Are European shareholders closing the gap in terms of legal redress against wayward management, or is the US firming up its status as a kind of “global court” for class actions? For Ralph Stone, partner in Shalov, Stone & Bonner, the scales are tipping towards Europe. “There is an erosion of investor rights in the US at precisely the time the Europeans are enhancing them,” he says. Stone points to developments in several European countries, including German corporate law reform and findings by the German Federal Court (BGH) on cases involving fraud by companies listed on the now-defunct Neuer Markt, which have helped define shareholders’ legal rights.
However, Europe remains untested compared with the US. German law extending shareholders’ access to courts (UMAG) sets high thresholds—for example, shareholders must try to induce the supervisory board to sue before they apply to court. The law is “aimed to avoid a lawyer-driven stream of corporate litigation with doubtful benefits for shareholders as exists in the US,” according Ulrich Noack, a law professor at Heinrich Heine University in Dusseldorf.
For similar reasons, “the judgements of the BGH don’t open the gates for lawsuits from dissatisfied investors,” according to Dirk Reidenbach, a researcher at the Banking Law Institute, Goethe University in Frankfurt.
Also, notwithstanding rumblings about tort reform and talk in November from the new US Treasury secretary, ex-Goldman Sachs CEO Henry Paulson, about the need to move from a hyper-legal approach to a more “prudential” system, the US is still the legal destination of choice for shareholders and other aggrieved parties.
This is borne out by the latest international litigation figures from law firm Fulbright & Jaworski, which show that a quarter of non-US companies surveyed had class actions pending against them in the US in 2006, up from just 6% in 2005.
For shareholder class actions, a record was set early in 2006 with the $1.1 billion (€800m) settlement by Dutch retailer Royal Ahold, “in what will surely be chilling news to non-US issuers already wary of being embroiled in US litigation,” according to a report by National Economic Research Associates, a New York consulting firm.
Indeed, US courts have extended the “f-cubed” concept, whereby they accept jurisdiction over cases where foreign shareholders sue foreign companies whose shares were traded primarily through foreign exchanges. Important precedents were set in the New York federal court, where judge Lewis Kaplan has defined “conduct and effects” tests that determine US jurisdiction in suits against advisors and bankers to failed Italian dairy company Parmalat. The concept of a “worldwide class” of shareholder will be further tested in 2007.
As Lista Cannon, London senior partner in Fulbright & Jaworski, points out, “Increasingly, judges are recognising that while US securities laws may not expressly permit foreign shareholders to sue, applying the conduct and effects tests in the world of global business may well provide a proper basis for US jurisdiction.”