Many UK pension schemes hold US equities either directly or indirectly (for example, in pooled funds).
In the US it is not uncommon for shareholders to seek compensation for losses arising from corporate fraud or corporate governance mismanagement. Often such actions are brought as class actions.
This briefing note gives a short explanation of US securities class actions and highlights the key issues for trustees to decide whether or not they want to become involved in any such action.
What is a class action?
A class action is one where a main claimant (referred to in the US as a lead plaintiff) can bring an action on behalf of a class of people who have suffered a loss. Where the action succeeds, damages are awarded to the whole class. A secondary process follows in which damages are paid out to all claimants in the class who have registered an interest.
With few exceptions, it is not possible to bring class actions in the UK. However, in the US, class actions have been common for a long period of time.
What is a US securities class action?
A securities class action is an action which is brought on behalf of shareholders in companies which have US listings. These actions are usually based on some kind of fraud, misrepresentation or other corporate misconduct by the company’s management. Trustees are institutional investors. Many invest in US-listed stock either directly or indirectly. Where stock is held directly as part of the portfolio of scheme assets, trustees will be able to join in a class action where they are a shareholder in the company at issue and either bought shares on a US exchange or bought shares on a European exchange, and can show that the matters complained of have sufficient connection to the US.
Alternatively, where trustees invest in pooled investment products, they are indirectly investing where the pooled investment includes in US assets. In these circumstances the pooled fund managers could be expected to pursue class action claims on behalf of investors.
Why might pension fund trustees be interested now?
Trustees are likely to be interested in US securities class actions because:
- The frequency and prevalence of these types of action has grown significantly in recent years.
- Until recently it has been very difficult to monitor claims and to know when it is possible to bring a claim.
- There are now more efficient and cost effective ways of monitoring actions and registering interests (or making a decision to become a lead plaintiff).
- UK pension deficits are still headline news and pension scheme governance has had increased prominence since the Pensions Act 2004. Trustees need to at least consider whether or not it is appropriate to pursue any claim.
Why would trustees want to get involved? Wouldn’t involvement mean that the value of any compensation is wiped off the value of the trustees’ stock?
In the US, the amount of damages can be determined regardless of the number of claimants. Damages are shared out among the members of the class who register their interest within a fixed timetable. The compensation pool is fixed. It is not determined by the number of people in the class. Compensation is paid regardless of whether a particular party has registered an interest. Often the compensation is paid by third parties such as directors and officers’ liability insurers or company advisers implicated in the matters complained of. The process also permits investors to pressure companies to implement good corporate governance principles to help reduce the likelihood of future wrongdoing thereby potentially increasing the value of the stock.
Do trustees need to take any active interest in class actions?
Yes. US courts do have only a limited obligation to look after the interests of all potential claimants.
It is the lead plaintiff who defines the class, controls costs and settlement terms and who can promote any changes in corporate governance proposed. Even if the trustees fall within the class, they will not be entitled to benefit unless they have registered an interest (the appropriate form must be completed absolutely correctly) as a member of the class within the prescribed timetable. It is a serious step for trustees to become the lead plaintiff (rather than merely registering an interest) and it is unlikely that trustees would seek to do this in the majority of cases.
Can trustees monitor securities class actions themselves?
Yes, unless their custodians are dealing with this for them. Monitoring is very time consuming and requires care with the information provided and time limits. It may not be feasible, therefore, for trustees to monitor this themselves. There are now specialist US law firms and a few UK-based monitoring companies offering to carry out this function.
Issues for UK pension schemes considering involvement
- Consider whether the scheme has got (or used to have in recent times) a direct holding in companies registered in the US or listed on a US stock exchange or the subject of a US class action.
- If so, discuss the issue with your investment consultants and, if necessary, the scheme’s lawyers.
- This will probably lead to a discussion with investment managers and custodians to see what their policies on the issue are and, in particular, to seek reassurances from them about what steps they are taking to cover it.
- If suitable reassurances are received, they should be incorporated into the investment management and custody agreements so that they become a binding obligation on the parties. The trustees will have probably delegated the function of monitoring and dealing with this issue.
- There is no reason to suppose that if, as a shareholder, a pension scheme takes a totally passive role it will recover the benefits to which it is entitled. The trustees need to ensure that the relevant registration forms are correctly completed otherwise their claim may be rejected.
- In some cases, some schemes may want to consider a role as lead plaintiff