CLS Blue Sky Blog

ISS Discusses the Risks of Participating in Securities Collective Actions Outside the U.S.

In contrast to class actions in the United States, the general principle in litigation abroad is that the loser pays the winner’s costs. This concept is known as “adverse costs,” and the risk of paying these costs can be daunting to investors interested in participating in global opt-in litigation. In certain jurisdictions, these costs can be quite expensive — when lawyers’ fees, expert witnesses’ fees and various other costs often incurred in large-scale litigation are tallied up.

The complexity and long duration of shareholder-related actions could compound the legal costs. One egregious example is the over £100 million that the Royal Bank of Scotland reported defending against shareholder claims regarding its £12 billion cash call in 2008. Shareholders in this case though were fortunate to avoid the costs by reaching an out-of-court settlement.

Nevertheless, investors should carefully consider the risk of adverse costs in each jurisdiction before participating in global litigation. Despite the misconception, participating in certain jurisdictions abroad is not inherently “free.” Costs often are not borne entirely by the representative plaintiff and its counsel as in the United States. Often ignored is the duty the claimant has to the defendants in the event the claimant should not prevail in the litigation.

One of the most common means to manage the risk continues to be third-party funding arrangements. Third-party funding agreements have contributed to the rise of collective litigation in Europe, Australia, and other parts of the world.

Under a third-party funding agreement, a funder who is not party to a lawsuit agrees to pay some or all of the litigation costs in exchange for an interest in the potential recovery, such as a share of the damages. To provide cover for adverse costs, funders often secure “after the event” (“ATE”) insurance in the event that they are ordered to pay defendants’ costs. Some funders may also guarantee to provide an additional indemnity or funding beyond the ATE that they secured.

ATE insurance is a commercially available policy that allows parties to limit their exposure in the event they lose a case. In theory, insurance companies and funders should only agree to such an arrangement if they are comfortable with the risk and level of coverage.

But even with litigation funding and ATE insurance, there is still a risk that participating investors could be left footing some of the bill. ATE insurance is subject to precise terms, such as exclusions and conditions, the agreed limit of indemnity, and governing laws of the jurisdictions. The insurer could dispute the scope of coverage, and thereby refuse to pay adverse costs in whole or in part. It is also possible that the court’s award of adverse costs could exceed the insurance limit of the policy.

If the adverse cost award exceeds the available ATE insurance coverage, it is possible claimants may be liable for the remaining costs. In the United Kingdom, in particular, where an adverse cost award can be quite high and not subject to a cap, the risk is plausible.

The risk of being ordered to pay the other side’s costs ultimately varies widely in each jurisdiction. For instance, some countries such as the Netherlands, Australia (as well as Sweden, Germany, and others) have provisions which protect the losing parties from having to pay the entirety of the legal fees to the other side. By contrast, other jurisdictions such as the United Kingdom, Brazil (and Italy) are considered at a higher risk of a high potential adverse cost award.

ISS SCAS describes how each jurisdiction handles adverse costs in more detail in their white paper. If you are an investor considering participating in global opt-in litigation, you should also carefully consider this as well as other factors set forth in the full report.

This post comest to us from Institutional Shareholder Services. It is based on the firm’s recent paper, Participating In Securities Collective Actions Outside the US: Are Adverse Costs Worth the Risk?, available here.

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