Report: Shareholder Suits Abroad Gravitate Toward Low-Risk Countries with Strong Track Records

October 25, 2023

Even as avenues for consumers to pursue group litigation abroad expand, activity in shareholder lawsuits outside the United States has grown more narrowly focused on jurisdictions with lower adverse risks and better histories of recovery, according to recent publications by service providers.

While the number of non-US shareholder actions filed in the first half of this year held steady, “litigation funders have changed their geographic focus, investing more resources in countries perceived as lower risk with more expedited legal proceedings and away from countries where previously filed suits have been slower and more challenging than expected,” Financial Recovery Technology (FRT), a global class action recovery service, wrote in its Mid-Year 2023 in Review.

According to FRT, 25 recovery actions were initiated outside the US from January through June, nearly on track to match the 52 cases filed in 2022. The 2023 cases were filed across six jurisdictions, however, compared with 11 countries in 2022. Both totals include opt-in actions, where affected investors are required to register as parties relatively early in the proceedings, as well as opt-out actions, where (like in US federal class actions) affected shareholders can wait until a case is decided to file a settlement claim.

The review found that countries with opt-out actions, such as Australia and the Netherlands, were seeing an uptick in new matters, while Germany, Brazil, and other jurisdictions where prior cases have become bogged down have seen fewer new filings. Risk calculations were also driving institutional investors’ decisions on whether to register for cases, FRT said, adding that, so far in 2023 it has seen “the greatest client participation in passive [opt-out] countries including Australia and the Netherlands.”

ISS Securities Class Action Services (SCAS), another settlement-claims-filing service, also underscored the importance of assessing adverse cost risks in overseas litigation, even when third-party litigation funders take out “after the event” (ATE) insurance—policies designed to kick in if a court orders plaintiffs to pay defendants’ costs.

“[E]ven with litigation funding and ATE insurance, there is still a risk that participating investors could be left footing some of the bill,” SCAS wrote in a September 2023 white paper, Participating in Securities Collective Actions Outside the US: Are Adverse Costs Worth the Risk? In one English High Court case where the judge found for defendants in 2019 (Lloyds/ HBOS), defendants claimed more than £30 million in legal costs, £9 million more than that funder’s ATE insurance cap.

The white paper highlighted the risk of paying adverse costs in five countries, saying risks were lowest in Australia, the Netherlands, and Japan and highest in the United Kingdom and Brazil. Despite such generalizations, the paper’s authors said investors need to rely on a “thorough, objective case and jurisdictional analysis” to make decisions on whether to participate in non-US litigation.

“Unfortunately, there is no universal approach to handling adverse costs across multiple jurisdictions,” they wrote. “The adverse cost risk is highly contextspecific based on the jurisdiction, the particular case, and the terms offered by the funder.”

If new cases and participant registrations are concentrated in a handful of lower-risk countries, the EU and the UK, at least, continue to expand their own legal mechanisms for collective redress. Depending on the commentator, this process is either leading to an explosion of “US-style” class actions or a more measured, European model.

“The growth of group litigation in the UK and Europe over recent years has been exponential, and its significance to businesses as a key corporate risk will only continue to increase,” the law firm Jones Day wrote in an October 2023 client booklet, The Rise of  US-Style Class Actions in the UK  and Europe.

In the UK, for example, Jones Day said 13 new claims were brought in 2022 under the collective proceedings order introduced in 2015, double the number in 2021. The authors attributed the rise to a “confluence” of factors: “an upswing in the thirdparty litigation funding market, increasingly sophisticated and experienced claimant law firms, and liberalised group claim procedures.”

Still, the UK has been a bit of a bumpy road for case organizers and funders. Most recently, the UK’s Supreme Court ruled that litigation funding agreements that provide funders a share of damages should be defined as “damages-based agreements,” meaning that they are unenforceable unless comply with a strict set of regulations that, among other things, limit the percentage to 10 percent— and completely unenforceable for opt-out proceedings before the Competition Appeal Tribunal. In the wake of this agreement, funders are working to revamp their agreements with registrants.

Unlike the UK, the EU appears to be moving slowly and steadily toward more claimant-friendly “collective redress” procedures. The European Commission’s 2018 “New Deal for Consumers” and 2020 “Representative Actions Directive” required the EU’s 27 member states to put in place a collective action mechanism for consumers in a range of sectors, including data protection, financial services, travel and tourism, energy, and communications. These cases can be filed by “qualified entities”— typically consumer groups registered in at least one of the EU countries—that represent a minimum number of claimants.

While adoption has been slow enough to prompt the European Commission to send “formal notice” in January to member countries who had failed to change their laws to conform, at least 10 countries have now complied with the directive, with all but a few in the process of doing so.

On September 29, 2023, Germany became the latest EU member country to approve a law transposing the Representative Actions Directive. Expected to take effect by the end of October, the new law expands protections for consumers in German courts, where previous collective actions provided only declaratory and injunctive relief. Also under the new law, consumers will have until three weeks after the end of oral proceedings to register their claim, when they will have a better idea of the case’s chances for success.

That said, the German parliament estimates that only 15 cases a year will be brought under the new law. Bird & Bird attorney Susanne Lutz says that is because of features in the final law that favor defendants. For one thing, at least 50 impacted consumers need to group together to commence an action. For another, litigation funding fees are capped at 10% of the “economic benefit resulting from the redress action” and contractual arrangements must be disclosed. In addition, the law dropped a proposal to include disclosure obligations for relevant documents. And finally, claimants can still be found liable for adverse costs, though the €300,000 cap is less than originally proposed.

“Many companies feared the introduction of a ‘class action’ based on the US model; however, this fear is not justified,” she wrote, adding that representative actions brought under the law “should not be able to be utilized as a business model for purely profit-making purposes.”