Guest blog: Almost from nowhere, pension managers and investment committees are being bombarded with class actions. But how do you manage these, and what are trustees’ duties in these cases?
Until recently, trustees have been able to maintain a distance from their involvement in class actions. This has suited them as there is a general dislike for an activity that is commonly perceived as ambulance-chasing among pension schemes.
So, why has this changed?
The main reason – and possibly the trigger for the sudden activity in the UK – is the 2010 US decision in Morrison v National Australia Bank, which limited US class actions to claims where the purchase was on a US exchange or within the US.
We have also seen a large number of US firms setting up in London with an eye on the action.
Until recently, trustees have been able to maintain a distance from their involvement in class actions.
This has suited them as there is a general dislike for an activity that is commonly perceived as ambulance-chasing among pension schemes.
So, why has this changed?
The main reason, and possibly the trigger for the sudden activity in the UK, is the 2010 US decision in Morrison v National Australia Bank, which limited US class actions to claims where the purchase was on a US exchange or within the US.
This decision has been consistently applied by the US courts, which has essentially shut out many claims.
The Morrison decision has resulted in the growth of boutique litigation firms whose USP is that they are prepared to take on banks and other institutions, which the more established law firms have been unwilling or unable to do due to conflicts of interest.
We have also seen a large number of US firms setting up in London with an eye on the action.
A majority of large UK schemes have collected on a settlement…
Source: NAPF Engagement Survey 2014. The research surveyed 50 pension funds with combined AUM of £419bn. Percentages above are rounded.
One of the big attractions of US class actions is their no-win, no-fee model. However, in the English courts, the basic principle remains that if you lose, you pay the costs of the winning side.
Litigation therefore remains a high-risk strategy for any claimant. But the new class actions successfully overcome this hurdle by providing a package that emulates the no-win, no-fee model.
There is no blanket duty for trustees to participate in all class actions, but they do need to apply their minds to the question
This involves a funder who is prepared to finance the claim, in exchange for a success fee, often combined with an insurance package covering the claimants’ liability in the event the claim is unsuccessful.
This funding has become more sophisticated in recent years with a large amount of capital raised – it is rumoured that there is now more than $1bn (£658m) of capital in the global market available to finance class actions.
So what?
This explains why these actions are taking off here – but not what trustees should do. So what are trustees’ duties in the context of class actions?
They should evaluate the pros and cons of potential claims and record their decision whether or not to participate.
There is no blanket duty for trustees to participate in all class actions, but they do need to apply their minds to the question.
I am often asked whether it is right for trustees to commence proceedings against an entity in which they continue to have a shareholding.
This is a good question and there may well be good reasons for trustees to decline to participate in such cases if they consider the action could be the death knell of the target company or adversely affect the value of their shareholding.
However, this is frequently not the case, as many institutions are large enough to withstand class actions and may also be insured against a liability.
Another difficulty is simply how do you choose which class action to join?
Specialist advisers are being established in the UK to help trustees make the right decision when it comes to choosing a class action.
There is also the potential to cause unnecessary panic with self-imposed or false deadlines being circulated by some organisations.
These naturally cause trustees to go into meltdown, as they cannot make decisions within the time limit.
However, when viewed closely, many of these deadlines are simply inviting expressions of interest, rather than being hard deadlines.
Like it or not, class actions are here to stay, and trustees should bite the bullet by delegating an individual or small committee to handle these matters, so they do not take up precious time at trustee meetings.
Katherine Dandy is a partner at Sackers
