• Private equity firms and hedge funds could take lead in launching claims
  • Investors can now sue directors personally

The number of shareholder class actions being launched in the US has jumped 58% in the last year, sending a warning signal to British companies that similar lawsuits could follow in the UK, says City law firm Wedlake Bell.

According to figures from Stanford Law School, there were 211 securities fraud class action filings in the US in the year to the end of August 2008, compared to just 133 the previous year, and following a general downward trend in cases since the peak in 2001.

Comments Tim Bird, Head of Wedlake Bell’s Corporate team, “This jump is a worrying sign for UK companies.”

“We could now start to see shareholder class actions against directors being brought over here for the first time, as investors seek to recover damages or force urgent reforms in corporate governance in the wake of the past year’s stockmarket turmoil.”

According to NERA Economic Consulting, which is part of Marsh & McLennan, the average settlement value in the US is now just over $30 million. Although damages in the UK are not expected to reach the punitive levels seen in the US, they could still be significant.

Explains Bird, “The key drivers are likely to be activist private equity firms and hedge funds whose growth has exploded during the recent boom years, taking large stakes in huge numbers of companies. This new class of investors are far less likely to baulk at following US investors’ example and taking aggressive action to influence corporate policy.”

“Although class action lawsuits have traditionally been much harder to launch in the UK because the current default position is that investors have to pro-actively opt-in to an action, with these committed activist investors as the driving force, smaller shareholders are far more likely to want to participate in the suit. They may start to see this form of action as just another weapon in their armoury to use in exercising board control.”

He adds that if investors do not feel that taking action against the company itself would serve their best interests, they now also have the option of launching legal action against the directors on behalf of the company, under derivative action provisions brought in in October last year under the Companies Act 2006.

He says that in a derivative action, directors could be held personally liable for failings such as negligence, breach of duty or breach of trust.

“Even though shareholders don’t directly and personally receive the damages from derivative actions, they may still feel it is worth their while taking this route if it is the best way of defending the value of their shareholding within the company,” says Bird.

He adds, “This also makes it easier for minority investors who are feeling the pain of the credit crunch to take legal action, because the Act does not require the shareholder to have a minimum number of shares to bring a claim.”