US shareholder lawsuits have led to billions of dollars in payouts. Now investors stung by UK stock price drops are increasingly turning to litigation.
Institutional investors in Serco this week reached a settlement with the outsourcing company over a contract overcharging scandal that prompted a plunge in its shares, in the first case of its kind to go to trial in England.
Similar lawsuits are piling up in the High Court against other London-listed companies including Glencore, Standard Chartered and Barclays.
Keith Thomas, head of securities litigation at law firm Stewarts, said such cases had accelerated as a result of investors’ desire to “hold companies to account” for “egregious governance failures”.
While shareholders were given strengthened powers in 2006 to sue UK companies for making “untrue or misleading” statements through Section 90A of the Financial Services and Markets Act, it is only recently that lawsuits seeking to use them have gained momentum.
Advocates of such litigation argue that it can help raise governance standards in corporate Britain, which has been beset by a series of scandals over the past decade at companies including Carillion, Patisserie Valerie and BHS.
The threat of legal action over bogus or deceptive disclosures helped ensure that companies “tell the truth”, and enabled investors to make informed decisions when they bought or sold securities, said Andrew Hill, head of securities litigation at law firm Fox Williams.
The litigation is picking up against a backdrop of underperformance in UK stocks. Over the past decade, the FTSE 100 has delivered little more than a fifth of the S&P 500’s return in sterling terms, including dividends.
The lawsuits have typically been filed against companies whose shares have underperformed particularly acutely — such as Serco, whose stock dropped about 70 per cent during 2013 and 2014.
“Accountability to shareholders is the cornerstone of good corporate governance,” said Chris Warren-Smith, partner at Morgan, Lewis & Bockius, the US-headquartered law firm that represented institutions including Allianz and Russell Investments against Serco. “Fundamentally, it means that actions have consequences.”
Shareholder litigation is a costly business for companies in the US, which according to Cornerstone Research and Stanford Law School have paid out $115bn since 1996 to settle about 2,900 securities class action lawsuits.
Sceptics contend that it has become a nuisance, as claimant law firms bring cases of low merit in the hope that US companies will settle to make them go away.
Such a regime in England, they warn, would primarily benefit not investors but claimant lawyers and litigation funders — firms that attempt to profit from lawsuits by shouldering the financial risks.
“There has been an upsurge in these types of claims, and there is a real question about who benefits,” said Kenny Henderson, partner and class action specialist at law firm CMS.
Chris Bushell, partner at law firm Herbert Smith Freehills, said: “There is a concerning trend of speculative claims being asserted and shareholders need to give very careful thought as to what it is appropriate to sign up to. There is more chaff than wheat out there.”
The first UK case was brought in the aftermath of the global financial crisis, when groups of Royal Bank of Scotland shareholders sued over allegations the bank misrepresented its financial health when it tapped them for cash in 2008. The bank settled the claims during 2016 and 2017 for about £900mn.
Plaintiffs also secured a payout in 2021 from supermarket group Tesco, which paid £193mn to settle a shareholder lawsuit over a 2014 accounting scandal.
Yet investors need to overcome big hurdles before they can win damages in England. These include the need, under Section 90A, to identify particular individuals at the company who can be held responsible for misleading them.
Who knew what and when was a central part of the defence in the Serco case, which the shareholders brought after the company was found in 2013 to have overbilled the UK government for the electronic tagging of offenders by tens of millions of pounds.
Serco’s lawyers argued that none of the company’s directors had known about the overcharging. “That is the end of the case,” Serco’s counsel, led by Richard Hill KC, said in written arguments.
Terms of the settlement were not disclosed, although the company said they were “not material” for the group and reflected its confidence that it would have won.
Despite the difficulties bringing them, shareholder lawsuits are gathering pace.
Fox Williams said last week it was preparing a case against gambling group Entain following a criminal bribery investigation by UK authorities into its Turkish subsidiary. The Ladbrokes owner accepted a £615mn penalty as part of a deferred prosecution agreement.
Entain said it was not aware of any such claim being issued and would “defend any such action robustly”.
Fast-fashion retailer Boohoo is also facing a lawsuit brought by Fox Williams over a drop in its share price following reports of labour rights violations at its suppliers’ factories.
Boohoo said it “strongly contests the allegations and will vigorously defend any claim”.
Glencore, Standard Chartered and Barclays have denied claims against them in court filings.
Oliver Middleton, partner at Latham & Watkins, said: “Litigation funders have come to the market in a big way, and the claimant law firms have established themselves here, including US firms who know how to bring these claims.”
He added that there had been a “change in attitude”, with institutional shareholders in the UK becoming “more comfortable” with suing companies.
Whereas claims in the US can be brought on an opt-out basis, meaning investors are automatically included in proceedings, no such class action regime for these types of claims exists in England.
Fund management houses have to proactively sign up, and City institutions generally have until recently been far more reluctant to join the fray than their US counterparts.
While litigation funding of such cases means shareholders who sue do not shoulder financial risk themselves, involvement is time-consuming and fund managers face the unwelcome prospect of being called to court to explain an investment decision gone wrong.
However, another case has the potential to facilitate more shareholder lawsuits by allowing them to be brought on an opt-out basis.
Plaintiffs in a case against Indivior and the drugmaker’s former parent Reckitt are trying to make it a “representative claim”, which is more akin to a US-style class action.
The High Court in December denied the claimants permission to make it such a case, but the Court of Appeal this month allowed them to challenge the ruling.
If the claimants succeeded, Latham’s Middleton said, the resulting legal precedent “really could be the birth of huge, US-style claims” in the UK.
