In the last 12 months, we have seen a marked increase in the number of shareholder claims that are being pursued. This phenomenon is not limited to traditional securities claims in the US, but is something that is happening in multiple jurisdictions.
There is nothing new about forum shopping, where claimants seek to establish jurisdiction in a court they perceive to be most favourable to their case. However, with the involvement of a more innovative plaintiff bar in the US, activist investors and the growth of the international litigation funding market, new legal theories are being pursued that not only seek to secure favourable jurisdictions but which are materially affecting the outcome of claims against globally trading corporate groups.
In the US, there are increased numbers of securities claims being filed against non-US issuers but whose shares are traded through American Depository Receipts (ADR). For ADRs that are not actually sponsored or otherwise actively promoted to US investors, it was considered that US courts had no jurisdiction over investor claims. However, the Court of Appeals for the Ninth Circuit ruling in a case concerning Toshiba meant that even where a foreign issuer had limited involvement in any share transaction, this would still amount to a domestic transaction sufficient for the purpose of the Exchange Act and therefore granting jurisdiction in the US. That case then proceeded to discovery and class certification. In January this year, the district court refused the claim class action status owing, in large part, to the complexities of the ADR and whether the plaintiffs acquired their securities in domestic transactions.
In the UK we are seeing an evolution in the law regarding liability of a UK domiciled parent company for the activities of globally trading subsidiaries. The movement is well underway and received considerable support from the 2019 decision of the (UK) Supreme Court in Vedanta v Lungowe which provided encouragement for foreign litigants seeking to bring group litigation against English-domiciled parent companies in the English courts. In Vedanta, the Supreme Court identified two crucial factors for granting permission to bring such a claim: the prospects of establishing parent company control over a subsidiary’s practices to establish a duty of care owed by the parent company to third parties affected by the operations of a subsidiary; and the claimants’ lack of access to justice in their own jurisdiction. Cases arising from the Samarco damn collapse in Brazil in 2015 are running through the English Courts and may well result in further Supreme Court rulings in this area.
These developments pose significant risks to multinational corporations who may be exposed to unexpected litigation where they consider they have only a light touch-point. In turn, it is a challenge for D&O insurers to underwrite such evolving international exposures.
