How growing corporate governance and global class actions may intersect
Two significant legal trends are emerging—and converging—in ways that could transform the litigation landscape in a number of jurisdictions around the globe.
First, class actions and related collective redress regimes are maturing and also gaining traction across UK and Europe, as well as other jurisdictions across the globe. At the same time, corporate environmental, social and governance (“ESG”) policies and investor stewardship mandates are being adopted with greater frequency by corporations.
It is also true that litigation funding is common in both consumer and shareholder collective redress actions. In a number of jurisdictions, it has acted as a catalyst for the use of collective actions.
Global class actions, ESG and investor stewardship principles have been developing on parallel tracks, but in the months and years to come, they are likely to intersect with increasing frequency. Empowered by evolving collective redress regimes, classes of claimants may bring a wide range of new cases against defendants who have acted unlawfully in matters related to environmental, social and corporate governance issues.
Investor stewardship principles and practices are being adopted in many markets around the world, as the development of stewardship codes for investors complements the similar development of codes of corporate governance that have been established for companies. Indeed, the International Corporate Governance Network (“ICGN”) defines stewardship as: “the responsible management of something entrusted to one’s care. This suggests a fiduciary duty of care on the part of those agents entrusted with management responsibility to act on behalf of the end beneficiaries.” The ICGN further defines stewardship at the individual company level as helping “promote high standards of corporate governance which contributes to sustainable value creation, thereby increasing the long-term risk adjusted rate of return to investors and their beneficiaries or clients.”
This new crop of ESG class actions is likely to be large and complex, traveling across borders in some cases and encompassing issues like the #MeToo movement, board diversity and inclusion, climate change, pollution, and COVID-19. Because of the breadth of possible claims, ESG cases may join securities, consumer, products liability, privacy and data breach, and antitrust class actions on the list of the most typical collective redress matters. Indeed, section 4.3(g) of the ICGN’s 2020 Global Stewardship Principles lists the “seeking [of] governance improvements and/or damages through legal remedies or arbitration” as one of methods available to investors to engage and collaborate with investee companies.
CLASS ACTION GROWTH
The United States has long been the center of the class action universe. (For example, in 2019 more than 400 cases were filed in the securities class action realm alone.) However, the rest of the world is starting to catch up, with several jurisdictions—particularly in Europe—this year debating the best way to deliver collective redress rights to investors and consumers.
We highlight some noteworthy recent developments on collective redress:
• The European Union. In June, the EU released a series of proposed rules that would allow consumers and investors to come together to fight unlawful practices via in-country and cross-border class actions. Under the rules, qualified entities, designated by EU countries, will be able to represent groups of consumers in collective cases. To prevent baseless suits, the proposals include a “loser pays” provision, which means the defeated party must pay the costs of the proceedings. And the rules explicitly allow consumer cases and “cases involving trader violations in areas such as data protection, financial services, travel and tourism, energy, telecommunications, environment and health, as well as air and train passenger rights.”
• The Netherlands. On 1 January 2020, the Collective Damages Act (Wet afwikkeling massaschade in collectieve actie, “WAMCA”) took effect. The WAMCA enables representative entities to bring damages claims on behalf of (international) parties in a class action before any district court in the Netherlands. The court can then award damages in its judgment, which was only possible under the prior regime (i) if parties had reached a collective settlement under the Act on the collective settlement of mass damages (Wet Collectieve Afwikkeling Massaschade, “WCAM”), (ii) by initiating individual damages claims after the representative entity had obtained a declaratory judgment or (iii) when the litigation was structured through an SPV.
The WAMCA therefore creates a potentially powerful tool for claimants to create leverage in settlement discussions. Although the legislator aimed to provide for a balanced and efficient system, whether the new Dutch class actions regime will also provide defendants with an effective way to deal with a mass claim setting, remains to be seen.
The new regime only applies to class actions initiated on or after 1 January 2020 and that relate to events that took place on or after 15 November 2016.
• Scotland. As of 31 July 2020, the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (the “2018 Act”) came into effect. This new mechanism for bringing “group proceedings,” as collective redress actions are known in the Scottish courts, sets out a structure for both opt-in and opt-out mechanisms. However, the Group Proceedings Working Group established by the Scottish Civil Justice Council (“SCJC”) conducted an informal consultation process for implementing the new mechanism. In the consultation the SCJC expressed a preference for introducing the new mechanism on an opt-in basis initially, with the opt-out mechanism to follow later.
Meanwhile, environmental, social and corporate governance policies have been rapidly becoming the norm for corporations, with many of them making ESG disclosures in their regulatory filings and regularly publishing ESG-related reports on their websites. In 2019, for example, 66 percent of companies listed on the U.S.-based Russell 3000 Index had made some type of ESG disclosure in their financial filings, according to a report by the National Association of Corporate Directors (“NACD”) in the United States.
The NACD report examined three key ESG risks, climate change, human capital management and water scarcity. Using the climate change results as an example, the report found energy and mining companies and industrial manufacturers made the most material disclosures in regulatory filings—not surprising given their core business activities. However, retail and consumer sector companies also made significant climate change disclosures, citing increased costs for energy, transportation and raw materials.
The growth of ESG-related disclosures has prompted a number of corporate law specialists to advise clients to exercise caution. A recent client briefing by the global law firm Clifford Chance is indicative of the kind of warnings firms are offering: “Investors are increasingly considering the [ESG] credentials of publicly listed issuers when making investments. This has put ESG disclosures (including climate change-related disclosures) in annual reports and prospectuses under intense scrutiny, meaning issuers are at risk of investor and activist claims if those disclosures are inaccurate.” The briefing goes on to say, “Experience from other jurisdictions (in particular the US) shows that investors are willing to pursue large-scale group claims against companies for inaccurately representing their ESG credentials…” ESG is no longer only a moral issue, but it is a financial one, as well.
Because of their size, scope and legal complexity, ESG-related class actions also may prove prime candidates for investment by dispute financing companies. As companies have increased their ESG reporting and statements in response to market and shareholder demands, there is a clear correlation with successful legal challenges to company claims and disclosures related to ESG performance. Put another way, when ESG issues matter deeply to corporate stakeholders, then those issues will end up before the courts unless companies meet their ESG related obligations.
A large, cross-border class action likely will require a years-long financial commitment by the law firms and claimants who bring them. Litigation funders can help alleviate the financial strain on those firms by providing non-recourse financing for such disputes. Third-party funding of litigation can be a sensible way of managing risk, as giving some equity in the success of a particular litigation provides certainty instead of exposure; and, as the legal industry continues to innovate, there is growing realization of the value of partnering with specialists whose involvement can save internal budgets and management time, whilst increasing the prospects of a favorable outcome.
To learn more about Omni Bridgeway’s litigation funding capabilities, visit us at omnibridgeway.com. While there, explore our recent podcasts, blog posts, and videos via our Company Insights. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.