Shareholder class actions: What is stopping their import ... · PDF filemisfeasance, have...

not in financial distress was about$3bn, agreed in 2000 by Cendant.

Excluding WorldCom and Enron, thetotal value of all settlements in 2005, of124 different shareholder class actions,was $3.5 billion which included ninesettlements of more than $100 millionaccording to Cornerstone Research inassociation with the Stanford Law SchoolSecurities Class Action Clearinghouse.

Such class actions have also becomepart of the legal landscape in Canada andAustralia as well as, recently, in Israel,China and Korea.

In the UK, those companies whoseshares or other securities have asecondary listing in the USA have alsoincreasingly been drawn into such actionsin the USA as defendants alongside theirdirectors. At the same time, streams ofenvoys from US class action law firms

INTRODUCTIONThe shareholder class action againstdirectors’ fraud has over the last 30 yearscome to play a central role in the legal,financial and corporate governancesystems of the USA.

The last 12 months have seen courtapprovals of two record-settingsettlements of shareholder claims againstUS companies, as well as theirdirectors, bankers, accountants andother advisers and counterparts.Payments of $6.1 billion were approvedto shareholders in WorldCom andpayments of $7.1 billion were approvedto shareholders in Enron. Bothcompanies, and those involved withthem, were held responsible forlarge-scale accounting frauds leading toan inflation of their share prices. Therecord settlement against a company

254 Pensions Vol. 11, 4, 254–290 � Palgrave Macmillan Ltd 1478-5315/06 $30.00

Shareholder class actions: What isstopping their import into the UK?Received: 30th June, 2006

Clive Wolmanis a barrister at 11 Stone Buildings, Lincoln’s Inn, specialising in financial services, company and commercial law. Previouslyhe worked as a financial journalist, for seven years as a Financial Times correspondent, covering primarily the securities andinvestment banking industry, and for six years as City Editor in charge of the Financial Mail On Sunday, winning a BritishPress Award and the Wincott Financial Journalism award. He founded and edited the weekly investment banking newspaperFinancial News and won the Bar Council law reform essay prize in 2004.

Abstract Shareholder class actions, which bring claims based on directors’misfeasance, have become big business in the US and to a lesser extent in othercommon law countries since the 1970s. But they have rarely appeared in the UK. Thatis primarily because of the stance taken by its influential institutional investors and itsregulators, and the rules of the English legal system governing procedure, the recoveryof legal costs and the liability of directors. However, reforms and developments in boththe US and UK have made the emergence of class actions more feasible and attractivethan in the past.

Keywords: class actions, law reform, directors, companies, shareholders, contingencyfees, USA

Clive WolmanEmail: [email protected]

That was the strategy behind theSarbanes-Oxley Act 2002, which waspassed in response to the Enron,WorldCom and other scandals.

Yet, after a brief fall in numbers in1996 and in spite of the willingness ofthe courts under the PSLRA to strikeout about a quarter of all cases, the tideof litigation has built up remorselessly.Between 1995 and 2002, the likelihoodof a US public company being sued byits shareholders for securities-relatedmatters rose approximately 40 per centaccording to NERA, a leading US-basedeconomic consultancy.

Based on the 2003–2005 filing rate,NERA estimates that over a five-yearperiod the average publicly listed UScorporation has nearly a 10 per centprobability that it will face at least oneshareholder class action lawsuit.

These figures include neitherderivative actions brought byshareholders on behalf of wrongedcompanies nor class actions allegingunfair allocations of shares in initialpublic offerings, a number which soaredto 312 in 2001 in the fall-out from theinternet boom, nor actions againststockbroking analysts, of which therewere 40 in 2002.

In fact, most securities class actions inthe USA allege fraudulentmisrepresentations of the financialposition or the financial prospects of acompany by its directors as well as, onsome occasions, its auditors or otherprofessional advisers.

The PSLRA has encouraged a morethorough investigation of such allegationsprior to launching the case by theplaintiff bar in order to meet the higherpleading standards and to avoid theadditional risk of cost penalties. As forcompany earnings and other forecastsmade by directors, the PSLRA offered‘safe harbour’ provisions to protect them.But, far from preventing lawsuits, on

have been crossing the Atlantic andseeking to sign up UK institutionalinvestors with portfolio holdings in UScompanies as lead plaintiffs in theirvarious cases.

Yet in the UK courts, shareholderclass actions have, with one partial andcontroversial exception, never beeninitiated in spite of all the high-profilecorporate collapses, executive frauds andalleged abuses of power and privilege inthe boardroom over the last 20 years.Instead to control and discipline errantdirectors, UK shareholders have relied ona variety of other legal, regulatory andinformal devices.

There are few other areas of legalpractice where the UK diverges sofundamentally from the other majorcommon law countries. This paper looksat why and how these differences havearisen, an account that stretches backover 150 years of development incompany law, securities regulation andgroup-based litigation, and examines theprospects of such forms of litigationinfiltrating the English legal system.

SHAREHOLDER CLASS ACTIONSAROUND THE WORLD

USA

Over the last 15 years, the US Congresshas attempted to curb the growth inshareholder or ‘securities’ class actions (thetwo terms are virtually synonymous). Inparticular, over the veto of PresidentClinton, it passed the Private SecuritiesLitigation Reform Act 1995 (PSLRA)which aimed to crack down on theperceived abuses of ‘entrepreneurial’plaintiff lawyers. It has also shifted someof the burden of deterring directors’ fraudand misfeasance away from civil litigationonto further regulatory measures,corporate governance and criminalsanctions, in line with the British model.

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Shareholder class actions: What is stopping their import into the UK?

company law has been heavily influencedby the USA, have also facilitated thebringing of class actions by shareholdersin the wake of a series of collapses ofinsurance and other companies. BothAustralia and Canada have notched upimportant landmark decisions over thelast year.

In August 2003, the Australian FederalCourt approved a settlement worthA$112 million (£46m) paid primarily tothe 23,000 former shareholders of theGIO insurance company who decidednot to sell their shares into a hostiletakeover bid by AMP in 1998. GIO’sdirectors at the time were forecasting aprofit of A$250m, whereas in fact itsuffered a loss of A$750m.

This was the largest settlement in ashareholder class action since class actionswere legitimised in Australia by a HighCourt case1 and by legislative reforms in1992. These introduced an opt-outprocedure in the Australian courts underwhich more than 100 class actions (of alltypes) have since been launched.

In Canada, shareholder class actionshave been encouraged by the adoptionby most Canadian provinces over thelast decade of a harmonised ClassProceedings Act and by several judicialdecisions certifying classes ofshareholders. In one case,2 an Ontariocourt accepted the notion of deemedshareholder reliance on allegedly falsemisrepresentations in a share prospectuswhile another3 certified a class actionfor alleged misrepresentations tosecondary market investors. TheOntario court’s judgment included arejection of the ‘fraud on the market’doctrine that has been crucial in thedevelopment of US class actions (seebelow) — but in a more recentdecision in September 2002,4 theQuebec Superior Court implicitlyaccepted the doctrine.

In China, since early 2002, the courts

many occasions, particularly during theinternet boom, these provisions seemedto encourage recklessness and have, ifanything, fuelled more litigation.

Another unintended consequence ofthe PSLRA has been to draw Europeanand Asian investors into the pool ofpotential plaintiffs. The PSLRA providesthat the court should normally appoint aslead plaintiffs those institutionalshareholders who have suffered thelargest losses as a result of the allegedmalpractice. The US courts make nodistinction between US and foreignshareholders. Because it is the leadplaintiffs who appoint the lead law firm,which thereby wins the right to thecontingency fee, if successful, the PSLRAhas given a powerful incentive to lawfirms to woo and win the allegiance ofas many potential lead plaintiffs, ie asmany institutional investors, as possible.Consequently, US law firms have startedtravelling regularly to Europe and Asia inthe hope of persuading their pensionfunds, mutual funds and insurancecompanies to take on such a role insuitable cases — and to appoint them astheir legal advisers.

The most active promoter in the UKhas long been the leading US securitiesclass action law firm, Milberg WeissBershad Hynes & Lerach, which since1995 has led more than 50 per cent of allthe larger securities class actions, includingthose against AOL Time Warner,American Express and Enron. In early2004 the partnership divided into two,based in New York and in San Diego.The smaller of the two firms, in NewYork, was in May of this year indicted oncharges related to the alleged payment ofillegal introductory commissions.

Non-US jurisdictions

Other common law jurisdictions, andother countries whose securities or


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1998, just nine days before its ADRprice collapsed following anannouncement of a profits slump. Thelitigation was settled in December 2001with the payment of $75m of damages.Other large European companies to havebeen sued include DaimlerChrysler,Deutsche Telekom and the Belgianspeech recognition software companyLernout & Hauspie. In 2001, thenumber of securities class actions in theUSA against foreign companies trebled to17 per cent of the total.

Current litigation

Four of the biggest suits against Europeancompanies are currently against:

• Cable and Wireless plc. In February2003, several class actions werebrought against the company, fiveformer executives and its auditorKPMG following the company’s shareprice collapse in 2002 alleging that thedefendants:— concealed large lease commitments;— failed to disclose a potential tax

liability, which has had the effect offreezing up to £1.5bn. of its cash;

— artificially inflated its gross revenuefigures by engaging in the phoneyswapping of carrier capacity withother telecom companies.

• Vodafone plc. A 43-page document filedby Milberg Weiss (assisted by the UKsolicitors Class Law) in November2002 alleged that four Vodafoneexecutives, in order to ‘protect andenhance’ £47m worth of seniorexecutive bonuses and other payouts,misled the market in 2001–02 by:— improperly delaying the write-down

of billions of dollars of goodwill andimpaired assets;

— giving a false steer to Bear Stearnsin August 2002 over thewrite-downs;

have started to accept shareholder actionsagainst companies for securities fraud.The largest of its kind, heard by theHarbin Intermediate People’s Court, wasbrought by nearly 700 shareholders inthe Shanghai-listed Daqing LianyiPetrochemical for false statements, madepartly at the time of its stock marketflotation in 1996–97 when its share pricesoared. Such cases seemed likely to getbogged down in a procedural morassuntil the Supreme Court released adocument in February 2003 whichclarified how the shareholder losses andcompensation were to be calculated.Other cases have now got underway inShenyang (against Shanghai-listed JinzhouPort and its auditor KPMG), Qingtaoand other cities.

Meanwhile, the South Koreangovernment in 2003 introducedlegislation to permit shareholder classactions, in particular suits alleging shareprice manipulation. The legislation,whose prime target was the powerful‘chaebol’ conglomerates, has beencoming into effect over the last twoyears.

By contrast, in European courts, theshareholder class action remains virtuallyunknown, although Sweden introducedlegislation to permit such actions in2004, which has led to a large suit by15,000 investors in Skandia Livs.Germany also introduced ‘model case’proceedings for shareholders at the endof last year. In any event, Europeancompanies and their directors are nolonger immune to such suits, at least notif they have listed any of their securities,most commonly American DepositaryReceipts (ADRs), on one of the USexchanges. One of the biggest earlytargets of such litigation in the USA wasthe French telecommunications companyAlcatel Alsthom, which completed anall-stock merger with a US companyDSC Communications in September



Goodman, who had concealed hisidentity by first making a sham transferof his shares to a third party. Goodmanwas in breach of the directors’ modelcode and at the time he dealt hepossessed inside price sensitiveinformation, which, if disclosed, wouldhave depressed the value of the shares.The basis for Knox J’s decision was thatthe court would not assist Goodman toenforce an uncompleted bargain as it wasfounded on his illegal act. In that case,Chase had not yet handed over the£1.15m before it discovered the breach.By contrast, a group of shareholders in asimilar situation would probably havealready handed over the money and sowould be unable to rely on this remedy.

Second, the defendants in such actionsare rarely if ever the directors responsiblefor the false statements about theircompany. It is usually assumed that theywill not have sufficient assets to satisfy ajudgment — and there is perhaps in theUK a natural reluctance among financialinstitutions to make individual directorspay, at least in cases of negligence, to theextent of forcing them into bankruptcy.Instead they sue deep-pocketed thirdparties such as:

• the company’s auditor;6

• the company’s investment bank;7

• the company’s commercialbank/lender.8

To these generalisations, there are in factthree partial exceptions, ie situations inwhich English courts have seen suchlitigation brought by a group ofshareholders against individual directors.

Instances of litigation in the UK

Prospectus frauds

The first exception is prospectus frauds.Three leading 19th century cases9 settled

— failing to admit to overpayinggreatly for numerous acquisitions;

— failing to give a true picture of themigration of users from fixed wireto wireless.

• Koninklijke Ahold NV. A Dutchcompany where details of anaccounting fraud came to light in itsUS Foodservice and Latin Americandivisions in February 2003. Thisrequired a $500m restatement of itsprofits over the two previous financialyears.

• Vivendi Universal SA of France. Thecompany and its high-profile formerchief executive Jean Marie Messier faceallegations that they misled investors in2001–02 in order to inflate the value ofthe shares used in an acquisition spree.

FINANCIALMISREPRESENTATION CASES INTHE UK

Why UK securities litigation is rare

The allegations against the Europeancompanies listed above amount to claimsof misrepresentation, either fraudulent ornegligent, a cause of action wellestablished in the English legal system.Yet no claim against these companies hasbeen brought in England. In fact,litigation alleging misrepresentation of acompany’s value, its assets or its prospectsis rare in England. In such litigation asdoes occur, neither the parties nor theissues accord with those in the standardUS class action.

First, the claimants are never a groupof ordinary shareholders but are morecommonly disappointed bidders for thecompany or finance professionals eginvestment banks or market-makers.Thus in one case,5 Chase ManhattanEquities, a market-maker, was allowed torescind the sale of £1.15m of Unigroupplc shares to it by a Unigroup director,


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relationships with each other, collectiveaction is fairly simple to organise andlitigation is not uncommon, based on avariety of different causes of action.

However, self-servingmisrepresentation as a cause of actionagainst directors was discouraged by anearly case Percival v Wright,11 where thecourt dismissed the claim that thedirectors had benefited from undisclosed,inside information about a possible saleof their company’s business when buyingshares from the claimants. Its reasoningwas that directors owe their fiduciaryduties to the company, not to theindividual shareholders. The headnote tothe case states baldly: ‘The directors of acompany are not trustees for individualshareholders, and may purchase theirshares without disclosing pendingnegotiations for the sale of the company’sundertaking’. In an undiluted form, thatprinciple would prevent shareholders inEngland from having a remedy in manysituations where US class actions havesucceeded.

However, in recent years the ambit ofPercival v Wright has been whittled down,in particular by Sir NicolasBrowne-Wilkinson V-C12 and by MackieQC13 who followed instead acontradictory New Zealand decision.14

Mackie QC was ruling on a dispute overa small car retailer owned by threebrothers. He found that the brotherrunning the business had exaggerated thethreat of the loss of its BMW dealershipto persuade his brothers to surrendertheir preference shares and he was heldto be in breach of his fiduciary duties.

Takeover bids

The third partial exception is wherethere has been a takeover bid. In somecases, the bid has succeeded and it is thenew controlling shareholder in thecompany who initiates the litigation, asin Morgan Crucible and Caparo cases.15 In

the law that, where a company has raisedcapital by issuing securities, purchasers ofthe securities are entitled to damages forfraudulent misstatements in the prospectuson which they relied. That principle hasbeen extended over the last century tonegligent misrepresentation both incommon law and by statute, mostrecently by s. 90 of the FinancialServices and Markets Act 2000.

Because the law is relatively clear,claims in this category have rarelyreached court in modern times. Over thelast 15 years, there have been tworeported cases,10 although neitherinvolved a class of shareholders acting asclaimants. The judges in both casesexamined and largely accepted thedistinction between:

• the subscribers to securities issued onthe basis of a false prospectus, whoform a well-defined class with whomthe issuer has a special relationship andwho therefore have a strong statutoryand common law claim, and

• the buyers and sellers of the securitiesin the secondary market over a periodof months or years, while a falseaccounting or financial statementremains in currency, who form a farmore diffuse group and whose claimfor damages is much weaker.

One consequence of this distinction isthat prospectuses and other capital-raisingdocuments in the UK are subjected tofar more painstaking scrutiny and duediligence by the company’s lawyers andinvestment bankers than its other tradingstatements or any ‘guidance’ that it maygive to stockbroking analysts.

Private companies

The second exception applies to privatecompanies with few shareholders. Infamily and other small companies whereshareholders and directors have close



of information and power between largewrongdoing corporations and theirdirectors on the one hand, and the massof individual consumers or investors whoare their victims, on the other. In a caseof securities fraud, there may be hundredsor even thousands of shareholders who areunaware of their rights under thesecurities laws or even that they havebeen the victims of a deception or, if theyare aware, whose loss is individually toosmall to induce them into the strains,stresses and costs of solo litigation. Classactions are thus an extremely effectivedevice for aggregating personal rights,which would otherwise not be vindicated,and achieving economies of scale.

Thirdly, class actions on the USmodel, which are almost invariablyfinanced by the plaintiffs’ law firmoperating on a contingency fee basis, area moderately satisfactory, albeit imperfect,solution to what economists call anagency problem. That is the problem ofbringing together a large and diffusegroup of litigants and then ensuring thatthose who represent them act in the bestinterests of the group as a whole, ratherthan in their own interests or those of asmall sub-group.

Fourthly, from the point of view of thecourt system and the administration ofjustice, class actions are usually a highlyefficient way of proceeding. They avoidclogging up the courts with a mass ofsimilar cases and avoid the risk ofinconsistent judgments on similar facts andissues being given in different courts. Thisjustification is probably the one that hasappealed most to the English judiciary andhas been the driving force behind theintroduction and use of Group LitigationOrders in England since 2000.

The common law roots of class actions

The fifth leg of the rationale is anhistorical one, drawing on the seminal

other cases,16 the claimant has been asingle shareholder, who has feltparticularly injured by the directors’misrepresentations or inadequatedisclosure.

Takeover battles often lead to litigationand even to suits against individualdirectors, perhaps because after emotionshave run high during a keenly foughtbid battle, institutional and corporateclaimants feel fewer inhibitions aboutsuing individuals. But there are rarelymore than one or two claimants. TheUK offers no examples of a large,dispersed group of shareholders beingmobilised for the purposes oftakeover-related litigation, in contrast tothe USA where such examples abound.

THE RATIONALE FORCLASS ACTIONS

The six reasons

To understand the failure or refusal ofthe UK legal system to importshareholder class actions on the USmodel, it is first worth considering thesixfold rationale for such class actions asdeveloped by US lawyers, judges andlegal theorists — and the particularadvantages of shareholder classes.

The first is that they are a device topreserve the integrity of the marketsystem in general and of the financialmarkets in particular. Shareholder classactions aim to do so by harnessingprivate grievances and initiative to trackdown evidence of large-scale fraud ordissemination of false information and todeter future malpractice by publicity andby extracting compensation from thewrongdoers. Class actions therebycomplement the more rule-based andinevitably more bureaucratic approach ofthe regulators.

The second justification for class actionsis that they help to redress the imbalance


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representative claim was ruled out by a2:1 majority. Fletcher Moulton LJsaid:19 ‘The relief sought is damages.Damages are personal only. To mymind no representative action can liewhere the sole relief sought isdamages, because they have to beproved separately in the case of eachplaintiff, and therefore the possibility ofrepresentation ceases.’

This ruling, although not explicitlyendorsed by the other judges, blightedthe development of all representative, ifnot all large multi-party, actions inEngland for the next 70–80 years. Thefirst signs of change came only whenthe judgment was distinguished byVinelott J in the Prudential v Newmancase, which is the leading case onpublic company shareholder litigation20

(see below).The US class representative action,

far from being a mere symptom of thelitigiousness of American society and anexcrescence on the face ofAnglo-American jurisprudence, cantherefore be viewed as a natural andfundamental part of its developmentover seven centuries.

The suitability of runningshareholder claims as classactionsFinally, shareholder litigation againstdirectors or professional advisers isparticularly well suited to proceeding as aclass action compared with, for example,mass personal injury claims arising from adefective product or transportationdisaster. For any litigation to beorganised as a class action, there has tobe as much commonality andhomogeneity as possible between themembers of the class in relation to thematters in issue.

In personal injury cases arising from,say, a large fire or the unanticipated side

work of Professor Stephen Yeazell.17 Itseeks to deny the supposedly anomalousstatus, in an adversarial system based onthe autonomy of individual litigants, of aform of litigation brought not by anindividual or legal person (eg a company)nor by the state but on behalf of a large,previously inchoate class of people manyof whom may not even be aware of thedispute.

Beginning with a suit from 1199against the parishioners of Nuthamsteadin Hertfordshire, Yeazell shows that theEnglish feudal system had acommunitarian approach, treating thegroup representative lawsuit as a naturalway of enforcing rights. Much morethan today, the individual’s identity wasin the Middle Ages defined by hismembership or residence of a manor,parish or guild. The procedural rules forrepresentative actions that were originallydesigned to assist these rural groups, werein the early industrial age adopted by theCourt of Chancery and applied to urbanand industrial associations. Thereafter, inthe late 19th and 20th centuries, in theUSA, these rules formed the nucleus ofwhat became the modern class action,albeit with some degree of conceptualconfusion about the roles of the courts,the class members and theirrepresentatives.

By contrast, in England, as well asin Canada and Australia, such progresswas stalled in the 19th century by theinternal problems of the Chancerycourts, by the growth of individualismand by the introduction of legislationdealing specifically with the rights,powers and remedies of companies,friendly societies and trade unions. Thechange in the attitude of the Englishcourts was crystallised by the Court ofAppeal in a 1910 case18 where anowner of cargo on a ship that wassunk purported to sue on behalf of 44other cargo owners. The plaintiff’s



shareholders are presumed to rely on theintegrity and efficiency of the stockmarket, and thus on its ability to reflectall publicly available information in theprices at which the shares are traded.

The other element of commonality isin the defences typically deployed by thedefendants to such actions, ie that it wasreasonable at the time for directors tomake the contentious statements or thatsuch statements did not bear the meaningalleged.

EXPLANATIONS FOR THEABSENCE OF SHAREHOLDERCLASS ACTIONS IN THE UK

Differences between the UK andthe USA

Although Yeazell provides a persuasivehistorical account of how the practice ofgroup representative litigation in generalhas diverged on the opposite shores ofthe Atlantic, other specific factors may becalled upon to explain the disparity inpractice between the UK, on the onehand, and other common law countries,in particular the USA, on the other. Sixsuch factors are identified below.

However, each of these factors belowis currently in a state of flux as a resultof legislative reform, far-reaching changesin the civil litigation system and theintroduction of tougher, better enforcedcorporate governance codes. The impactof these changes suggests that a processof limited convergence between the twocountries — or indeed between themajor Commonwealth jurisdictions —may be underway.

Key factors which may explain theabsence of shareholder class actions inthe UK today include:

• The lack of facilitation offered to class,representative and group litigation byEnglish procedural rules.

effects of a drug, that homogeneity rarelyexists. The victims, as well as differinggreatly in their circumstances at themoment disaster struck and in the extentof their injuries and suffering, will alsohave very different views towards therisks of litigation and how it should behandled. Some will prefer to reach anearly settlement while others will wantto hold out for a larger sum later.Reaching a settlement and then dividingup the pot of damages fairly between thevictims is bound to be a fraught andcontentious process.

By contrast, the loss suffered byshareholders as a result of a securitiesfraud is purely financial and thus inprinciple much easier to calculate. Thedivision of damages between theshareholders will, other things beingequal, be proportionate to the size oftheir holdings. Damages are by far themost common remedy in such cases, andother established remedies, for examplecorporate governance improvements,affect all shareholders equally inproportion to their holdings.

Furthermore, most shareholders, it cannormally be assumed, own diversifiedportfolios of shares and thus are unlikelyto differ greatly in how much risk theyare prepared to take in negotiatingcompensation in respect to one share.

In the most common form ofshareholder litigation, where the directorsare alleged to have published falseinformation to the market about theircompany’s financial performance orprospects, the alleged misrepresentationaffects all equally. In other words themisinformation will inflate (or depress) theprice of all a company’s shares by an equalamount above (or below) their true price.

Nor is there any need to prove thatshareholder claimants individually reliedon false statements, thanks to the fraudon the market doctrine accepted by UScourts (see below). Instead all


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opt-out procedure, a lead plaintiff and hislaw firm can be certified as representingan entire class of victims of a breach ofthe securities laws or of directors’fiduciary duties, or indeed of some othermass tort or corporate wrong. Ifsuccessful, the lead plaintiff can claimdamages sufficient to compensate theentire class without the individualmembers of that class taking any actionat all. Efforts to notify such individuals inadvance are required only to the extentthat they are reasonable at that time.

In practice, only if and when the caseis resolved and any damages paid into anescrow account are the lead plaintiff andhis lawyers placed under an obligation tomake all possible efforts to track downthe individual members of the class andnotify them of their possible entitlementto the damages. All that the individualshareholder then has to do to claim hisshare is to fill in, sign and return a form.The administrative costs of this exerciseare met out of the damages fund. Theonly individuals excluded from suchdamages are those who have explicitlyopted out and thereby preserved theirright to bring an individual action. Veryfew ever do so.

This opt-out procedure was created bythe US Advisory Committee on CivilRules in 1966 with a redraft of the classactions provisions in Rule 23 of theFederal Rules of Civil Procedure, whichdates back to 1938. The dramatic surgein class actions in general and inshareholder class actions in particular inthe USA over the last 30 years is usuallyattributed more to this revision than toany other single factor. In 2001, 3,100class actions (of all varieties) werecertified in the Federal courts, a 30 percent increase over 2000. But in the statecourts, where similar proceduralprinciples apply, the increase in classactions over the last decade has beeneven more dramatic.

• The way in which the lawyers leadingthe class litigation get paid and inparticular the absence of purecontingency fees in the UK.

• The reliance in the UK on regulationrather than litigation to determisconduct by companies and theirdirectors in both financial and othermatters.

• The greater reliance by UKinstitutional shareholders on voluntarycorporate governance codes andinformal pressure than on litigation toenforce good behaviour.

• The limited causes of action availableto shareholders in the UK as a resultof the conservatism of the Englishjudiciary in developing company andsecurities law, particularly for thepurpose of assisting shareholder groups.

• The lack of suitable defendants toshareholder class actions. There havebeen few deep-pocketed directors inthe UK against whom judgment canbe enforced. At the same time, there iswidespread scepticism about the valueof making the companies themselvespay.

Of these factors, probably the mostimportant are the first two, which areinterlinked.

The US procedural rules forclass actions

For reasons pinpointed by StephenYeazell,21 the English legal systemprovides very limited assistance tofacilitate class actions in its proceduralrules. In particular, English courts in the20th century lacked the powers that UScourts have to impose classwide liabilityon the defendants to an action. Thequestion now is whether recent reformsand innovations carry within them thepotential for overturning this assumption.

In the USA, under the so-called



The counterpart to that characteristicis that the other members of the classcannot enforce a judgment in favour ofthe representative on their own behalf, atleast if they are seeking damages. Thebest that they can normally expect is aninjunction or declaration which benefitsthe whole class. In Prudential v Newman,Vinelott J endorsed a two-stageprocedure to allow class members tosecure damages. First, the claimant mustwin a declaration that the members of aclass that he claims to represent (in thatcase, the shareholders) are entitled todamages, perhaps assessed according to aspecified formula. Then those members,after proving their personal loss, caninvoke that declaration to secure damagesfor themselves.

In a few cases, where no distinctionsneed to be made between the classmembers, the courts have awardedsufficient damages to compensate themall at a single trial. Thus the successfulrepresentative claimant of a class ofowners of cargo in a ship which collidedwith the defendant’s vessel had todistribute the damages awarded amonghis fellow cargo-owners.24 A secondcase25 concerned a market trader’s breachof copyright in a large number ofmusical recordings, where all the victimsagreed that the damages should be paidto their common industry watchdog.

However, neither of these cases northe Prudential case has been used as aspringboard to develop representativesuits in a way similar to the US classaction. In the most notable representativeaction of recent years,26 the initiatorswere not the claimants but the defendantinsurance company, which, faced with abarrage of claims over its bonus policy,decided to finance a test case itself inorder to achieve finality. By contrast,applications in the USA to certifysecurities class actions are rarely greetedwith anything other than unremitting

UK procedure rules

The closest equivalents in the UK toRule 23 are the Civil Procedure Rules(CPR), Part 19 s. II, which deals withrepresentative actions, and Part 19 s. III,which covers group litigation and whichcame into effect in 2000. The UK has amuch more pragmatic approach tomulti-party litigation than the USA; themain purpose of these CPR provisions isto achieve efficiencies in casemanagement by avoiding a duplication ofhearings and the risk of inconsistentjudgments.

In contrast to the USA, the Englishlegal system makes several importantdistinctions between representativeactions and group litigation; although inboth situations the courts have widediscretionary powers of case managementwhich can be used to blur thosedistinctions.22

The key distinction is that therepresentative in a s. II action does notneed to sign up all or any of the class ofclaimants he purports to represent.Indeed, until he secures a settlement or ajudgment, the rest of the class do notneed to take any action at all unless theywant to contest his right to representthem. In that case they becomeco-defendants. Thus the representativeoperates more like the lead plaintiff inthe USA of an opt-out only class.

The English representative class canalso embrace defendants. In one case,23

Waller J decided that a defendant can besued in a representative capacity evenwithout any agreement between the classmembers that he be their representative.

Even more than a US class action, theEnglish representative lawsuit has thepotential to gloss over the differencesbetween the class members without anyconsideration of which issues arecommon to the class, which areindividual and which are best tackled bythe creation of sub-classes.


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However, in the light of a lukewarmresponse, the Government in April 2002,decided not to proceed with a generalprovision for representative claims but topass legislation embodying the principlesto cover only specific issues. Several ofthe respondents thought that theprovisions already contained within CPR19, in the words of the response ofProfessor J. A. Jolowicz, ‘can achieve thegreater part of what could be achievedby the procedures adumbrated in thisPaper’.

Costs and the free rider

The one issue that neither CPR 19 northe Government consultation papertackles in any fundamental way is that ofcosts. However, costs are by far the mostimportant reason for the failure of therepresentative action to emerge from theprocedural backwaters. Under Englishlaw, the representative himself has to payall the legal costs upfront and, if he loses,he also has to pay the defendant’s costshimself without being able to recoupanything from the other members of theclass he was representing. Thus, there islittle incentive for the other members tojoin the action or pay their fair share ofthe costs; they may as well remain freeriders on the public-spiritedness of therepresentative claimant. Not surprisingly,there are few such public-spirited, andwealthy, individuals around.

The Prudential in its case againstNewman Industries pointed out that itwas acting in just such a way bybringing and financing the action onbehalf of all Newman’s shareholders,even though it owned only 3 per cent ofthe shares. However, this argument wasgiven short shrift by the Court of Appealwhich said:

‘We were invited to give judicial approval tothe public spirit of the plaintiffs who, it was

hostility by the defendants. In England, itwould require a robust judge to overrulea corporate defendant determined toundermine the power of a representativeshareholder action against it.

Developments in UK procedure

In February 2001, the Governmentpublished a consultation paper entitled‘Representative claims: proposed newprocedures’, which would havestrengthened CPR 19 s. II by allowing:

• Representative organisations, such asconsumer or environmental groups ortrade unions to bring an action onbehalf of its members.

• Named groups, eg trade unions, torepresent all its members save thosewho specifically opted out.

• Some unnamed groups to proceedwithout notifying or even identifyingall the members of the class it claimsto represent, where it would beimpracticable to do so. This provisionmight well have covered one or morelarge institutional shareholders in acompany willing to represent allshareholders who, for example, boughtshares within the same period.

• Sufficiently high damages to beawarded in some cases to cover theentire class, with such damages either:— being applied for the benefit of the

class as a whole, eg to financehealth and safety measures orresearch or a price reduction (this isalready the effect of a successfulderivative action against a company’sdirectors); or

— being held in a trust fund anddistributed to those who applied —this would be the appropriatemechanism in cases where directorshave misled the market, and wouldaccord fairly closely to the USmodel.



the court should have final discretionover the matter. CPR 19.11(3)(a)(iii)says: ‘A GLO may, in relation toclaims which raise one or more of theGLO issues, direct their entry on thegroup register’. The question iswhether the word ‘claim’ in thiscontext bears the ordinary meaning ofa right to seek a judicial remedy thathas been asserted (in some form) orwhether, as the White Bookinterpretation requires, a claim onlybecomes a ‘claim’ (as a term of art)once a claim form has been issued.28

If the former meaning is adopted, thena judge would be able to place on theregister all claims meeting certain criteriathat would raise GLO issues if litigatedby a specified class of people, even ifsome of the deemed litigants never havea claim form issued or take any action atall. Examples of such a class might be allthose who suffered personal injury in thePaddington rail crash, or all theshareholders in Marconi on 31stDecember, 2000 or all those who boughtshares in Marconi between, say, Apriland December 2000.

Presumably, a judge would use hispowers under the CPR to order that hisdecision be advertised in the press orelsewhere — and would respect the rightof a deemed litigant to be left off theregister if, unusually, he requested it, forexample if he opposed litigation againstcompany directors as a matter ofprinciple. If a deemed litigant failed tohave his attention drawn to the judge’sdecision as a result of the publicity, hewould have no involvement unless anduntil the group action was successful.Only at that stage, would he bepersonally notified of his potential rightto a share in the damages and asked tocomplete a form. If he had sufferedpersonal injury, further evidence as to thequantum of damages would then need tobe gathered and assessed. But in

said, are pioneering a method of controllingcompanies in the public interest withoutinvolving regulation by a statutory body. Inour view the voluntary regulation ofcompanies is a matter for the City. Thecompulsory regulation of companies is amatter for Parliament.’27

In the USA, the free-rider problem issolved by removing legal costs as anissue. The law firm acting for the classbears all the costs itself and gets paidsolely on a contingency basis — andthere is no rule requiring the loser topay the winner’s costs. This issue isconsidered below.

CPR 19 covers the other form ofmulti-party action, group litigation, moreextensively than representative actions inits provisions for group litigation orders(GLOs) in sub-sections 19.10-19.15 andPractice Direction PD 19B.

Under a GLO, each individualclaimant group must have issued a claimform in his/her/its own name beforegoing on the group register. Once onthe register, a claimant is bound by thecourt’s decisions on all common issues.The judge in the case has extensivepowers to decide which issues arecommon to the group as a whole; whichissues have to be resolved individually;and which issues should be tackled bythe creation of sub-groups. Within thesubgroups, he can select different testcases in order to determine each issue orset of issues.

On the crucial question of opting-inor out, the conventional interpretationof CPR 19 — for example that in theWhite Book on Civil Procedure Rules— is that it requires opting-in andexcludes opting-out. However, thisinterpretation is contrary to the finalreport in 1996 of Lord Woolf’scommittee, on which the CPR isbased. It recommended that opting outshould be used in some cases and that


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conduct of the litigation and the agendaof issues being determined.

Those two points apply also inrepresentative actions, but with less force.Proceedings under a GLO are likely totake longer to get to trial than under arepresentative action, not least because ofthe complexity of separating thecommon and individual issues, and thuslimitation is a greater danger. Secondly, ajudge is more likely to have sympathyfor a class member who, in the wake ofa representative action, complains thatmany of his concerns and issues wereoverlooked in the primary litigation thanhe would for a class member making thesame complaint about the GLO process.In the latter case, a more exhaustivereview of the possible issues affectingsub-classes will have been undertaken bythe court and the class member shouldhave had more opportunities to join thelitigation.

Under the CPR, judges have widediscretion when it comes to allocatingcosts. That discretion could be used, forexample, to penalise and deteropportunistic late joiners who delayjumping on the bandwagon until it isclear that the claimant group has won andthere will be no adverse costs award. Inthat situation the judge could require thelate joiners to pay all or part of those costsincurred by the claimant group which areunrecoverable from the losing defendantsbecause they exceed the ‘standard basis’costs as assessed by the court.

The leading case on GLO costs29

clarified some of these issues but leftmany others in doubt. Applyingtraditional costs principles becomesdifficult in cases where the claimants winon the common group issues but thedefendant wins on some of the individualissues (or vice versa), and where theclaimant group includes severaldiscontinuers and several other latejoiners.

shareholder lawsuits, normally no furtherevidence would be required as suchmatters as the size of an individual’sshareholding and the date and price atwhich he acquired it should already beknown.

However, so far no judge making aGLO has been bold enough to apply thisopt-out interpretation of CPR 19.11(3).Indeed none has been asked to do so. Itwould constitute a subtle but radicalchange in the nature of English litigation.

One problem of adopting an opt-outapproach is raised by the issue of costs.A deemed claimant whose claim isentered on the GLO register withouteven his knowledge, let alone consent,can hardly be required to pay a share ofthe defendant’s or his own side’s costs ifthe group claim fails. Thus, such anapproach would be viable only ifsomeone, presumably the lead law firm,insured against the costs risk on behalf ofthe entire class (see the section on costsbelow). On the other hand, if the groupclaim succeeded, the law firm would beentitled to claim damages on behalf ofeveryone within the class on the register.Only then would it be obliged to trackdown and notify all the class members.

Under GLOs, the total costs of thelitigation are allocated between commongroup-wide issues, which are then sharedbetween the group members, eitherequally, pro rata to the size of their claimor following some other formula, andindividual issues. This does not avoid thefree-rider problem, as a potentialclaimant can wait to see if the grouplitigation is successful or not beforeissuing a claim himself. Nevertheless,GLOs impose some penalties onwould-be free riders. First, they have tobe careful not to fall foul of thelimitation period on claims (mostcommonly, three or six years) andsecondly, by failing to join the group,they lose any ability to influence the



a serious issue when the shareholdersare in a company whose shares arequoted in more than one country);and

• other case management problemswhere the court has discretion tosimplify the issues being adjudicated.

From the experience of these cases, it ispossible to draw the followingconclusions for possible shareholderlitigation under a GLO:

• Even a complex mixture of commonor overlapping issues, as well asindividual or divergent ones, withinthe class of claimants should notfrustrate the efficient running of aGLO. Park J approved the creation offour sub-classes in the ACT litigationand as many as eight or nine oncross-border tax relief. Even withineach sub-class, there are a variety ofdifferent issues, not all of whichconcern all the members. Because ofthe flexibility of a GLO, it is easier fora class of claimants to overcome theproblems of demonstratingcommonality among them of issues andfacts in the UK than in the USAwhere plaintiffs confront a fairly highhurdle to win class certification fromthe court.

• A GLO can reduce the usual risks oflitigation, in particular cost-relatedrisks, by its reversal of the normalorder of proceedings. First, thecommon issues of principle areresolved. In securities cases, thesewould typically be directors’misstatements and their impact on themarket. Only later does evidence haveto be gathered on the individual factualcircumstances. This is often the mostcostly part of the process, particularly ifextensive disclosure or expert evidenceis required. In securities cases thismight involve questions of individual

The growth of GLOs

Since their introduction in May 2000,54 cases have been subjected to GLOs(up to June 2006). They includeseveral high-profile cases, such as thedeep vein thrombosis claims againstairlines, the McDonald’s hot drinksclaims (which were unsuccessful) andasbestosis claims on behalf of 3,000South African miners.

No applications have been made forany shareholder actions to be broughtunder a GLO. But at least one 1998case,30 in which 200 shareholdersbrought a claim arising from aprospectus fraud, would almost certainlyhave proceeded under a GLO, had theregime already proposed by Woolfcome into force.

Nevertheless, the most importantgroup litigation since 2000, which hasled to the issue of four GLOs so far,has been financial in character. Thisconcerns claims brought by a variety ofUK and foreign companies against theInland Revenue for breaches of EUlaw and/or tax treaties in its operationof Advance Corporation Tax (ACT)and related corporation tax provisionsdating back over 30 years. Thesecases,31 all being heard by Park J inthe Chancery Division and all beingled by City solicitors Dorsey &Whitney or Slaughter & May, have sofar demonstrated the potential and thesuccess of the GLO approach to casemanagement.

If analysed element by element,GLOs do not offer anythingdramatically new in English procedure.What has made GLOs effective is theway in which they combine thedifferent rules on:

• the consolidation and joinder ofparties;

• preliminary hearing orders;• jurisdictional applications (likely to be


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from doing so in the end by therestrictions imposed on auditors under theSarbanes-Oxley legislation passed in theUSA. Offering such a no-risk package topotential litigants would overcome one ofthe biggest obstacles to class litigation byshareholders, and by other groups.

Organising a group, winningagreement on a joint approach andsecuring a GLO from the court can takea considerable amount of time. But oncethe GLO is up and running, the casethen usually proceeds very quickly notleast because, like a bus pulling out intoa crowded street, it tends to be givenpriority (by the court listing office). Forexample, although the ACT test cases forone class were selected only in March2002, the trial of those cases wascompleted by December.

The judge managing the GLO haswide discretion because the GLO rulesare very schematic.

Sometimes the defendant accepts thevalue of a group action in achievingfinality. In fact it was the InlandRevenue that took the initiative inapplying for the first GLO in thecorporation tax cases. But on later issues,it opposed them, perhaps realising howpowerful a tool they were for drawing inpotential claimants who would otherwisehave been deterred by the costs and risksof solo litigation.

How decisions are made on theconduct of group litigation when thereare sharp differences within the groupis not wholly clear. The participants inthe tax cases set up steeringcommittees operating on a simplemajoritarian principle. But issues suchas whether an individual claimant’svoting power should be proportionateto the size of its claim — what ifsome claimants have inflated theirclaims? — have yet to be resolved.Creditors’ committees in insolvencyproceedings may offer the best model.

reliance and the degree of distortion atthe time of buying the shares.

• Costs: Where the claimants are mainlysophisticated companies or institutionswith specialist legal staff on hand andwhere most of the total amountclaimed by value comes from only afew dozen, rather than from hundredsor thousands of, claimants, thefree-rider problem is not a seriousinhibition. Thus in one ACT class,there are as many as 215 claimants,sharing common costs. In another class,50 companies each agreed to pay£20,000. The largest claimants gettogether and agree a formula by whichto share costs and can usually bring inother companies or institutions, perhapswith the help of trade bodies orprofessional associations. In ashareholder class action, this approachwould be relatively easy for a group ofperhaps 20 or so institutionalshareholders in a company, most ofwhom will be members of theNational Association of Pension Funds(NAPF), the Association of BritishInsurers (ABI), the Association of UnitTrusts and Investment Funds (AUTIF)or other industry bodies.

After-the-event insurance to cover costsis available in such cases but premiumscan be high. For one of the sub-classesof claimants in the tax cases, it came to40 per cent of the anticipated costs ofthe two sides.

Class action management

The accountancy firmPriceWaterhouseCoopers played a keyrole in packaging the litigation against theInland Revenue, calling meetings andmobilising the different litigation groups.It even considered taking on all thefinancial risk itself, by offering claimants ano-win, no-fee package, but was deterred



million, ie just over five per cent ofthe damages.

In the Enron case, Milberg Weiss andits successor firm in San Diego claimedto be spending $40m or so onout-of-pocket expenses and another$50m on its lawyers’ time beforeconcluding any settlement. The risks itfaces are less those of provingwrongdoing within Enron but inidentifying and proving the culpability ofsufficient deep-pocketed defendants toallow a judgment to be satisfied. Itargues that even a contingency fee ofseveral hundred million dollars or moreis not an excessive reward for the risks itis taking.

The most common criticism levelledagainst the US legal system by Europeansis that the size of the contingency feesthat the courts allow lawyers to claim,inflated further by huge jury-determinedawards of damages, encourages a surfeitof unmeritorious litigation. In fact, someUS courts have been introducingmeasures to cut the proportion of thedamages awarded that law firms canpocket, particularly in shareholderlawsuits in the wake of the PSLRA.

The use of court auctions

The most radical device, which is basedon the same entrepreneurial andcompetitive market ideology as that ofthe class action plaintiff bar, is for thecourt to hold an auction for the right torepresent a class of shareholders. Subjectto meeting a set of quality controls, thelaw firm making the lowest bid, usuallythe lowest percentage contingency fee,will be granted the class litigation rightsby the court.

This auction device dates back to theruling of Judge Walker concerningmisstatements by Oracle SystemsCorporation.32 A more sophisticatedauction between 15 different law firms

HOW CLASS ACTION LAWYERSGET PAID: CONTINGENCY ANDCONDITIONAL FEESMost discussions about the differencesbetween US and UK legal practice turnat some stage to the question of legalcosts and by whom they are borne.

The issue is particularly acute in adiscussion of class actions. Someone hasto take the initiative and notify, mobiliseand organise a class of potential litigantswith a common grievance. Unless thegroup is a small cohesive one, then thepeople taking on this time-consuming,costly and potentially risky function haveto be either very public-spirited or, if thesystem offers them substantial rewards forsuccess, entrepreneurial.

Solicitors’ firms that, once a class hasbeen formed, will formulate its claimsand represent it in the courts, would bethe natural candidates to take on amobilising role, were it not for the factthat lawyers in the UK lack anyentrepreneurial tradition. That in turnprobably reflects the bars that the Englishlegal system has long placed in the wayof lawyers receiving any financialincentives for taking on such up-frontcosts that may never be recovered.

Contingency fees

In the USA, the classic device used topromote such initiative is thecontingency fee. In most securitiesactions, the plaintiffs’ law firm isallowed to take, at the discretion ofthe court, somewhere around 20 percent of the damages in lieu of fees.Sometimes the figure can rise as highas 30 per cent plus. In other cases,where the potential damages are huge,the proportion may be limited to only10 per cent. In the WorldCom case,the court agreed in September 2005 toaward the attorneys who brought theclass actions a total of ‘only’ $347


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standard legal costs, but also the successfees they have to pay and the premiums,if any, that they had to pay to obtainafter-the-event (ATE) insurance coveragainst the risk of losing and beingobliged to pay the other side’s costs.

These changes have been accompaniedby a boom in the volume and thevariety of ATE insurance cover. Thepremiums themselves are now sometimesoffered on a deferred and contingencybasis. That allows litigation to bepackaged on the basis that the claimantwill not have to pay any substantialout-of-pocket expenses. If he wins, theother side will have to pay his ATEinsurance premium, his success fee andstandard legal costs (although innon-standard personal injury cases, theseare likely to be less than his total costs).If he loses, he is excused the ATEinsurance premium but his insurancecompany will still pay the winner’s costs.

Such an arrangement comes close toachieving for the potential claimant alitigation package with zero-downsidecomparable to the contingency feesystem in the USA. Partly for thatreason, commentators have stronglycriticised these rules for giving the clientlittle or no incentive to negotiate lowersuccess fees and for giving his lawyerevery reason to exaggerate the risks oflitigation to justify a large success fee,knowing that it will be recovered fromthe other side. Such criticisms haveprompted the Court of Appeal to laydown guidelines limiting the maximumpercentage uplift in certain standardpersonal injury cases.35

However, for misrepresentation andother securities and Companies Act cases,there are no such guidelines orlimitations. Indeed, in the developmentof a new area of litigation, the courts aremore likely to accept that theuncertainties justify the maximum 100per cent uplift.

was held in the case of Cendant (seeabove).33

In some other common lawjurisdictions, contingency fees arepermitted but usually the courts arestricter than in the USA in imposingmaximum percentages of the damagesawarded. Thus in Canada, the OntarioCourt of Appeal upheld as reasonableand enforceable a contingency fee of 15per cent of the first $1 million recoveredand 10 per cent of each additional $1million recovered, plus any costs paid bythe defendant. The total recovery therewas $2.75 million.34

CFAs in the UK

Traditionally, English common law andthe rules of its professional bodies havebanned any form of success fee forlawyers involved in litigation. Indeed,until 1966, champerty (ie non-partiestaking a share of the spoils of successfullitigation) was a criminal offence. Theban was modified in 1995 by theintroduction of conditional feeagreements (CFAs). These permitclient–lawyer agreements by which thelawyer is paid a lower fee or none at allif his client loses his case, coupled with asuccess fee of up to a maximum of 100per cent on top of his standard fees if hisclient wins.

At first CFAs applied only to personalinjury cases but in 1998 the Governmentextended CFAs to all civil cases, to offsetthe adverse effects of curbing legal aid.

In addition, in recent years, litigationfinancing companies have set up whichoffer to cover the costs and risks oflitigation in suitable cases, but avoid thechamperty and maintenance rules byensuring that they do not control theconduct of the litigation.

Equally important, since April 2000,successful litigants have been able torecover from the losers not only their



This argument gains further force ifthe firm offers a zero-downside litigationpackage to potential claimants whichensures that they pay no costswhatsoever. Because successful litigants inEngland typically recover only about 75per cent of their costs from the otherside, this would be a very expensivepackage for a law firm to offer.

There is therefore an argument forraising the 100 per cent maximum toperhaps 150 per cent or 200 per cent (ie2.5 or 3 times the standard fee),although, by way of offset, a cap couldalso be imposed on the maximum fee asa percentage of the damages awarded.There is a precedent for adamages-linked cap in that, between1995 and 2000, the Law Society’sguidance to solicitors was that theyshould not take more than 25 per centof damages as a success fee. In mostlitigation brought by shareholders inquoted companies, the damages, ifawarded or agreed at all, are likely to besufficiently high to ensure that a cap of25 per cent, or even 20 per cent, isunlikely to lower the success feespayable.

The second obstacle is that sucharrangements still require the litigants toopt in. As explained above, arepresentative action under CPR 19 s. IIallows US-style class actions to bebrought on an opt-out basis. But there isno financial incentive to do so. Even ifthe law firm has operated on the basis ofno-win, no-fee plus 100 per cent successfee, that is unlikely to be adequatecompensation for the risks of bringing arepresentative action, which is likely tobe ferociously defended given the highstakes, rather than just a standardindividual claim.

Furthermore, once the representativeand his lawyers have won a declarationfrom the court that all or any memberswithin a specified class, eg all

The importance of these developmentsfor shareholder class actions is that inprinciple they would allow a solicitors’firm to offer a litigation package toshareholders that requires them to incurminimal costs up-front and to bear norisks. Not only would that be attractivein itself to the risk-averse British litigant,it also overcomes the free-rider problemthat has dogged and stymied thedevelopment of representative classactions. There would be no free riderssimply because there would be nolitigants having to pay costs on whom tofree ride.

As indicated above,PriceWaterhouseCoopers consideredoffering such a package in thecorporation tax cases but so far, as far asis known, no firm has offered such apackage to a large class of claimants.

Obstacles to class actions in the UK

Two serious costs-related obstacles remainin the way of shareholder class actions,although both could be removedrelatively easily by modifications in theCFA rules.

The first is that, although the 100 percent maximum uplift is justified on thegrounds that CFAs should encourageonly the bringing of cases with at least a50 per cent chance of success, in largeclass actions, a huge amount of time thathas to be invested up-front by a lawfirm. That time is needed not only toassess the group-wide merits of the case,but also to notify, mobilise, handle andassess a large group of potential litigants.With such heavy upfront costs, ano-win, no-fee plus 100 per cent successfee arrangement would only offersufficient incentive to a law firm, evenone not particularly averse to risk, if itrestricted itself to pursuing cases with amuch higher chance of success than 50per cent.


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class actions, by reducing the costs oflaunching them, should also beconsidered. The first is that, in contrastto the USA, the share registers of all UKcompanies are transparent documentsopen to public inspection. Even wheninstitutional shareholdings are registeredin the names of custodians or nominees,their designated accounts are usuallyshown on the registers so that thebeneficial owners of the shares can bequickly identified by cross-checkingother publicly available databases.

In addition, most share registers arenow held in electronic form and recentlegislation facilitates the use of electroniccommunications for the purposes ofshareholder voting and participation incompanies. These developments, whencombined with the power of email andthe web, have the potential to cutdrastically the costs of notifyingshareholders and mobilising a group forlitigation purposes.

The second characteristic is the powerand eagerness of the British press topublicise shareholder — and consumer— grievances. One law firm, called ClassLaw, which was set up in London in1998 and comprised only a handful oflawyers before being dissolved sevenyears later became one of thebest-known law firms in the UK, largelyby skilfully publicising the group-basedlitigation it has initiated against a varietyof corporate giants. Its experienceillustrates another way of reducing thecosts of mobilising a class, by cultivatingpress relations.

REGULATION, NOT LITIGATIONIn preventing, investigating andpunishing frauds against shareholders, theUK’s company and securities legislationhas traditionally emphasised the role ofthe regulators responsible for investorprotection. There are few statutory

shareholders who bought in the stockmarket during a six-month period, areentitled to damages, a financial incentiveneeds to be given to the law firm tonotify such potential claimants. At thesame time, the original solicitors’ firmshould gain some benefit if rival solicitorspiggy-back on its success by bringing inmany of the follow-up claimantsthemselves.

Perhaps, the courts should recognisethe ‘franchise’ that has been won (in theform of a declaration) either by theoriginal representative himself — or byhis solicitors if they were bearing all therisk themselves by operating under ano-win no-fee basis. The courts wouldpermit the representative or his solicitorsto charge a franchise fee to allsubsequent claimants under thedeclaration.

Proposed reforms

If as a result of the reforms suggestedabove, in some large multi-party actionsthe claimants’ lead solicitors consistentlyended up with unduly generousremuneration, the court could even useits power to appoint the group’s leadsolicitor under CPR 19.13(c) to hold aUS-style auction.

The Department of ConstitutionalAffairs issued a consultation paper in June2003 on ways of simplifying the CFAregime. It could be argued that proposalssuch as those outlined above wouldcomplicate rather than simplify theregime. But the important point is thatthe rules governing CFAs are fluid andlikely to be subjected to many morechanges in the light of experience overthe next few years. Thus, changes aimedat clearing some of the costs-relatedobstacles in the way of class actions mayget onto the political agenda.

Two other characteristics of the UKthat are more favourable to shareholder



solicitors’ firm Class Law (see above) ofbeing ‘ambulance chasers’. Tiner hadbeen disturbed by criticism of the FSA’shandling of the split capital trust episodein 2000–01, when shareholders sufferedheavy losses that Class Law was seekingto recover through a group lawsuit.

The Financial Services Act 1986 gavethe Securities and Investments Board(SIB), the predecessor of the FSA, thepower to order those who breached itsregulations to pay compensation to anyvictims or to ‘disgorge’ their illicitlyobtained profits or a combination ofboth. That remedy, which has beencarried over into the new regime underthe Financial Services and Markets Act2000 (the FSMA) ss. 382–384, has thepotential to displace most civil claimsbrought by shareholders, although itwould not cover all forms of malpracticeunder the Companies Acts. However,the SIB and FSA have between themused these powers only about half adozen times over the last 15 years.

Relying on the FSA to wincompensation is meant to be a morestreamlined and rapid process and to leadto lower legal costs for all parties. It isparticularly valuable for those who lackthe knowledge and resources to initiatelitigation themselves (even on a no-win,no-fee basis).

However, the rarity of such actionsunderlines the classic drawbacks ofexclusive reliance on regulators. Thetypical regulatory agency is under-fundedand thus unable to employ investigatorsand litigators of the right quality andquantity. As a quasi-governmentaldepartment, it also tends to becentralised, procedure andprocess-oriented, and lacking initiative.

The FSMA, which was drafted withconsiderable input from the regulators ofthe SIB and the embryo FSA, goesbeyond its predecessor, the FinancialServices Act 1986, in facilitating civil

provisions and fewer regulatory practicesthat encourage the victims to pursue thefraudulent and the negligent through thecivil courts.

The UK, in common with mostEuropean countries but in sharpdistinction to the USA, has applied thesame principles to most forms ofconsumer protection.

The USA of course can hardly be saidto lack powerful regulatory agencies inmany sectors of the economy, particularlyin the financial sector where theSecurities Exchange Commission (SEC)and the Commodity Futures TradingCommission exercise a pervasiveinfluence. However, the SEC has alwaysendorsed the role of the ‘privateattorney-general’ and seen privatelitigation as an important complementaryinstrument in its fight against fraud andmalpractice in the financial markets, evenif in practice it typically has a waryrelationship with the class action lawfirms.

The SEC formulated the rule 10b-5(in 1942) which forbids the making ofany untrue statement of a material fact inconnection with the buying or selling ofsecurities — and it is this rule that hasformed the basis of most shareholder classactions in the last 30 years. The SECalso made common cause with theshareholder plaintiff bar in opposing thepassage of the PLSRA in 1995.

The interests of regulators

By contrast, the City regulatory bodiesand now the Financial Services Authority(FSA) have always kept private litigantsat arm’s length and have rarely if everintroduced any rules or procedures, letalone supplied any information orintelligence, which might encourage orassist them. Before a Parliamentary SelectCommittee in October 2002, JohnTiner, FSA managing director, accused


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included’. This is very similar to theground covered by the SEC’s rule 10b-5.

The use of the phrase ‘as a result of’in s. 90 is particularly useful inestablishing common issues in a classrepresentative or group shareholderaction. A false statement issued by thecompany which has demonstrablydistorted the stock market price wouldfurnish sufficient proof of causation andobviate any need to prove that eachindividual claimant had relied on thedetails of the statement.

This gives a statutory claim byshareholders (under the FSMA s. 90 andChapter 9 of the listing rules) a decisiveadvantage over a claim formisrepresentation at common law orunder the Misrepresentation Act 1967and indirectly endorses the ‘fraud on themarket’ doctrine, discussed below.

The second area is covered by FSMAs. 118, coupled with s. 150, whichallows individual (but not corporate orinstitutional) victims of market abuse tosue the miscreants for damages. The1986 Act contained no provisions againstmarket abuse, which is now a civiloffence covering insider dealing, marketmanipulation and making false statementsor creating misleading impressions aboutthe value of a security. It includes givinga false view of the performance andprospects of a quoted company and thusoverlaps with misrepresentation and withFSMA s. 90 and the FSA’s listing rules.The FSA is intimately involved indefining the scope of civil liability as it isobliged to issue a code which gives moredetailed guidance as to what constitutesmarket abuse. Behaviour that the codestates does not amount to market abusewill give the person concerned immunityfrom a civil action for that behaviour.

It is instructive to analyse the legalposition if, in the Chase Manhattan vGoodman case (recounted above),36 beforethe truth emerged, Chase had

proceedings against miscreants in financialmarkets. This can be seen in twoparticular areas of relevance toshareholders contemplating a class action.

One area is the listing rules. Thesespecify the information that must bedisclosed by companies listed on theLondon Stock Exchange (or otherrecognised investment exchange). Formany years, it was unclear whetherbreaches of the ‘listing’ rules, in relationto events occurring long after company’soriginal listing (or flotation), exposed thedirectors to litigation by shareholderssuffering losses caused by the breaches.Section 150 of the 1986 Act, althoughdealing with compensation, was notexplicit on the issue. The anomalousposition of the Stock Exchange, whichwas then the listing authority responsiblefor the listing rules but also a privateorganisation, compounded the doubt.Lightman J, in the Possfund v Diamondcase cited above, was inclined to acceptthat such ‘secondary market’ breacheswere actionable, although that caseconcerned common lawmisrepresentation.

The FSMA removes the doubts overthis issue. It gives the FSA clear statutorystatus and thus the power to deem thatthe listing rules extend to the ongoingrequirements of a listed company to keepthe stock market updated, long after itsoriginal flotation. Chapter 9 of the FSAlisting rules, entitled ‘ContinuingObligations’ requires the immediatedisclosure of all changes in a company’sperformance, financial position orexpectations that are price sensitive. Atthe same time, the FSMA s. 90, like s.150 of the 1986 Act, requirescompensation to be paid by anyoneresponsible for listing particulars to aperson who has suffered loss ‘as a resultof any untrue or misleading statement inthe particulars; or the omission from theparticulars of any matter required to be



executives have prompted some of themost important changes in the runningof UK public companies since the 1980s.

Ironically, in view of the fact thatthese achievements have, it is argued,made reliance on litigation unnecessary,one of the factors that kindledinstitutional activism was a court decisionconcerning their responsibilities astrustees of the funds that they manage.37

Brightman J held that the trustee of atrust fund that has a controllingshareholding in a company must act as aprudent man of business:

‘What the prudent man of business will notdo is content himself with the receipt ofsuch information on the affairs of thecompany as a shareholder originally receivesat annual general meetings. Since he has thepower to do so, he will go further and seethat he has sufficient information to enablehim to make a responsible decision fromtime to time, either to let matters proceed asthey are proceeding, or to intervene if he isdissatisfied.’38

The institutions and their umbrellaorganisations, such as the NAPF, ABIand AUTIF, appreciated that, betweenthem, they hold controlling stakes inmany, if not most, quoted companies.Hence, uninterrupted passivity mayamount to a breach of their fiduciaryobligations exposing them to the risk ofa class action.

Vulnerability of UK institutions that failto act

In the USA, several pension fund trusteesand investment managers have been suedby a class of beneficiaries for failing touse their votes and other powers ofinfluence over investee companies eitherproperly or at all.39 In the UK also, anaction by a minority group ofbeneficiaries of a pension fund against

immediately sold on the Unigroup sharesto a variety of stock market buyers andpaid over the £1.15m to Goodman’snominee. Would English law haveoffered any remedy to the group of sharebuyers once they realised that they hadoverpaid? In Goodman, Knox J refused toaward compensation against Goodmanfor his non-disclosure and his breach ofthe directors’ model code on the groundsthat the causation was too remote.However, if the events had occurredafter the FSMA came into force,individual shareholders as a class maywell have had a market abuse claimunder ss. 118 and 150.

The FSA may eventually becomewilling to play a role in notifying andorganising a potential class of victims ofmarket abuse, given the hybrid,semi-public and semi-private, nature ofclass actions and the FSA’s expandedstatutory duties. In cases where the FSAhas itself led litigation for compensationon behalf of private shareholders,aggrieved institutional investors andprofessional dealers may find itadvantageous to launch a piggy-backclass action, making use of any findingsof fact or declarations against thewrongdoers.

It is possible, therefore, that the newFSMA provisions coupled with anenhanced role for the chief regulatormay encourage a straddling of thetraditionally deep divide in the UKinvestor protection regime betweenregulation and private litigation. So far,however, there have been few, if any,signs of such a development.

Voluntary corporate governance codesand informal pressure

A series of corporate governance codesintroduced at the behest of institutionalshareholders, reinforced by more regularmeetings of such shareholders with


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sector pension funds, US companies thathave been sued for securities fraud or arethe subject of a derivative action arenow often required to introducecorporate governance reforms as part ofthe settlements. Thus to settle the classactions led by Calpers, the New Yorkand the Florida state employee pensionfunds, Cendant and Samsonite in 2000agreed to several corporate governanceenhancements. These included provisionsthat the majority of directors beindependent; that the audit,compensation and nominatingcommittees be comprised entirely ofindependent directors; and that shareoptions for executives should not bere-priced downwards without shareholderapproval.

By contrast, in the UK, the unhappyexperience of the institutional plaintiffsand the rebuke of the Court of Appealin Prudential v Newman in 1981 have hada chilling effect. They certainlyencouraged the institutions to operatebehind the scenes rather than stickingtheir heads above the parapet.

As the shadow of that case fadeshowever, there are indications of change.Particularly since the return to power ofa Labour Government in 1997 and itschanges to company law givingshareholder meetings more specificpowers, the institutions have becomemore vocal in their dissent. They have,for example, voted against the directorson general meeting resolutions dealingwith issues such as the ‘goldenhandshakes’ for departing directors.

Role of UK financial institutions

Perhaps the biggest force for change inthe attitude of UK institutions towardsshareholder class actions is their growingexposure to them. That is mainly due tothe marketing efforts in the UK andcontinental Europe (for reasons explained

the trustees and managers for breaches oftrust in using their investment powerswas held by the Court of Appeal to beanalogous to a derivative action by aminority shareholder on behalf of acompany. The claimants were thereforeentitled to have their costs paid out ofthe fund whatever the final verdict.40

Because of both legal and politicalpressures, UK institutional investors havetherefore taken the initiative. Throughthe various voluntary (ie non-legallybinding) codes, as well as by issuingstatements of guidance, they have had astrong influence on several matterswhich, in the USA, might well havebecome the subject of litigation. Theseinclude the preservation of existingshareholder pre-emption rights when acompany issues new shares; the use ofenhanced scrip dividends; the criteria forapproving major acquisitions;management buyouts; takeover defences;corporate treasury policy, the disclosureof non-audit relationships with auditors;the rotation of audit partners; executiveremuneration and service contracts; theremoval of directors; and the regulationof shareholder meetings.41

The shareholder activism envisaged byBrightman J (see above) may of courseextend to suing errant directors as acomplementary means of raising standardsof corporate governance and directors’conduct. There is no necessarycontradiction in an institution bothpursuing regular, informal contacts withan investee company to improve itsgovernance — and participating in a classaction against it and its directors if andwhen necessary. Indeed some of thebiggest US institutions, such as Calpers,the Californian state employees’ pensionfund, have on several occasions served aslead plaintiffs in suits against companieswith whom they also have regularmeetings on corporate governance issues.

Largely due to the influence of public



through the offices of the NAPF or ABI,although none has yet materialised.

Limiting the causes of action: Thecautious development of company law

It has become conventional wisdom thatthe profound influence of Englishcompany and securities law over othercommon law countries in the 19th andearly 20th centuries has been in steadydecline for the last 50 years.

One of the most commonly citedreasons has been the cautious approachof the English judiciary to developingthe law in spite of rapidly changingeconomic and social conditions, althoughin recent years their stance has started tochange. The result has been that judgesin other jurisdictions — Australia andNew Zealand, as well as the USA andCanada — are viewed as moreprogressive and their decisions havebecome more influential.

So for example, in North America,judges often draw an analogy betweenpublic officials and directors of publiccompanies. But in UK, although theprinciple that a petitioner or claimant hasan interest in the vindication of legality inits own right has emerged in public law, ithas been firmly rejected in company lawdisputes. A strictly pragmatic and(arguably) commercial approach is takentowards infractions of the company’s rulesunder its Articles of Association.

There are several potential causes ofaction in company and securities law,which in other jurisdictions have givenrise to class lawsuits, but which theEnglish approach has undermined orweakened. Here four of the mostimportant are discussed.

No liability for negligence

The first is the liability of directors fornegligence, or for failure to exercise a

above) of Milberg Weiss and other classaction law firms such as Cohen, Milstein,Hausfeld & Toll, from Washington DC,and Spector Roseman & Kodroff fromPhiladelphia. A large number of UKinvesting institutions have received a shareof the damages from these class actionsand sometimes they even been drawn inas lead plaintiffs. For example, aCalifornian court appointed a UK hedgefund as lead plaintiff in an action againstCovad Communications Group in 2000.

Usually these actions concern the sharesthat the institutions have bought in UScompanies. But, as indicated above, agrowing number of UK, continentalEuropean and East-Asian companies arealso being sued in the USA.

In all these securities class actions,non-US investors who have lost money asa result of the malpractices are entitled toshare in the damages on an equal footingwith US investors. They have the samestanding even if they bought their shareson a non-US stock market. Thecommonly adjudicated issue of whetherthere has been a substantial adverse effecton US securities markets or on USinvestors is important only in establishingwhether US courts have jurisdiction.

Initially, some institutions in Englandand Scotland were so hostile to thenotion of shareholder class litigation that,not only did they rebuff all approachesto join the lawsuits, but they refused tofill in the forms sent out after asettlement in order to recover their shareof the damages. Others failed to fill inthe forms due to inexperience ormaladministration.

Over time, however, UK institutionshave become familiar with the workingsof class actions and some of theirhostility or at least passive resistance tothem has been eroded. In the aftermathof the internet and telecoms stockmarket boom and bust, several havediscussed bringing a joint legal action


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their company46 or who failed to ensurethat an appropriate information andreporting system was in place.47

The English courts have not beenimmune from these trends, although theprincipal source of judicial innovation hasbeen the UK Insolvency Act 1986, inparticular s. 214. This imposes personalliability on directors who carry ontrading when they should have knownthat there was no reasonable prospect ofavoiding insolvent liquidation and indoing so failed to minimise the potentiallosses to creditors. In an assessment ofwhat he should have known, the directoris assumed to have acted diligently andto possess the general knowledge, skilland experience reasonably to be expectedof a person carrying out his functionswithin the company.

In two cases, Hoffman J (as he thenwas) explicitly adopted the objectivecriteria of s. 214 for setting the standardsby which to judge a director of acompany not approaching insolvency.48

His approach was later endorsed by theCourt of Appeal.49 These principlesamount to a considerable extension ofthe civil liability of directors and theirvulnerability to disqualification, asillustrated by the cases following thecollapse of Barings bank.50 But theseprinciples have yet to yield a civiljudgment against any director of a listedcompany in spite of the managerialexcesses during the internet and telecomsboom and bust from 1997 to 2002.The Company Law Reform Bill whichhas been passing through Parliament in2006 and is likely to come into force inOctober 2007 would make clear that adirector can be held liable for negligence.

The derivative action

The second cause of action of whichUK shareholders have sometimes beendeprived arises from the oppression of

reasonable standard of care, skill (orcompetence) and diligence. In earlytimes, the English courts were willing toimpose fairly demanding standards ondirectors or others in a commercialfiduciary role. In one 1740s case, the 50committee men of a charteredcorporation were held liable for thenegligent supervision of the corporation’sloan-granting activities.42

However, a change can be discernedby the end of the 19th century. A seriesof cases43 suggested that directors wouldonly be liable for gross negligence, thatthey would not be liable for failing toattend even crucial board meetings, andthat they were entitled to rely on theadvice and information of the executiveseven if they later proved to befraudulent. These rulings hardened intodogma after the City Equitable case of192544 in spite of the radical extension ofthe law of negligence, includingprofessional negligence, in thehalf-century after 1932. Although RomerJ’s judgment in City Equitable was morenuanced than the later interpretations, hecertainly held that a director was notrequired to exercise a greater degree ofskill than could reasonably be expectedfrom a person of his knowledge andexperience. There was no objectivestandard by which he could be judged.

It fell to the Court of Appeal of NewSouth Wales to be the first in theCommonwealth, in 1995, to jettisonexplicitly the City Equitable principles ina judgment that has been widely citedeven in England.45 The court held thatdirectors had an obligation to understandthe business for which they wereresponsible. Somewhat earlier and moreaggressively, the US courts raised thestandards of care, skill and diligenceexpected from directors imposing, forexample, personal liability on directorswho failed to devote adequate time todetermining a fair price for the sale of



relied on to determine in a disinterested waywhether it is truly in the interests of thecompany that proceedings should be brought. . . today it would be uncommon for anylarge number of shareholders to attend andvote in person at a general meeting of alarge public company, and . . . directorsalleged to be liable to the company mightbe able to determine the outcome of aresolution in general meeting in their ownfavour by the use of proxy votes.’

This dictum would also cover conflictsof interest and duty faced byshareholding pension fund investmentmanagers if, for example, they are alsomanaging the pension fund of thecompany whose directors are underattack.

In the same case, the Court of Appeal,while upholding the traditional rigour ofFoss v Harbottle in other respects,acknowledged that control of a company‘embraces a broad spectrum extendingfrom an overall absolute majority ofvotes at one end, to a majority of votesat the other end made up of those likelyto be cast by the delinquent himself plusthose voting with him as a result ofinfluence or apathy’.54

The Court of Appeal recentlymodified one of the key restrictiveelements in its original Prudential vNewman judgment.55 It held that where awrongdoer has disabled a company frompursuing its cause of action, in particularby forcing it into insolvent liquidation,the court will allow shareholders to makepersonal claims for loss against him, evenif the loss merely reflects that of thecompany.

It may seem surprising that none ofthese extensions to the exceptions to Fossv Harbottle has been invoked by anyrecent minority shareholder suits,whether as derivative or representativeactions. In fact, both forms of actionhave largely fallen into desuetude inrecent years.

minority shareholders and the Englishcourts’ long-entrenched, indeedaxiomatic, commitment to the rule inFoss v Harbottle.51 This states that if awrong is done to a company, then theproper claimant is the company and nota group of shareholders in the company.At such, it has been the graveyard ofmany potential actions brought by groupsof minority shareholders.52

By contrast, most US states, inparticular Delaware, have erected a muchless demanding set of hurdles in the wayof minority shareholders (except on theissue of costs). In addition, between 1975and 1999, legislative reforms supplantedthe rule in Foss v Harbottle in eight of theten Canadian provinces, New Zealand,South Africa, Japan and Australia — andare shortly to do so in Hong Kong.

However, a few English judgments inrecent years have appeared to widen theambit of the equally well-entrenchedexception to the rule viz when those incontrol of the company are perpetrating afraud on the minority. Thus in one case,the notion of fraud was extended to covernegligence on the part of the directorswhen that negligence allows a director tobenefit at the expense of the company.53

Similarly, the notion of ‘control’ was,tentatively, given a broader and moreup-to-date meaning in Prudential vNewman. It was noted that, in the typicalmodern publicly listed company, wrongsmay escape redress not because directorsare able to stifle action through use oftheir majority voting power, but becauseindividual shareholders, when part of alarge, diffuse body, have insufficientincentives to take collective action. Theyexercise what has been called ‘rationalapathy’.

Vinelott J, in Prudential v Newman, saidthat the court could

‘have regard to any other circumstanceswhich show that the majority cannot be


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Section 459 cases have servedprimarily as a remedy for shareholders inprivate companies, particularly thoseoperating as ‘quasi-partnerships’ based oninformal understandings between theshareholders which give rise to‘legitimate expectations’. But petitionssubmitted by shareholders in publiclylisted companies have also beenaccepted57 — and there is nothing toprevent such petitioners fighting a groupor representative action.

One intriguing question is whetherthe conduct of the company’s affairs caninclude the treatment of, andcommunications to, its shareholders and,if so, whether unfairly prejudicialconduct can extend to the making offalse statements. A common scenario iswhere company directors embark on aconcerted effort to dissuade shareholdersfrom selling some or all their shares bymaking false, over-optimistic statementsto them in private. That is the allegationmade, for example, against Marconi’sformer finance director John Mayo in2001 by SG Asset Management andother institutional shareholders. In thatsituation, a petition under s. 459 by agroup of shareholders has an advantageover a misrepresentation claim in that itfocuses on the conduct of the directorsand the interests of the shareholders.Thus it should normally allowpetitioning shareholders to sidestep theneed to prove individual causation, ie itshould not be necessary for each toprove that he would have sold his sharesbut for the misstatements.

Negligent misrepresentation

Negligent misrepresentation is anotherpotential cause of action where theEnglish courts have taken a restrictivestance, at least in relation to theauditor-shareholder relationship, a stancethat has run against the general extension

The derivative action may be given arevival by company legislation scheduledfor 2004, which would supplant Foss vHarbottle and its exceptions. Under theCompany Law Reform Bill, which if itsuccessfully completes in Parliamentarypassage will come into effect in late2007, the court would have thediscretion to decide whether to permit aderivative action, taking into account thepetitioning shareholders’ good faith, theinterests of the company, whether thewrong has been ratified or whethercompany has resolved not to take action,the views of an independent companyorgan (if any) and the availability ofalternative remedies.

Unfair prejudice

However, the main explanation for thedecline of derivative actions is the rise inpopularity of an alternative form of reliefagainst minority oppression provided bys. 459 of the Companies Act 1985. Thisdefines as a cause of action the conductof a company’s affairs ‘in a mannerwhich is unfairly prejudicial to theinterests’ of some of its shareholders.This wide-ranging provision, which doesnot require any independent illegality tohave been committed, was introducedbecause of the reluctance of the judiciaryto give anything other than the mostrestrictive possible interpretation to s.210 of the Companies Act 1948, thepredecessor to s. 459.

In fact, a remarkable number ofsuccessful claims have been brought unders. 459 as the courts have responded toParliament’s implied wish that they take amore active role. Thus one recentScottish case,56 in which an unlawfulpayment had been made to a director,allowed the petitioner in effect to outflankthe rule in Foss v Harbottle. It remediedthe unfair prejudice by requiring thepayment to be returned to the company.



other respect, UK law at present stilltreats auditors less favourably. It continuesto impose on them joint and severalliability whereas, in the USA, the PSLRAand the legislation of many individualstates have reduced the burden onauditors to proportionate liability fornon-fraudulent behaviour.

Fraud on the market

The final area in which potentialshareholder class actions have beenconstrained by the caution of the Englishcourts is that of ‘fraud on the market’.This should probably be classified less as acause of action than as a rule of evidence.The doctrine, outlined above, wasexplained by one US judge as follows:

‘The fraud on the market theory is based onthe hypothesis that, in an open anddeveloped securities market, the price of acompany’s stock is determined by theavailable material information regarding thecompany and its business . . . Misleadingstatements will therefore defraud purchasersof stock, even if the purchasers do notdirectly rely on the misstatements . . . Thecausal connection between the defendants’fraud and the plaintiffs’ purchase of stock insuch a case is no less significant than in acase of direct reliance onmisrepresentations.’63

The crucial role this doctrine plays infacilitating securities class actions wasendorsed by the US Supreme Court in aleading case:

‘Requiring proof of individualized reliancefrom each member of the proposed plaintiffclass effectively would have preventedrespondents from proceeding with a classaction, since individual issues then wouldhave overwhelmed the common ones. TheDistrict Court found that the presumption ofreliance created by the fraud on the markettheory provided a practical resolution to the

of liability in this area over the last 40years. In the leading Caparo case, theHouse of Lords ruled that negligentauditors were not liable to those buyingshares in a company for false statementsin its report and accounts unless therewas a special relationship betweenauditor and shareholder.58

Much (although not all) of thereasoning in the Caparo judgment hasattracted wide criticism — and not onlyfrom shareholders. Thus Gower’sCompany Law says: ‘What was surprisingto a company lawyer about Caparo wasthe narrow view taken by the court ofthe purposes Parliament had in mindwhen steadily expanding over thecentury the disclosure provisions of the[Companies] Act’.59

Despite this, the courts have showedfew signs since 1990 of relaxing Caparo’sstrict limitations on the liability ofnegligent third parties towardsshareholders for misstatements. Ifanything, they have been furthertightened as, for example, in theshareholder group action cited abovewhere the auditors were excused becausethe shareholders were not informed oftheir role.60 In other cases, the auditor,although telling the potential sharepurchaser in person that the accountswere accurate, was held not to haveassumed a responsibility to him and sowas not liable.61

The upshot is that it is now moredifficult for shareholders in the UK tobring themselves within the ambit ofauditors’ duty of care than it is in theUSA. That consequence is ironic as theHouse of Lords in Caparo cited in itssupport a leading US case on negligentmisstatement62 in which Cardozo CJfamously spoke of not imposing ‘liabilityin an indeterminate amount for anindeterminate time to an indeterminateclass’.

Note, however, that, at least in one


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the auditor’s report in deciding to sell; theloss would be referable to thedepreciatory effect of the report on themarket value of the shares before eventhe decision of the shareholder to sellwas taken. A claim to recoup a loss allegedto flow from the purchase of overvaluedshares, on the other hand, can only besustained on the basis of the purchaser’sreliance on the report. The speciousequation of ‘investment decisions’ to sell orto buy as giving rise to parallel claims thusappears to me to be untenable.’

Lord Bridge’s argument might be regardedas fallacious because of the very equationor symmetry between buying and sellingdecisions that he denies. Just as an investormight buy shares in a company in relianceon a falsely optimistic statement by theauditors or directors, a shareholder mightdecide to sell his shares because he isworried by the lowly valuations in anauditor’s report — which later turn out tohave been too pessimistic.

Far more common, however, is thesituation that Lord Bridge describes. Ashareholder decides to sell, not because hehimself has scrutinised or paid anyattention at all to the auditor’smisstatements — but for a variety of otherreasons. However, in selling, he implicitlyassumes that the actual and potentialbuyers and sellers in the market havebetween them taken into account theauditor’s report and all other publiclyavailable information — and thatknowledge will be reflected in the shareprice. If, as Lord Bridge acknowledges,market integrity has been undermined by‘the depreciatory effect of the [false]report on the market value of the shares’,then a causal link betweenmisrepresentation and loss is established.

Equally, an investor may buy shares notbecause he himself has read an optimisticauditor’s statement about the company butfor a variety of other reasons. However,once again he will be relying on the

problem of balancing the substantiverequirement of proof of reliance in securitiescases against the procedural requisites . . .’64

The doctrine was subsequently enshrinedby the US Congress in 1995 in thePSLRA and also applies to cases wherematerial facts have been omitted bydirectors or others.65 In Canada too, thedoctrine has recently made someheadway.66

The uncontroversial premise behindthe US doctrine is that most purchasersor sellers of shares, and other assets, donot read every official statement or pieceof relevant information. Instead, they relyon the efficiency and integrity of themarket to take all such information intoaccount so that they can be assured of afair price whenever they deal.

In the UK, the only judicialrecognition of ‘fraud on the market’ hasbeen in physical markets where a markettoll has been evaded by the holding of anearby rival market.67 However, in suchcases, any loss suffered by buyers orsellers through the consequent distortionof prices is incidental. By contrast, insecurities cases it is fundamental.

As noted above, the FSMA s. 90 andits predecessor, the Financial Services Act1986 s. 150, accommodates the ‘fraud onthe market’ doctrine and the causal linkit creates. Some senior English judgeshave also recognised such a causal linkbut failed to see through its implicationswith any consistency or clarity.

The most egregious example is thejudgment of Lord Bridge in the Caparocase (at 627, the key phrase beinghighlighted in bold):

‘Assuming, without deciding, that a claim bya shareholder to recover a loss suffered byselling his shares at an undervalueattributable to an undervaluation of thecompany’s assets in the auditor’s report couldbe sustained at all, it would not be byreason of any reliance by the shareholder on



that should improve the chances ofshareholders as a group successfullyinvoking any of the four causes of actionoutlined above against companydirectors, although perhaps not againstauditors.

THE LACK OF SUITABLEDEFENDANTS

The deep pocket principle

Nearly all shareholder lawsuits allegewrongdoing of some form by one ormore of the directors of their company,even if employees or agents under theircontrol are primarily to blame and evenif external professional advisers also bearsome culpability.

However, in publicly quotedcompanies, the losses suffered by theshareholders are typically so large as tooverwhelm the private resources of thosedirectors. The shareholders then have toseek other deeper-pocketed defendants.In cases where none of the blame can bepinned on any well-financed externaladviser or other contractor, the onlyremaining credible defendant is thecompany itself.

In many cases, the company will haveto accept formal liability either becausethe directors’ wrongful acts were carriedout in its name or because of thedoctrine of vicarious liability or becausethe company is contractually bound toindemnify the directors. This analysisapplies when the losses are suffered in apersonal capacity by only part of thebody of shareholders, most commonly bythose who bought their shares during aperiod when the company’s share pricewas distorted by false informationdisseminated by the directors.

However, in other cases, the victim ofthe directors’ wrongdoing may be thecompany itself. In that situation, insteadof being a defendant, the company

efficiency of the market to take thatstatement into account in setting the priceof the shares. If the statement turns out tobe false, market integrity will have beendamaged and the share price will fall,again establishing a causal link betweenmisrepresentation and loss.

Underlying Lord Bridge’s judgment isa long outdated assumption about thenature of stock market investment.Decisions to buy shares are discretionary,he implicitly assumes, and thereforelikely to be influenced by officialstatements concerning the performance ofthe company. By contrast, decisions tosell are prompted by other considerationssuch as the need to raise cash and so theseller is forced to rely, as Lord Bridge’sexample suggests, on the integrity andefficiency of the market to offer him afair price.

In fact, there is little discernibledifference in the motivations behind buyand sell decisions. The majority of selldecisions taken by today’s professionalinvestors are discretionary in the sensethat they are switches from what is seenas an overvalued share to an undervaluedone or they form part of a generalportfolio rebalancing. At the same time,a significant number of share purchases arenot discretionary, for example those madeby index-tracking funds, which nowown more than 20 per cent of UK stockmarket quoted companies, or those madeby short-sellers who are forced to covertheir positions.

If English courts were to follow LordBridge’s acknowledgment of investors’reliance on stock market integrity, whiledisregarding the per incuriam element,then class litigants in the UK would beable to reap most of the benefits of thefraud on the market doctrine withoutany radical judicial innovation.

Thus, recent years have seen a changein the judicial and legislative climatesurrounding company law. Over time,


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institutional and foreign investors. Buteven in the USA it has become animportant issue.

The financing of the 15 largestpost-PSLRA settlements in US securitiesclass actions was recently investigated byProfessor Joseph Grundfest of StanfordLaw School and Cornerstone Research.His research showed that no less than77.4 per cent of the damages were paidby the companies whose securities hadbeen manipulated. Directors’ andOfficers’ (D&O) insurance underwriterspaid 10.4 per cent, third parties such asauditors paid 11.7 per cent, while thedirectors responsible for the allegedlyfraudulent statements paid a mere 0.5 percent. These directors paid compensationfrom their own resources in only four ofthe 15 cases.

Who pays

Grundfest concedes that these figuresmay not be properly representativebecause, in smaller settlements, D&Oinsurance is much more likely to coverfully the compensation that thecompanies have to pay out. Further, theplaintiff law firms insist that in smallersettlements, the directors are more likelyto have deep enough pockets to make asignificant contribution themselves.

Milberg Weiss, for example, estimatedthat in all its settlements, the proportionof compensation paid out by companiesis only about one-third, with D&Oinsurers making the biggest contribution.

Nevertheless, stung by such criticisms,Milberg and its successor firms emphasise,when negotiating settlements, thenon-pecuniary elements of its claims, inparticular corporate governanceimprovements. Partner Bill Lerach hassuggested that shareholder class actionlawyers should be remunerated partly byreference to the amount of damagesextracted from non-company sources.

normally becomes a claimant and arecipient of any damages payable, whichthereby accrue for the benefit of itsshareholders.

The distinction between these twocategories can often be a fine one andshareholders who sue their own companyoften end up shooting themselves in thefoot. Even if the shareholders’ moneythat is tied up in ‘their’ company merelytravels in a circle back to thoseshareholders again, it will arrive at itsdestination in a diminished state becauseof litigation costs. Certainly disentanglingthe legal and economic consequences ofsuch lawsuits is a complex business.

Money in a circle

The belief that a class action brought byshareholders is in economic terms littlemore than a lawsuit brought againstthemselves runs deep among UKinstitutional investors. Indeed, it is themost commonly cited reason for theirhostility to class actions. They argue thatany pay-outs they may personally receiveas compensation for buying shares at aninflated price would be more than offsetby all the damages payable to other sharepurchasers with similar claims by othercompanies in which they had, andcontinue to hold, prior stakes. Theconcentrated institutional ownership ofUK public companies and the size andspread of most institutions’ portfoliosacross British industry mean that, overall,few if any institutions would profit fromsuch litigation. The only winners, it isalleged, are the lawyers who wouldreceive huge contingency fees fortransferring the money out of oneshareholder pocket into another.

In the USA, this argument has lessforce because of the more diffuseownership of shares. Private investorsown a bigger proportion of stock marketcompanies and there are many more



public company directors are worth suing.First, some directors, even in the UK, havebecome extremely wealthy thanks to thestock market boom of the 1980s and 1990sand the large awards of share options andbonuses. For example, John Mayo, theluckless finance director of Marconi(mentioned above), was reckoned to haveearned more than £20m in pay andbonuses while an investment banker beforejoining Marconi.

The role of D&O cover

The second and more important reasonis the growing probability that thedirectors will have D&O cover. Thereare no overall figures for the UK but theevidence of individual insurers andbrokers all points to a rapid increase notonly in claims and premium rates butalso in cover and numbers insured, albeitfrom a low base. A Zurich FinancialServices survey in 2001 suggested thatless than 20 per cent of small andmedium-sized companies had cover.

The growth is a response to theextra risks imposed by new corporategovernance requirements and insolvencyprovisions. Sales of policies may alsohave been spurred by the publicityfrom the lawsuit being brought byEquitable Life against 15 ex-directorsincluding nine non-executives.69 Thedirectors in fact had limited D&Ocover but, apparently, it has alreadybeen wiped out by the £5m legal billrun up so far.

The ABI argues that getting D&Oinsurers to meet the damages arisingfrom shareholder class actions is anillusory way of protecting institutionalshareholders from suing themselves, aspremiums will have to rise and thepublic companies (which they own) willhave to pay them. However, some ofthe cost of higher premiums wouldsurely fall on the directors themselves, if

Elsewhere in the world, the picture ismixed. In the GIO case cited above,which was Australia’s biggest shareholderclass action, half the compensation waspaid by GIO, now owned by AMP, andhalf by nine individuals, including GIO’snon-executive directors, and its adviserMacquarie Bank.

In the UK, the most obvious responseto the institutions’ objections toshareholder litigation is to invite them, inappropriate cases, to sue only themiscreant directors and any third parties,but to leave the companies off the list ofdefendants. Alternatively, the claimantshareholders could press for corporategovernance reforms rather than damages.Of course, small private share buyerswho have lost heavily may protestagainst such a strategy, if the company isthe only deep-pocketed defendant likelyto be found liable. But in grouplitigation, they would probably be in aminority and in representative actionstheir ability to influence the conduct oflitigation is likely to be very limited.

Is there any risk that the costs ofsatisfying a judgment against directorswill bounce back onto their companies,for example if the directors have acontractual right to be indemnified?Section 310 of the Companies Act 1985bars a company from indemnifying itsofficers against liability for negligence orbreach of duty or trust against thecompany. However, the section permitscompanies to take out D&O cover fortheir directors — and if they use captiveinsurers or if their premiums are jackedup sharply immediately after any pay-out,the indemnity issue can get blurred.

It is commonly argued that there islittle value in suing individual directorsto the point of bankruptcy, exceptperhaps to make a public example ‘pourencourager les autres’.68

There are, however, two reasons forthinking that a significant proportion of


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The key arguments advanced againstshareholder class actions are as follows:

• The shareholders end up suingthemselves and the true miscreants(normally the directors) rarely pay anymore than a small fraction of thedamages.

• Class actions generally impose excessiveand punitive liability on defendantswho are compelled to compensateeven those who have not soughtdamages. This goes beyond the properrole of civil litigation.

• Shareholder class actions encourageplaintiffs and their lawyers to launchunmeritorious ‘quick strikes’ in thehope of extracting a settlement out ofthe defendant companies, as theycannot afford to fight the case to fulltrial or to bear even a small risk of anadverse judgment.

• The huge contingency fees paid tosecurities class action lawyers in theUSA have promoted excessivelitigation, and inflicted adisproportionate cost on US companiesand the US economy in terms ofdamages and the diversion of executivetime.

• Litigation as an enforcement device isfar too costly compared with regulationby a public agency, which is moreefficient.

• Class actions of all kinds infringe thebasic common law principles of privaterights, private actions and litigantautonomy and are marred by confusionabout the status of the class.

The counter-arguments are as follows:

• It is within the power of theinstitutional shareholders in the UK totarget their claims for damages againstdirectors, their D&O insurers and thirdparties such as auditors and investmentbankers rather than against the

not directly then through downwardpressure on the rest of theirremuneration package (ie they wouldbear part of the economic incidence, ifnot the formal incidence, of the higherpremiums).

But even if the ABI argument is partlyvalid, the real advantage of insurance isthat it introduces a powerful, additionalmechanism to control and discipline theconduct of directors. Underwriters willinsist on monitoring risky companiesclosely while those with strong corporategovernance procedures in place are likelyto be charged much lower premiums.Directors who have been successfullysued may find it difficult to have theircover renewed except at exorbitant rates,and will thus be effectively disqualified.

SUMMARY OF THE CASE FORAND AGAINST SHAREHOLDERCLASS ACTIONSIn summary, most of the factors thathave placed the UK in a uniquely hostileposition towards shareholder class actionsamong the major common lawjurisdictions and economies have startedto lose some of their force over the lastone or two decades.

The most serious obstacles in the wayof such litigation would be removed ifthe English judiciary used its discretionunder the Civil Procedure Rules tointroduce two changes. First, it couldpermit class litigation on an opt-outbasis, either through group litigationorders or representative actions. Secondly,it could show a greater degree ofunderstanding of the economic problemsof organising collective action, inparticular that of deterring free riders, bymodifying some of the rules on costs inmulti-party actions.

However, the case for facilitating or atleast tolerating shareholder class actions isfar from being won.



substantial pay-out. (However, suchevidence demonstrates only that themarket to provide contingency fee-basedservices is open to competition. It doesnot refute the suspicion that the lawyers’share of the damages in shareholder classactions may be so high as to draw in toomany lawyers and encourage too muchlitigation.)

• The experience of the USA and mostother common law countries is thatexclusive reliance on a regulatoryagency to redress wrongs againstshareholders or investors leaves manywrongs unremedied. Class actionsreduce the costs of litigation througheconomies of scale and by removing therisk of duplication and inconsistentjudgments.

• Anglo-American civil litigation hashistorically embraced a variety of formsof group proceedings including invarious periods representative actions,compulsory joinder and consolidation.It also embraces punitive and exemplarydamages and provides several models

companies — and to press forcorporate governance improvements aspart of any settlement.

• One of the legitimate purposes of classactions is to prevent large corporationsor those that control them frombenefiting from their wrongful conductat the expense of a large number ofsmall consumers or investors simplybecause the victims are too dispersedand the amounts they have lost are toosmall to justify individual litigation.

• Most, albeit not all, of the academicevidence based on an analysis of theprocess of litigation and settlement doesnot support the view that it has been inthe interests of plaintiffs or their lawyersto bring unmeritorious shareholderslawsuits for extortion or otherpurposes.70

• The empirical evidence is thatcontingency fee-based lawyers do notearn more, in fact they earn slightly less,than they would as traditional hourlyfee-earning lawyers because only a fewof their cases provide them with a


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Figure 1: Total and average value of settlements in US securities class actions have been rising

Source: Cornerstone Research

WorldCom, Inc.’s $6.156 billion Total Settlementas of Year-End 2005Cendant Corporation’s $3.1 billion CommonStockholder Class Settlement

$26,065

$150 $444

All Years 1997 1998 1999 2000 2001

$1,123

$4,701

$2,238

2002 2003 2004

$2,688 $2,071$2,983

2005

$9,667

N = 735 N = 14 N = 29 N = 65 N = 90 N = 96 N = 111 N = 93 N = 113 N = 124

Dollars in Millions

TOTAL SETTLEMENT DOLLARS BY YEAR

20 Prudential Assurance Co Ltd v Newman Industries Ltdand others ChD [1979] 3 All ER 507.

21 See ref. 17, above.22 One of the most authoritative comparisons of group

and representative actions is in a paper published in2001 by Duke University School of Law written byNeil Andrews, fellow of Clare College Cambridgeentitled: ‘Multi-party proceedings in England:representative and group actions’.

23 Bank of America National Trust and Savings Association vJohn Joseph Taylor [1992] 1 Lloyds Rep 484.

24 The SS Greystoke Castle HL [1947] 1 All ER 647.25 EMI Records Ltd v Riley [1981] 1 WLR 923.26 Equitable Life Assurance Society v Hyman HL [2000] 3

WLR 529.27 Prudential v Newman [1982] Ch 204 at 224.28 The CPR uses the word ‘claim’ ambiguously. For

example, PD19B r. 9.1 and CPR 23.2(4) bothpresuppose that a ‘claim’ comes into existence andcan be evaluated or ‘related to’ an application for anorder before it actually ‘starts’ with the issue of aclaim form. Thus a ‘claim’ appears to be synonymoussometimes with an ‘asserted right’ and sometimeswith ‘proceedings’ (see also CPR 7.2). The word‘claim’ is not defined in the Glossary to the CPR andthus, arguably, should not be viewed as a term of art.

29 Sayers v Merck and Smith Kline Beecham plc [2001]EWCA Civ 2017, [2001] All ER (D) 365.

30 Abbott v Strong Ch. D. [1998] 2 BCLC 420.31 One of the test cases, which focused on the limitation

period for claims, was decided in July 2003 andreported: Deutsche Morgan Grenfell Group plc v InlandRevenue Comrs and Another [2003] EWHC 1779(Ch).

32 Re Oracle Sec. Litig., 131 F.R.D. 688, 689-90 (N.D.Cal. 1990).

33 Re Cendant Corp. Sec. Litig., 2001 U.S. App. LEXIS19214 (3d Cir. 2001).

34 In Raphael Partners v Lam, [2002] O.J. No. 3605,Docket No. C36894, Sept. 24, 2002.

35 Halloran v Delaney [2002] EWCA Civ. 1258.36 See ref. 5, above.37 Bartlett v Barclays Bank Trust Co. Ltd [1980] 1 All ER

139.38 At 151.39 See for example Thomas V O’Neill v Deforest P Davis

JR 721 F Supp. 1013 [1989] US Dist LEXIS 11530;11 EBC 1817; Nl Industries Inc and Kronos Inc vLockheed Corporation [1992] US Dist LEXIS 22649;Atwood and Corneal v Burlington Industries, MorganStanley [1994] US Dist LEXIS 12347, *; 18 E.B.C.2009.

40 McDonald v Horn [1995] 1 All ER 961.41 See Stapledon, G. P. (1996) ‘Institutional Shareholders

and Corporate Governance’, Clarendon Press,Oxford.

42 The Charitable Corporation v Sutton [1742] 2 Atk 400.43 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch

392. Re Cardiff Savings Bank: The Marquis of Bute’s case[1892] 2 Ch100. Davey v Cory [1901] AC 477.

44 Re City Equitable Fire Insurance Co Ltd [1925] Ch 407.45 Daniels v Anderson [1995] 16 ACSR 607.46 Smith v van Gorkom 488 A 2d 858 (Del 1985).

(companies, friendly societies, tradeunions, trusts) on which a litigative classcould operate as a separate entity withthe lead law firm occupying a fiduciaryrole.

References1 Carnie v Esanda Finance Corporation Limited [1995] 182

CLR 398.2 Maxwell v MLG Ventures [1995] OJ No. 2698.3 Carom v Bre-X Minerals [1999] 97-GD-39574 and

[2000] C33905.4 Yves Beaudoin et al. v Avantage Link Inc [2002] JQ No.

4575.5 Chase Manhattan Equities v Goodman and others Ch.D.

[1991] BCLC 897, [1991] BCC 308.6 See, for example, Morgan Crucible v Hill Samuel Bank

and Others CA [1991] Ch. 295 where an acquirersuccessfully claimed that the accounts and financialforecasts of its target company were whollymisleading and Caparo Industries v Dickman [1990] 2AC 605, which is the leading case on theresponsibilities of auditors. Note that in Caparo thedirectors were also sued, but it was in the context ofa takeover.

7 See British & Commonwealth Holdings v SamuelMontagu and Others CA [1995] where an investmentbanker represented wrongly that his client Quadrexhad sufficient funds to make an acquisition, and,again, Morgan Crucible v Hill Samuel.

8 As in Smith New Court Securities v Citibank HL [1997]AC 254, where the defendant (Citibank), in seekingto sell to Smith New Court a tranche of Ferrantishares that it was holding as security, invented afictitious rival bidder offering a fictitious price for theshares.

9 Peek v Gurney [1873] LR 6 HL 377, Derry v Peek[1889] 14 App Cas 337 and Edgington v Fitzmaurice[1885] 29 Ch D 459.

10 Al-Nakib Investments (Jersey) Ltd. v Longcroft [1990] 1WLR 1390 and Possfund Custodian Trustee Ltd andanother v Diamond and others [1996] 2 All ER 774.

11 [1902] 2 Ch 421.12 In Re Chez Nico (Restaurants) Ltd [1992] BCLC 192

(at 208).13 In Platt v Platt [1999] 2 B.C.L.C. 745 (Ch D). The

decision was reviewed by the Court of Appeal but itdid not consider the issue of a director’s fiduciaryduties.

14 Coleman v Myers [1977] 2 NZLR 225, NZCA.15 See ref. 6 above.16 For example Re Chez Nico which concerned an offer

by directors to take a public company private.17 Yeazell, S. (1987) ‘From Medieval Group Litigation

to the Modern Class Action’, Yale University Press,CT.

18 Markt and Co. Ltd v Knight Steamship Co Ltd [1910] 2KB 1021.

19 At 1040–41.



Principles of Modern Company Law’ (7th edn),Sweet & Maxwell, London, p. 584.

60 Abbott v Strong Ch D [1998] 2 BCLC 420.61 For example: James McNaughton Paper Group Ltd v

Hicks Anderson and Co [1991] 2 QB 113; and PeachPublishing v Slater and Co [1998] BCC 139.

62 Ultramares Corp v Touche [1931] 255 NY 170 at 179.63 In Peil v Speiser 806 F 2d 1154, (3d Cir 1986) at

1160.64 Basic v Levinson 485 US 224 [1988] at 242.65 See Affiliated Ute Citizens v United States 406 US 128

[1972].66 See ref. 4, above.67 In Scottish Cooperative Wholesale Society v Ulster Farmers

Mart HL [1960] AC 63.68 Voltaire on the English rationale for executing

admirals.69 The auditors too are being sued cf. Equitable Life v

Ernst & Young [2003] EWCA Civ 1114, [2003] AllER (D) 451.

70 See for example Coffee, J.C. (1986) ‘Understandingthe plaintiff’s attorney: the implications of economictheory for private enforcement of law through classand derivative actions’, Columbia Law Review, May.

47 Re Caremark International Inc Derivative Litigation 698 A2d 959 (Del Ch 1996).

48 Norman v Theodore Goddard [1991] BCLC 1027 andRe D’Jan of London Ltd [1994] 1 BCLC 561.

49 Cohen v Selby [2001] 1 BCLC 176 (at 201), whichhowever emphasised the need to show a causal linkbetween negligence and loss.

50 Re Barings plc (No 5) [2000] 1 BCLC 523 CA. Seealso Re Landhurst Leasing plc [1999] 1 BCLC 286 at344 per Hart J.

51 [1843] 2 Hare 461.52 For example Pavlides v Jensen [1956] Ch 565., which

represents perhaps the zenith of the influence of Fossv Harbottle.

53 Daniels v Daniels [1978] Ch 406, a case concerningthe sale of a company property to a director at a grossundervalue, which distinguished Pavlides v Jensen.

54 At 219.55 Giles v Rhind [2002] EWCA Civ 1428; [2002] 4 All

ER 977.56 Anderson v Hogg [2002] SLT 254, Inner House.57 In Re Astec (BSR) plc [1998] 2 BCLC 556.58 Caparo Industries plc v Dickman [1990] 2 AC 605.59 See Davies, P. L. (2003) ‘Gower and Davies


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