Introduction
Legal framework
Facts
Original settlement
Amended settlement
Comment


Introduction

On 13 July 2018 the Amsterdam Court of Appeal declared the settlement between Fortis (since renamed Ageas) and multiple claimant organisations binding. The €1.3 billion settlement is the largest of its kind in Europe.

Under the settlement, persons who held Fortis shares at any time between 28 February 2007 and 14 October 2008 are entitled to compensation for the events of 2007-2008 subject to a full release of liability with respect to these events.

The Fortis settlement emphasises the usefulness of the Act on Collective Settlement of Mass Claims (WCAM) to resolve cross-border disputes before the Dutch courts, irrespective of whether proceedings on the merits on behalf of the whole class could be litigated on in the Netherlands. The Fortis settlement also provides valuable insights on the general acceptance of third-party litigation funding by the Dutch courts.

To date, the WCAM has been used in eight separate cases.

Legal framework

The WCAM procedure came into force in 2005 and embodies Articles 7:907 and 7:910 of the Civil Code and Articles 1013 to 1018a of the Code of Civil Procedure. Under the WCAM, the parties that have concluded a settlement can submit a joint request to the court to declare the settlement binding. In such a request, the court must, among other things, assess whether the amount of the agreed compensation is reasonable and if the interests of the persons for whom the agreement was concluded are sufficiently guaranteed. Other interested parties may object to the request.

If the court declares the settlement binding, all injured parties are bound by it unless they declare within a period set by the court that they wish to withdraw from the settlement agreement (an opt-out declaration).

Facts

The settlement relates to multiple class actions that were brought in the Netherlands and Belgium by or on behalf of investors that held Fortis shares during the several months preceding the group's collapse at the beginning of October 2008.

It was alleged that Fortis had misrepresented:

  • the value of its collateralised debt obligations;
  • its exposure to subprime-related mortgage-backed securities;
  • the evolution of its financial position; and
  • the extent to which its acquisition of ABN AMRO – in a consortium with the Royal Bank of Scotland and Banco Santander – had compromised its own solvency.

The claimants also alleged that Fortis had materially misled investors with public disclosures made in connection with a September 2007 initial public offering aimed at funding the acquisition of ABN AMRO, including in the prospectus.

Between April 2007 and October 2008, Fortis's share prices dropped significantly.

Original settlement

On 20 May 2016 Fortis and various claimant organisations entered into a settlement agreement. The parties jointly requested the court to declare the settlement agreement binding under the WCAM procedure (the original settlement).

However, the court refused to declare the original settlement binding. The court based its rejection on the following arguments.

Active versus non-active claimants
The original settlement divided the class of eligible shareholders into active claimants and non-active claimants. Active claimants (claimants who filed a, or participated in, the legal proceedings before the original settlement was announced) were to receive a higher compensation than non-active claimants. Further, based on the way in which the original settlement was structured, active claimants were prioritised over non-active claimants in the event of insufficient funds.

The settling parties argued that it was justified to distinguish between active claimants and non-active claimants, as it would remedy the 'free rider' problem. The active claimants had made real efforts and incurred costs to file legal proceedings, whereas non-active claimants had not. The court stated that a certain level of difference among class members had been acceptable, but it held that the way in which the distinction between the class members was explained was objectionable and stood in the way of approving the request for a binding declaration.

Cost compensation, fees and transparency
The court further held that the claimant organisations had not been sufficiently transparent about their expenses in relation to the costs that they claimed. The court could therefore not assess whether the fees paid to the claimant organisations had been reasonable compensation for the costs incurred.

To refute the lack of transparency. the claimant organisations argued that the compensation that Fortis would pay to the claimant organisations did not form part of the agreement and was therefore not subject to court approval. The court disagreed and stated that the compensation for claimant organisations had played an important role in the establishment of the settlement. If such compensation had not been provided for, the settlement would not have been concluded and no request would have been made for the agreement to be declared binding. Consequently, the court held that the settling parties were obliged to disclose the success fees and costs in order for it to assess whether the agreed compensation was reasonable.

Amended settlement

The court gave the settling parties the opportunity to amend the original settlement in accordance with its considerations. This resulted in an increased settlement amount and an arrangement to compensate the active claimants and non-active claimants on the same basis, with active claimants being entitled to additional compensation of 25% to cover their costs. The parties did not alter the fees of the claimant organisations.

On 5 February 2018 the court ordered the claimant organisations to further clarify their business models. These submissions were discussed during a further hearing in March 2018.

This ultimately led to the 13 July 2018 ruling, where the court approved the amended settlement agreement that the parties had concluded on 13 April 2018.

The court determined that the amended settlement allowed all parties to receive equitable compensation per share. Further, all active claimants would share in the dilution risk in the same way as the non-active claimants. Finally, the active claimants would receive a specific additional compensation to compensate for costs and efforts incurred (and to address the free rider problem).

The court also considered that the compensation that the claimant organisations received was several times higher than the costs incurred. However, in view of the major procedural risk that the claimant organisations and their litigation funders had taken on for a long time in the case and considering that the financing costs for such a risky investment were high, the court held that the agreed compensation scheme was reasonable. However this did not apply to the compensation relating to members of the Dutch Shareholders Association (VEB). The court found the additional compensation for the active members of VEB unjustifiable, since these members did not incur any real costs though VEB. However, under the amended settlement, VEB members would still be considered as active claimants and accordingly receive additional compensation. The court held that such an arrangement was neither reasonable nor justifiable.

Nevertheless, since the court could not declare a collective settlement only partially binding, it ruled that it would be too far reaching to reject the amended settlement as a whole. Therefore, the court declared the amended settlement binding.

Comment

It is highly likely that if VEB had been the only claimant organisation the court would have rejected the amended settlement. The court's critical opinion of VEB could lead to an alternation of its business model in future WCAM settlements or to a critical view of other settling parties towards the role of VEB in a future WCAM settlement.

To date, Dutch WCAM procedures have been unique to Europe and make the Netherlands an attractive forum for settling cross-border disputes. The court's favourable decision in Fortis confirms that the WCAM procedure could facilitate parties who are domiciled in jurisdictions that do not offer similar settlement options on an opt-out basis.

It remains to be seen how the court's view on the transparency of compensation schemes will affect the popularity of the WCAM procedure. A binding declaration under the WCAM could offer defendants the possibility to obtain full closure of claims that are likely to be pursued in multiple jurisdictions. This is often highly desirable in order to address reputational concerns. The court's general acceptance of success fee arrangement, and hence a certain commercial interest among the settling parties, further favours the WCAM as an attractive mechanism for claimants (organisations) to solve disputes. Yet, the court's explicit consideration that fees must always be subject to the court's review under a request for a binding declaration could lead to parties' preferences to negotiate a private settlement, where fee arrangement could remain confidential.

The court's view on the transparency of fees and funding structures fits well within the latest legislative developments in the field of collective redress. The Dutch legislative proposal to (possibly) introduce a collective damages action tightens the requirements that representative organisations have to meet regarding governance, funding and representativeness in order to have their collective claims admitted. This enables the court to require further information on the funding structure. Similarly, the recently presented European legislative proposal New Deal for Consumers imposes strict obligations for qualified representing entities to be transparent with regard to the origin of the funds that they use for their activities. These developments are certainly worth following.

For further information on this topic please contact Jeffrey Kleywegt at AKD by telephone (+31 88 253 5091) or email ([email protected]). The AKD website can be accessed at www.akd.nl.