An alternative venue for class settlements
Ruling on jurisdiction
Collective Settlements Act and private international law
An alternative venue for class settlements
Until recently, the United States has been the jurisdiction of choice for non-US claimants initiating class action proceedings against US and non-US companies. In Summer 2010, in Morrison v National Australia Bank,(1) the US Supreme Court restricted the possibility for non-US claimants to initiate securities class actions in the United States. In its ruling, the Supreme Court stated that a presumption against the extraterritorial reach of US legislation is a "longstanding principle of American law", and therefore US legislation is meant to apply only within the United States unless stated otherwise. The Supreme Court ruled that the Securities and Exchange Act 1934 and the Securities Act 1933 had no extraterritorial reach, and therefore could not provide a cause of action for non-US plaintiffs suing non-US and US companies for misconduct in connection with securities listed on foreign exchanges.
Since the Morrison ruling, these so-called 'foreign-cubed' claims are barred in the United States but, as noted by the Supreme Court, the United States is no longer the only jurisdiction with a system of class actions and class settlements. The Netherlands is an attractive alternative for class settlements. In 2005 the Netherlands enacted the Act on the Collective Settlement of Mass Claims, which has proven to provide a quick and efficient solution for the collective settlement of mass claims. Under this system, interest groups on behalf of, in effect, a class of shareholders negotiate a settlement agreement with the issuer and submit such agreement to the Amsterdam Court of Appeals for approval. Once approved, the agreement is binding on all such shareholders, unless they expressly elect to opt out within a specific period. If use is made of the opt-out option, the right to initiate individual proceedings against the defendant is retained. Persons not making use of the opt-out option receive the relief as agreed in the settlement agreement. This opt-out system is unique in Europe. Therefore, shareholders are increasingly seeking to make use of this mechanism as an alternative system for class settlements.
Although this was not the original intention of the legislature, the Act on the Collective Settlement of Mass Claims also provides a cause of action for non-Dutch claimants, as ruled by the Amsterdam Court of Appeals in the Shell decision.(2) Although there was an international dimension to the Shell case, it also had a strong link to the Netherlands: a substantial number of the Shell shareholders were Dutch residents or companies and one of the Shell entities was a Dutch company. Therefore, the question remained as to whether non-Dutch claimants that acquired securities listed on a foreign exchange would be able to obtain a class settlement against a non-Dutch company pursuant to the act – that is, whether foreign-cubed claims were possible in the Netherlands. The Amsterdam Court of Appeals recently answered this question in the affirmative in its provisional ruling in Converium.(3)
The case concerned two Swiss reinsurance companies: Scor Holding AG (formerly known as Converium Holding AG) and Zurich Financial Services Ltd (ZFS). Until December 11 2001 Converium was a subsidiary of ZFS. On that date ZFS sold all its shares in Converium through an initial public offering; Converium's shares were listed on the SWX Swiss Stock Exchange and American depositary receipts were listed on the New York Stock Exchange. Between 2002 and 2004, Converium announced several times that it had to increase its loss reserves. Consequently, Converium's shares declined in value and securities holders of Converium and ZFS inititated securities class actions in the United States against both companies. The US District Court for the Southern District of New York excluded from the certified class any non-US claimants that purchased Converium shares on any non-US stock exchange. A settlement was reached with the certified group of claimants and approved by the district court.
The excluded claimants, represented by Dutch interest groups Vereniging VEB and the Stichting Converium Securities Compensation Foundation, subsequently reached a settlement agreement with Converium and ZFS and asked the court to declare the settlement binding pursuant to the Act on the Collective Settlement of Mass Claims.
After receiving the request, it was agreed that the court would first decide on its jurisdiction in a provisional ruling. The excluded claimants represented by the interest groups consisted of approximately 12,000 persons and companies, of which only 200 were Dutch residents or companies. The majority of the claimants were Swiss residents and companies. The remaining claimants were residents and companies from other EU member states and third states.
The court ruled it had jurisdiction in respect of all excluded claimants. In respect of Dutch claimants, the court ruled that it had jurisdiction in accordance with Article 2(1) of the Brussels I Regulation, which stipulates that "persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State". In respect of claimants from other EU member states and European Free Trade Agreement (EFTA) member states, the court ruled that it had jurisdiction based on Article 5(1)(a) of the Brussels I Regulation and the Lugano Convention, which stipulate that "a person domiciled in a Member State may, in another Member State, be sued in matters relating to a contract, in the courts for the place of performance of the obligation in question".
Once the settlement agreement is declared binding, it will be carried out in the Netherlands, as the foundation will be the entity distributing the relief set out in the settlement agreement to all excluded claimants from its Dutch bank account.
Alternatively, the court ruled that it had jurisdiction in respect of claimants from other EU or EFTA member states pursuant to Article 6(1) of the Brussels I Regulation and the Lugano Convention, as the claims are so closely connected that it is expedient to hear and determine them together in order to avoid the risk of irreconcilable judgments resulting from separate proceedings. Finally, in respect of claimants from third states (ie, claimants from non-EU member states), the court, on the basis of Article 3 of the Dutch Code of Civil Procedure, held that it had jurisdiction on the following grounds:
- One or more of the persons requesting a binding declaration was a Dutch resident or company; or
- The underlying case had links to the Dutch legal sphere.
Both grounds applied as the interest groups were incorporated in the Netherlands and, as mentioned above, the settlement agreement was to be performed in the Netherlands by the foundation.
The court emphasised the importance of the fact that the settlement agreement required the foundation to distribute the relief. The court appeared to suggest that as long as a Dutch interest group was involved in executing the settlement agreement, no other connection to the Netherlands was required in order for the court to have jurisdiction to declare the settlement agreement binding.
The court was fully aware that by its provisional ruling, it created an alternative venue for international class settlements. It referred to the limitations of the US courts as a result of, among other cases, Morrison. Furthermore, the court discussed the Shell decision and whether, in the Converium decision it was equally possible to reach a Dutch settlement that was complementary to the US settlement, thus reaching a global settlement for all involved parties.
The ruling on jurisdiction is provisional. All interested persons have been notified and can submit a defence against the ruling. A definitive ruling is expected by Summer or Autumn 2011.
The Shell decision has shown that the court is willing to declare a class settlement binding on non-Dutch class members. In the Converium decision the court took this one step further, showing its willingness to declare class settlements binding even if the connection with the Dutch legal sphere is minimal.
Taking into account the fact that a decision of the court under the Brussels I Regulation and the Lugano Convention is likely to be recognised in all EU and EFTA member states, and that the Netherlands is the only EU jurisdiction where a class settlement can be declared binding on all persons on an opt-out basis, the Netherlands is increasingly becoming an attractive alternative for class settlements.
Collective Settlements Act and private international law
The Dutch government is supportive of the Netherlands becoming a centre for the international collective settlement of mass claims. This is evidenced by the instruction of Dr H Van Lith of the Erasmus University Rotterdam by the Ministry of Security and Justice to write a report analysing the relationship between private international law and collective settlements concluded for the benefit of foreign interested parties under the Act on the Collective Settlement of Mass Claims.(4) The main object of the research was to assess the suitability of existing private international law instruments at national, European and international levels for the application of the act in international class settlement cases. One of the conclusions of the report was that the concepts used in the Act on the Collective Settlement of Mass Claims and the Brussels I Regulation do not match completely. The friction is a result of the fact that the Brussels I Regulation's rules on jurisdiction were not written for collective redress and the collective settlement of claims. According to the report, it might be deemed necessary to modify the Brussels I Regulation in order to deal with this issue. As an increasing number of EU member states are enacting their own legislation on collective redress of mass claims, this might be an advisable step.
For further information on this topic please contact Jeroen Ouwehand or Stana Maric at Clifford Chance LLP by telephone (+31 20 711 9000), fax (+31 20 711 9999) or email ([email protected] or [email protected]).
(2) Hof Amsterdam, May 29 2009, LJN BI5744, JOR 2009, 197 m nt AFJ Leijten (Shell).