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Shareholders have a right to be angry about corporate malfeasance and institutional incompetence. But should they, automatically, have a right to much more?
Take the case of the London-listed outsourcer Serco and security group G4S from July 2013. Shares in the two fell heavily when they were accused of overcharging the government by millions of pounds for the electronic tagging of offenders. Serco had £236mn wiped off its market value in a day, after it was found to have billed for tagging criminals who were still in prison, still at large, or still very much dead. G4S lost £167mn of its value on the same day, having demanded payments for guards so diligent that they strapped an ankle tag to a prosthetic leg. Serco was later fined £19mn, and G4S £44mn, following a Serious Fraud Office investigation.
None of this enforcement action was much help to investors, though. Hence they sued. And, last week, in the first UK shareholder lawsuit to go to trial, Serco deemed disbursement the better part of valour and reached an undisclosed settlement. G4S shareholders’ group action settled before it got to court.
Justice was done, investors would argue. Given that seldom appears whenever the SFO is involved, it is easy to see why they put their faith in civil actions. It is also easy to see why shareholders in Standard Chartered, Barclays, Glencore, Entain, and Reckitt Benckiser are now doing much the same over other claims for financial loss.
Those who feel out-of-pocket already have proof that UK lawsuits can win redress at a reasonable cost. A group action against Royal Bank of Scotland over its mendacious 2008 rights issue secured £800mn. As one lawyer put it: “It showed these [suits] are profitable.”
Meanwhile, those who feel outraged have reason to believe litigation can raise corporate governance standards. A shareholder suit against Tesco alleging overstatement of profits delivered £193mn and a warning to FTSE chief financial officers. As another lawyer argues: “It’s a bonus to the market, to the advantage of shareholders.”
However, would enabling more and much larger group actions really be a bonus to London’s market?
Already, corporate advisers and even some claimants’ lawyers worry that nuisance suits may be encouraged by commercially aggressive law firms and litigation funders.
Grant Thornton consultants in a public web discussion have noted: “The availability of third-party litigation funding and ‘after-the-event’ insurance in the UK mean that it’s becoming increasingly attractive to bring securities claims in this jurisdiction.” One of the claimant lawyers adds privately: “US lawyers are very familiar with ‘stock drop’ cases; they make whole careers out of it. It’s not really about holding companies to rights, it’s all about making money.”
Shareholders don’t always see much of it either. Where settlements are small, the amounts flowing through to claimants — after lawyers, funders and insurers take their cut — can be limited. Here, the post-settlement quotes from the opposing parties can be telling: when claimants insist it was really just about holding management to account, that typically means their payout was, to quote Serco, “not material”.
But it could become easier for shareholders to do these lawyers’ and funders’ bidding. Although the UK legal system does not permit US “opt out” class actions — where all shareholders are automatically assumed to have signed up — the Court of Appeal has been asked to allow a similar arrangement, currently used in competition cases, for the Reckitt investor lawsuit.
One big suit would not change perceptions of London as a listing venue overnight. However, some in the legal industry suggest a few years on from a court approval, there “might be a knock-on effect, a huge rise in class actions”.
For a London market already trying to recover from a series of self-inflicted injuries — from Brexit to listing rules, governance to pay — giving UK companies one more reason to remain private, and losing one last advantage over the US would be shortsighted. Albeit not as much as an errant G4S tagging operative.