable for those costs. Hence such cases most usually concern multinational companies. NB: there is no such thing as a “class action” in English law, but there is a rarely used concept of “Group Litigation Orders”.

Arguments in favour of pursuing class actions

The primary argument in favour of pursuing such actions is that they are one of the few ways of holding errant managements to account and improving corporate governance. Clearly they can also result in current and previous shareholders that participate gaining some restitution. ShareSoc itself may benefit financially too, by taking any small share of any awards that are made. Any such financial gains would improve our ability to support and broaden our membership – remember that ShareSoc is a not-for-profit organisation. Details of any such financial participation by ShareSoc would be provided to participating members…

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ShareSoc

27th Jul '14

This poll is now closed and has received an overwhelming majority of respondents in favour of participation in class actions, where deemed appropriate.

Out of 195 respondents, 77% were in favour, 17% against and 6% “Don’t know”.

ShareSoc’s board will now consider any specific class action proposals, and act as and when appropriate.

Thank you to all those that participated.

emptyend

28th Jul '14

A few observations, if I may.

First, it is easy, riskless and costless for people to click the mouse a few times and respond to a poll.

Second, I didn't see the poll question, but I rather suspect that risks, costs, hassle and other negatives may not have been presented fully and that people will have simply translated the poll as "would you like a shot at some free money?" - to which there is a very easy answer.

Effectively, such suits could be considered as shareholders suing themselves, as any restitution must come mainly from company funds! It is possible that some recompense can be obtained directly from management, but in most cases settlement of such claims is likely to be covered by insurance against such an eventuality that their employer provides.

I fear the latter is quite unlikely. And, in the event that insurances are being forced to pay out more, then that will inevitably raise the insurance costs for every single company in the country, both public and private. It is much more likely that such actions will pit one group of shareholders against another, and be to the detriment of shareholders as a whole, because the response to raising the risks of running a public company will simply mean that even more companies will be taken private.

Nevertheless, simply the fact of having to account for their behaviour in court, and the reputational impact thereof can act as a deterrent against bad behaviour.

Yes that is certainly a good point. However, it will also deter people from acting as Directors of companies, especially non-execs who are frankly not being paid to risk such hassle. So the consequence may well be to dramatically shrink the (already-limited) pool of willing NEDs and to materially weaken corporate governance at companies which are most at risk. Whilst this recent case is entirely unconnected with this issue, it shows the very real personal damage that being dragged through courts can wreak on individuals - especially to those who are personally wholly innocent.

What actually makes matters worse for current shareholders is that previous shareholders may participate to recoup historic losses, meaning that funds can be transferred from the company which existing shareholders own, to past shareholders.

This will certainly be a major issue which will kill liquidity in companies which run into any trouble - again creating further damage for shareholders themselves.

My very strong advice to ShareSoc would be to pursue such a course EXTREMELY selectively, rather than pandering to mobs baying for blood simply because they have lost money on ill-judged investments. ShareSoc would be very much better advised to focus ALL their efforts on ensuring that investors actually use the corporate governance tools ALREADY at their disposal, such as getting shareholders to vote on resolutions at AGMs and to use the powers already at their disposal to remove directors where necessary, challenge pay policies and (more relevantly than either of those points) challenge corporate strategy. The correct approach is to be active in nipping incipient problems in the bud - not to be complacently letting problems arise and then belatedly trying to obtain some restitution for shareholders' own idleness!

Either get involved before problems arise or sell your shares!!!!

Shareholder Class Actions

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