There is no EU-wide mechanism
While class actions in the US are arguably commonplace, with some high-profile cases such as AIG and Bank of America (BoA) making headlines in recent years, no unified class action mechanism exists across EU member states – only non-binding recommendations.
The UK uses Group Litigation Orders
The UK’s legal system does not have a class action regime where securities litigation is concerned, but a mechanism known as a group litigation order (GLO) enables institutional and/or individual investors or groups of shareholders with separate claims to join them so they can be managed collectively.
They were introduced due to insufficient collective redress systems
GLOs were introduced in 2000 as a result of Lord Woolf's
Access to justice final report, which identified the insufficiency of existing collective redress mechanisms in the UK — particularly in dealing with big-ticket group litigations (product liability and the like).
But few have so far been granted
Only 94 GLOs have been granted by the courts thus far, but some of these have recently made news, including shareholder actions against RBS, Lloyds Banking Group and, most recently, Tesco.
Misleading prospectuses can cause issues
The RBS case – which aims to recoup up to £4bn in investor losses – is premised on allegations that its rights issue prospectus misled investors. The £6bn Lloyds claim is also based on a misleading prospectus. Tesco’s investors maintain that accounting irregularities hiked up its share price.
Courts can order consolidated claims
In the UK, it is sometimes the court, rather than the parties, which decides that separate claims should be consolidated. This judicial discretion makes GLOs nimble and flexible, compared to more rigidly structured US class actions. Nonetheless, they can take two or three years to be resolved if they are not settled out of court early on
There are different funding models
GLOs can be funded in different ways depending on circumstances, for example via ‘no-win no-fee’ arrangements or contingency fees. Third party funding, in which hedge funds invest (by way of finance) in a litigation in exchange for a share of its proceeds, is becoming more common and is being used in the Tesco case.
The mechanisms differ from US class actions …
Unlike US class actions, which are opt-out (claimants are automatically signed up to the action), GLOs operate on an elective (opt-in) basis. Lawyers must actively identify members of a group of claimants and put each through the requisite registration and client care process. The number of claimants can range from hundreds (Tesco) to tens of thousands (RBS).
… As does the compensation
Unlike the notoriously sky-high damages awarded in the juried US class actions, judge-ruled group litigations in the UK can only yield compensation for the actual loss investors suffered as a result of the company or institution's misstatements or omissions. The loser of a lawsuit pays the winner's costs.
The original version of this article, 'Changing suits', was published in the September 2016 print edition of The Review. To opt in to receive future printed editions, log in to MyCISI, select 'Communications' under 'My Account', and tick 'Yes' to receive The Review hard copy.