Why opt-in class actions are likely to change the way asset managers approach group litigation
By Paul Baker, Managing Associate & Gerard Heyes, Supervising Associate, Simmons & Simmons LLP
Published: 22 December 2014
Over the past few years there has been a steady and noticeable increase in the number of “opt-in” class actions being brought in the UK, across Europe and globally. That increase has coincided with an ever more sophisticated approach to promoting and handling group litigation by the law firms involved. Law firms acting for a claimant class are motivated to increase the number of participants in the proceedings they manage (as that will increase the potential total recoveries and mean that costs are shared more widely) and have identified asset managers as a good source of potential participants. This article seeks to explore some of the key considerations for asset managers when presented with opportunities to participate in opt-in group litigation, the potential risks faced, and the ways in which such risks can be managed.
Background
Historically, asset managers’ involvement in group litigation has generally been limited to participation in US style “opt-out” class actions. In those circumstances, asset managers or custodians would typically receive notice of the litigation (which meant their investors or their fund formed part of the relevant class) and very limited further action or consideration was required. Opt-in group litigation on the other hand raises a number of questions for asset managers as regards their potential duties, particularly in terms of providing notification to clients and, ultimately, whether or not to participate.
What are the duties of asset managers?
Unfortunately there is no “one size fits all” answer to that question, as asset managers’ duties will differ depending on: the types of investment structures that may be impacted by the class action, the investors in those investment structures (retail clients may be invested, for example), the capacity in which the asset manager acts (trustee / fiduciary etc) and, not least, the contractual terms governing the relationship between the asset manager and its clients.
While there may be circumstances in which a duty to notify investors of, or at least consider the possibility of participating in, a given opt-in class action may be said to arise, it is clear that there is no overriding duty to participate in all class actions – for example, having considered the costs and risks involved in participation in a class action, asset managers may well make a reasoned decision not to participate. What that analysis points to, however, is that the key is to put in place a process that ensures that the right factors are considered in reaching such a reasoned decision and that the decision is documented appropriately.
What processes and procedures should be considered?
While the process itself will necessarily differ from manager to manager, depending on the structure of the business, we have identified some of the issues that managers may wish to take into account in designing and implementing a process for assessing potential opt-in group litigation.
- In the first instance, it may be prudent for managers to establish a central point of contact responsible for the co-ordination of opt-in class action notifications received. That central point can then take responsibility for forwarding all such notifications to the relevant fund managers / trustees etc for consideration.
- What processes are in place, or need to be created or updated, in order to identify which investors / funds are affected by the class action? This is likely to involve consideration of who would coordinate and undertake any necessary information gathering and investigative processes (in-house, third party providers?).
- How (if at all) will a cost-benefit analysis be undertaken in order to formulate a view on whether or not to participate in the class action? For example:
- Is participation in potentially long-term litigation compatible with the overall investment cycle of the investor / fund concerned.
- How might an assessment of the legal merits and any litigation funding arrangements be approached?
- How will any potential conflicts within the decision-making structure be managed?
- Who will bear the costs of the assessment process, and any additional costs from the litigation?
- If those costs are being passed-on to clients, does that require additional disclosure to investors?
- What would be the process if, during the course of the litigation, the asset manager is required to participate in the action (e.g., provide evidence or assistance as part of a test case)?
- An essential but complex part of the above analysis is trying to determine the potential downsides of participation. Even where opt-in class actions are presented by claimant law firms as essentially “riskless” (because, for example, they are backed by third party litigation funders and insurance policies) there are nevertheless a number of risks that still need to considered.
- Where does liability for costs (including adverse costs) lie if the third party funder goes out of business?
- How financially secure are the particular third party funders that are backing the litigation?
- Do the third party funders have a contractual right to walk-away from the litigation on the occurrence of specified events (e.g., if their view of the merits changes)
- What potentially incorrect representations may have been made to the insurers that could allow the insurers to refuse to pay out on the policy?
The questions set out above may well not be relevant in all circumstances, but they do help to illustrate some of the complex issues that can arise in the decision-making process, even before the merits of the litigation itself have been considered.
Conclusion
It seems likely that it is only a matter of time until one of the large opt-in class actions is successful and, should that happen, there is a risk that investors who would have been eligible to participate in the class, but did not do so due to the inaction of their asset manager, may seek legal recourse against their manager for the amounts they would have received in the litigation. That said, as matters stand it seems equally possible that it may be challenging for investors to allege, even on a loss of opportunity basis, that liability through non-notification or non-participation should arise in circumstances where the relevant class action was litigated in a jurisdiction with no track record of success to suggest that the benefits of participation outweigh the risks. This may of course change if a track record of success in such jurisdictions begins to emerge. Accordingly, now may well be a good opportunity for asset managers to manage proactively the risks that may arise from group litigation in the future. This is likely to mean, as a minimum, that there is a clear audit trail regarding the decision-making process and the implementation of a policy supporting that process.