UK Shareholder Class Actions: An Emerging Threat for D&O Insurers?

In this episode of the PLUS Podcast, we dive into the complexities of defending shareholder class action claims in the UK, and their implications for corporates and D&O insurers alike. We explore the steps legal teams and directors must take when faced with a claim, from defence strategies, and key battlegrounds, to effective insured to insurer engagement. We discuss critical actions to protect both individuals and businesses and common coverage issues. With insights from experiences professionals in this area, we uncover the key lessons for navigating these high-stakes cases. 

Transcript

PLUS Staff: [00:00:00] Welcome to this PLUS podcast. Before we get started, we'd like to remind everyone that the information and opinions expressed by our speakers today are their own, and do not necessarily represent the views of their employers, or of PLUS. 

The contents of these materials may not be relied upon as legal advice. With the housekeeping announcements out of the way, I'm pleased to turn it over to Owen Dacey. 

Owen Dacey: Thank you, Tyla, for the introduction. And yes, welcome to this episode of the PLUS podcast brought to you by the London Chapter of PLUS.

Before we start, just a quick thank you to our London Chapter sponsors, Berkshire Hathaway, Specialty Insurance, Marsh, Clyde & Co and my employer, Rising Edge. So, today's topic, we're here to talk about UK shareholder class actions. Being from the D&O insurance market myself, the question I have is whether this is a looming threat to D&O insurers.

But before we get to that we're going to provide you with an introduction to really the legal basics of shareholder class actions in the UK. [00:01:00] And then run also through some of the key dynamics at play with these types of claims looking at the litigation itself and then some of the key insurance issues to be considered.

With me, we're very lucky to have experts here from the law firms Herbert Smith Freehills and Reynolds Porter Chamberlain. Starting with HSF, we have partner Chris Bushell, who is a solicitor advocate. He has significant experience acting for clients in across a range of different areas and commercial disputes.

He's got a particular focus on class actions and disputes work, so he's very well placed to talk on this topic. He's also advised a number of companies from different industries in the defense of significant shareholder class action claims in the UK too. Chris is also listed as a leading individual in the Legal 500 for 2024.

Then also from HSF, we have Greig Anderson. He's also a partner and solicitor advocate, assisting clients with commercial disputes. He specializes in insurance disputes, helping policyholders, brokers, [00:02:00] insurers, reinsurers on claims and all sorts of coverage issues that can arise in respect of a wide variety of insurance and reinsurance.

He has a broad range of experience across all different types of lines, but also D&O, which is the relevant one we're thinking of here when we talk about this type of claim. And he also advises on non-contextual matters such as policy drafting and review, which again is something, a point that kind of comes out in what we're talking about today.

He's also ranked as a leading individual in the Legal 500 UK for insurance litigation for policy holders. And then we have James Wickes. James is a partner at the law firm, RPC, head of the Professional and Financial Risk team in London. He acts for insurers and reinsurers on complex coverage matters and disputes, again, across a range of different lines of business, including D&O, which we're talking about today. James also has some experience defending directors. But importantly today, James and his team at RPC have also acted for the D&O market and on many of the UK Section 98 FUSMA claims [00:03:00] we're talking about today over the last decade.

So, like Chris and Greig, he's very well placed to share his insights on today's topic. And finally, you have me, I'm Owen Dacey. I'm Head of Claims and General Counsel at Specialist Insurance Underwriting Agency Rising Edge. And what I'll say about myself is I've handled quite a few D&O claims, management liability claims in my life.

With that, we'll get started with the basics. And we'll come to you, Chris, for this. Shareholder class actions are still relatively uncommon in the UK compared to other jurisdictions like the US or Australia. Could you just explain on a high level the legal framework here in the UK where shareholders are trying to take collective action against the company, what is the legal basis for these claims and how do they get off the ground?

Chris Bushell: Yeah, sure. So, in terms of how the claims are put there's a number of different ways that we often see them. There are misrepresentation claims, there are negligent misstatement claims, there are tort or deceit claims, but primarily, when we're talking about securities class [00:04:00] actions over here, we're really talking about claims brought under Section 90 or 90A of FISPA, as you alluded to in the introduction.

Section 90, if we take that one first so this is talking about untrue misleading statements or omissions in the context of prospectuses. So that's the relevant document. We're talking about prospectuses here. In terms of, the relevant standard for those claims, it's essentially negligence. And there is a defense of reasonable belief.

And we may come on to talk later, I think a bit about some of the kind of strategic decisions that need to be taken in relation to how you make out that defense. And in terms of who the claims are brought against they can be brought against the issuer. So, there is the company. They can be brought against, frankly, anyone who is responsible for the content of the prospectus, most obviously the directors, the issuer, but also potentially [00:05:00] investment banks, law firms. As far as I'm aware, and I think James and Greig will correct me if they disagree, so far, no one has brought a claim against a bank or a law firm, but it's quite typical on a section 90 claim for it to be brought against both the issuer and the director.

If we flip over to 90A, which is probably more “in vogue” at the moment we're talking about untrue misleading statements or dishonest omissions or dishonest delay. This is basically in the context of any other information that is published on a recognized information service. All the other stuff that is pumped out there into the market and the typical documents that is identified is usually something like an annual report, and quite often reference to statements in an annual report about corporate [00:06:00] governance and processes that the issuer has in that regard. In terms of the relevant standard, we're basically talking about fraud, so dishonesty or recklessness and in terms of whose knowledge is relevant there, there is this concept which again I imagine we may return to later on in terms of talking about battleground areas.

There is this concept of a person discharging managerial responsibility, so a PDMR. That is a kind of relevant personal persons within the issuer whose knowledge is relevant. And in terms of who the claims can be brought against a significant difference, they can only be brought against the issuer.

So not the kind of wide-ranging list of potential targets that we talked about in the context of section 90. Only against the issuer, but obviously people like the directors are still going to be very relevant as part of the defense of the claim because they will be part and parcel of this [00:07:00] PDMR discussion.

Um, I think you quite fairly mentioned, Owen, in the introduction that shareholder claims against listed companies are a pretty recent phenomenon here. There haven't been that many so far. I think it's less than 15, more than 10 in terms of where proceedings have actually been issued.

There are a few reasons for that. I guess for anyone who might be listening from a kind of US background, we use this phrase sort of class actions not really as our kind of US colleagues would understand it. We don't have an opt out regime here. What we're really talking about is a claim form with a long list of claimants attached to it and you see you have to opt in to the proceedings. And the fact that it is generally that mechanism is one of the reasons perhaps why there haven't been that many to start with.

The first one was back in sort of 2009-ish. Again, Greig will correct me if I've got that wrong, but that was RBS, which was a matter that my [00:08:00] firm was involved in. It rose out of the 2008 financial crisis to do with RBS rights issue. There was then the HBOS Lloyds matter which followed not that long after, although actually was not brought as a section 90 or 90A claim, but for reasons that we probably need not delve into on this podcast.

And then there was a bit of a gap. And then there's been a sort of a relative flurry in recent years, so Tesco, RSAH, 4S, Circo, Barclay, Standard Charter, Glenco, BT Petro Boohoo. Bricket, Benkeiser, those are the ones that immediately come to mind, but I think I can't add them up that quickly, that's still probably less than about 15.

Obviously, all sorts of free action correspondence floating around on these kinds of claims, but in terms of ones that have actually been issued, we're talking about relatively small numbers. We don't actually yet, have a judgment really in this kind of space. There was a judgment in the Lloyd's [00:09:00] HBOS claim, but as I mentioned, that wasn't actually brought as a Section 90/90A claim, and whilst there was a judgment in a case called Autonomy on 90A, which is helpful in terms of a bit of guidance on main backgrounds there. That wasn't actually a securities class action, so it was in a sort of different context.

There is quite a lot of uncertainty still in this area, which is both helpful and unhelpful, depending on which side of the fence you are in these kinds of matters. 

Owen Dacey: Yeah, definitely. Very interested in understanding what's driving this? Because, like you say, there was that lull, and it does seem like there's a flurry. What's going on in the UK landscape now? Who and what is driving this trend? And what are the motivations, do you think, or that you can allude to that's driving this trend?

Chris Bushell: Yeah, I think there's a few factors in no particular order I think the rise of litigation funding and insurance within this jurisdiction, insurance in relation to adverse costs. There is more money around, I think, in terms [00:10:00] of for claimants and claimant law firms to look at to fund these kinds of cases, because let's all be honest about this, these kinds of cases are big and they are expensive. So often they do not get off the ground unless you have got that kind of funding and insurance in place. Secondly, and I've alluded to it already, but there is just a bigger market of boutique claimant firms now who are interested in bringing these kinds of claims and frankly, I think there's just a sort of better quality of claimant firm around these days.

I think probably if you were talking to people 10 years ago or 15 years ago, this was an area that was considered sort of corporate ambulance chasing and a bit grubby. And there might have been some question marks about the quality sometimes of people being involved in looking at these kinds of claims.

That's not the case now. There are very sophisticated, very able people on the kind of claimant bar side. So that's a change. I think probably the third thing is really just ESG. [00:11:00] Everyone's focused on ESG. And in particular, if you're an institutional investor, if you're a trustee of a pension fund or you're a kind of portfolio manager, a big asset manager running other people's money, I think there is just a real pressure on you nowadays to have thought very carefully about whether or not this is a potential asset, this kind of claim and whether or not, therefore you should be looking at bringing these kind of claims. And also, in terms of just holding companies to account and where there is a clear case of underlying wrongdoing, is it right to bring a claim to address those kinds of issues?

So, I think, subject to anything that James and Greig might want to add, those are probably the main drivers. 

James Wickes: Yeah, just one thing to add, Chris, a lot of these claims, in fact, pretty much all of them follow on from a regulatory or criminal investigation or prosecution.

So I think the trend, [00:12:00] probably also follows those regulators and prosecutors being more, proactively more active, the more investigations and prosecutions that are successful the more follow on shareholder claims we're probably going to see and we've obviously seen, the likes of the SFO and the FCA post financial crisis kind of ramping up the aggressive nature of how they pursue corporates and individuals, I think.

Chris Bushell: Yeah, I guess the other point around that you've mentioned, this sort of proven wrongdoing, there's, I think there's a bit more of a road map now. All of those cases that I've reeled off, again, I think, without going back to check, they will all have that kind of platform in there.

There's a regulatory decision, or there's been an investigation by a case, or there's a deferred prosecution agreement, something like that. So, they have that kind of base platform and people have seen it work as being a basis to get claims off the ground. And also again, as we may come on to talk about a little bit [00:13:00] later, there's just a little bit more of a roadmap now about how these cases are run, and how is the court going to try and manage them.

How do you approach things on that front? So, I think people probably feel a little bit more comfortable in terms of bringing these claims and what they might look like. 

Greig Anderson: And there's probably a general level of additional awareness amongst the community, whether it's lawyers or otherwise, if you read enough about them in the press, they'll be more front of mind.

Now, inherited structurally from the States, albeit they look different over here, there's been the rise of class actions in Australia. And my sense over the last few years, with 90A really being the vehicle, is that the UK is catching up with other class action jurisdictions and is probably number three now.

Owen Dacey: Yeah, it's fascinating. And the other thing I was just thinking about when you were talking about that regulatory piece is that the key difference I see here, what seems to come out here is that in the US that the shareholder claim follows an event a lot of the [00:14:00] time, like a negative event of some kind causing a stock drop.

You see it filed the next day. You might see it filed the next week, whereas over here it seems to be very much, and this is important for underwriters and insurers and clients of course as well, but there seems to be this lag from when the original conduct or the original event happens.

James Wickes: It takes some time too, to build that investor base to bring the flame.

Chris Bushell: I think that's one of the main reasons, the fact that it's not opt out here, you have to go and up build and make sure that it's a viable claim here, whereas in the US, ping it in and start the process and go from there. 

Owen Dacey: Okay, and just on the final thing on that legal framework then, is there anything particularly on the horizon in terms of the legal framework for these claims that people should be aware of?

Chris Bushell: I think as I mentioned we still don't have any judgments yet, really. There are some trials coming up. I think the Barclays one is say coming up still, a year or a bit away. I think that it's listed trial in October next year.[00:15:00] 

There's a couple, I think, the following year. There have been a few kinds of more recent decisions around the sort of process of running things. As I mentioned, there is this sort of split trial format now. Where I think it's relatively established that the way the courts want to run these things is deal with defendant liability issues first, and then questions around claimant reliance causation and quantum will all be dealt with in a second trial, although there are some sort of procedural tweaks around that to try and ensure that there is a sort of fair balance in terms of the burden of litigation.

So again, I think there's a relatively well established practice now of trying to ensure that claimants at least do some disclosure or put in some evidence around their position on reliance so that it's not all reverse engineered depending upon what [00:16:00] a liability award might, I'd say um, I think the other kind of horizon scanning or, or area to keep an arm might be around representative claims. So, there is this mechanism under the CPR 19.8 about, bringing a representative action, representative claim. People will be familiar, not in a securities class action context, but the Lloyd and Google decision.

And then it has been tried in a securities context on a couple of occasions recently. So far without success, but still subject to appeal. In the interest of balance, I'm usually on the defense side, but you can see how a starting point is that kind of mechanism, which is more akin to a sort of US opt out, potentially from a claimant point of view. It's quite attractive for dealing with defendant liability issues, and you can see a kind of argument that, potentially you could deal with those kinds of issues early on, and then depending on what the court's answer is to [00:17:00] those, you then deal on a more individual basis with causation and quantum later on.