To help asset management companies’ legal teams work efficiently with a finance provider to establish affirmative recovery programs, we share three factors in-house lawyers should consider before participating in funded European securities group actions.
Legal departments at asset management companies have always focused on protecting their funds and fund shareholders from legal and regulatory risk. Traditionally, that has meant ensuring their funds comply with applicable regulations, provide adequate disclosure to fund shareholders and utilize investment strategies consistent with a fund’s stated investment objective and prospectus limitations. It has also meant vigorously defending a fund that is threatened with litigation. More recently, however, in-house teams have been tasked with evaluating opportunities to pursue affirmative litigation on behalf of their funds that could increase shareholder value. As asset managers navigate the unprecedented market volatility caused by the COVID-19 crisis, the legal department’s role in identifying and pursuing their funds’ valuable legal claims will become even more significant. However, in-house lawyers face a slew of challenges when identifying and pursuing affirmative matters internationally, particularly because their funds’ regular outside counsel are rarely in a position to bring an affirmative lawsuit in a foreign jurisdiction. The general prohibition on contingency fees in non-U.S. jurisdictions also means that most cases will require a litigation funder, and in-house counsel will be tasked with negotiating funding terms and documentation.
To help asset management companies’ legal teams make sense of these complexities and work efficiently with a finance provider to establish affirmative recovery programs, below we share three factors in-house lawyers should consider before participating in funded European securities group actions.
#1 Jurisdictional obligations and risk profiles
When deciding where to pursue potential securities claims, in-house lawyers should first ask two questions: What will the organization’s obligations be? What risks are associated with the jurisdiction?
Because the litigation burdens placed on asset managers and their legal and investment personnel vary widely by jurisdiction, informed in-house counsel will want to understand the relevant legal standards, adverse costs risk, discovery obligations, potential for anonymity in the proceedings and anticipated case duration. To see how different European jurisdictions compare, see the table [BELOW].
While claimants incur no out-of-pocket costs when pursuing funded actions (as that risk is assumed by the non-recourse finance provider) and bear no financial risk in actions where adverse costs are covered by the funder, the risk profile of a jurisdiction ultimately helps inform whether the litigation and potential recovery is worth the commitment of internal resources necessary for the adviser’s funds to participate. Conducting a thorough analysis of jurisdictional requirements at the outset helps ensure in-house lawyers maximize shareholder value when pursuing claims.
European jurisdictional risk profiles and loss thresholds
|JURISDICTION||LEGAL STANDARDS||ADVERSE COSTS||DISCOVERY||ANONYMITY||DURATION|
|PASSIVE||Dutch settlement foundations||Established cause of action and procedure for class-wide litigation/settlement; direct reliance not required||No adverse cost risk for passive participants||No discovery of passive participants||No public disclosure of passive participant identities||Cases typically resolve within 3 years|
|ACTIVE||Dutch group/SPV actions, Denmark, Germany, UK||Low||No passive option but established cause of action and damages methodology; direct reliance not required||
De minimis adverse cost risk; amount can be fully indemnified by funder
|Production burden limited to trading records||
Limited or no public disclosure of participant identities to opposing parties or publicly
Cases typically resolve within 5 years
|Medium||Established cause of action but damages methodology uncertain; direct reliance not required||
Adverse cost risk may be material but is capped or otherwise limited; amount can be determined in advance and insured with ATE policy
Production burden may include investment research, fund prospectuses and organizational documents; jurisdiction may require registration formalities/POAs. Opposing parties can’t compel discovery but may ask court to require production
Disclosure of participant identities to opposing parties, but public disclosure may be limited in some way
Cases typically resolve within 5 years but material risk of longer case duration
|High||Cause of action may be recognized but basic claim elements (e.g., reliance) may be uncertain (or unfavorable)||Adverse cost risk is uncapped; amount cannot be determined in advance and available insurance may be insufficient to cover full exposure||Extensive initial production burden and opposing parties can compel discovery||Participant identities are disclosed to opposing parties and publicly available||Cases routinely last more than 5 years|
#2 Claimant group composition is important
Outside of North America and Australia, most securities litigation is pursued through “group actions” where groups of institutional investors band together to pursue claims based on the same set of facts. The second consideration for in-house lawyers pursuing funded securities litigation is the composition of the claimant group, as claimant groups that include large institutional investors are more likely to be litigated in a manner that serves the best interests of claimants.
If an action is made up only of many smaller claimants, the case will likely be funder-driven, and participants will be less involved in decision-making. Theoretically, interests should be aligned, but if, for instance, funders wish to achieve an earlier settlement so their overall investment is smaller, claimants may be unable to influence that decision.
Large claimants can positively impact recovery outcomes in two ways. First, the presence of large claimants helps ensure that the defendant takes the matter seriously. Second, one or more large claimants are likely to have greater influence and can help ensure the funder both directs counsel and also funds the case to maximize value for all claimants.
#3 Funder capabilities and engagement agreements
Funding in the context of European securities actions is already well established, with a mature market of funders available to service claimant groups—meaning participants can expect to receive and vet multiple funding proposals for any potential matter. Because the funder is often responsible for running a case through a formal delegation of authority from the claimants, it is crucial for in-house lawyers to carefully evaluate any potential financing partner based on three criteria: Funder capabilities, client services and funding agreements.
To ensure their organizations have access to the capital they need when they need it, in-house counsel should understand the range of financing solutions offered by prospective finance providers. Many funders that historically have been active in securities litigation offer a simple, off-the-shelf product to their clients, wherein the funder covers all the fees and expenses related to the matter. A sophisticated finance provider like Burford can additionally offer solutions that give advisers additional fund management tools, through portfolio financing – which allows funds to pursue multiple claims under a single agreement – or claim monetization.
The level of involvement between funders and claimants can vary widely, so in-house lawyers should also understand the level of client services offered by the finance provider. Some funders work through the case completely independently of the claimants—so, after signing initial contracts, claimants never hear from their funders until they receive a check in the mail. Burford, by contrast, provides regular reporting to clients throughout the lifecycle of their matters. Burford also provides direct access to local counsel and damages experts so that investors can fully understand the legal landscape and basis for claimed damages. Funders also range in their degree of ongoing and personalized support. Burford is committed to addressing its clients’ individual needs. As just one example, at a recent mediation of a large complex securities litigation involving multiple claimant groups, Burford and its counsel were accompanied by several of its clients to help ensure their interests were represented—and was the only finance provider to appear with client representatives.
When reviewing the terms of a funding agreement, in-house lawyers should ask:
- What is the finance provider’s capital source—and is there any chance funding may become unavailable during the course of a multi-year litigation?
- What is the finance provider’s scope of authority?
- What are the finance provider’s reporting obligations?
- What exit opportunities are available to the funder and the claimants?
- How will costs and proceeds be allocated?
- How are adverse costs handled?
- How do local counsel engagement letters work?
- Are there any special considerations for assigned claims?
Whether and how a finance provider can answer these questions will give claimants better insight into whether the funder is prepared to be a true partner throughout the duration of the litigation.
Making strategic decisions
Embarking on an affirmative securities recovery program is a significant undertaking; having a strategic financing partner in place can make the transition easier.
Burford is uniquely positioned to work with asset management companies given its wide range of financing solutions (including funding fees and expenses, portfolio-based facilities and monetizations) and a team of 130 that includes former in-house lawyers at global investment funds with the expertise to provide guidance on how to select appropriate claims and the experience to maximize value to claimants in any jurisdiction in the world. Burford is also well-positioned to be a partner throughout the duration of funded matters given its access to ample sources of permanent capital.
Finally, in-house lawyers from asset management companies may also take comfort in knowing that they are in good company: Burford has worked and continues to work with some of the world’s largest and most sophisticated investors as well as parties with smaller claims.
Leeor Cohen is a Senior Vice President with responsibility for assessing and underwriting legal risk as part of Burford’s investment team. Prior to joining Burford, he was a Director in Leveraged Finance at Bank of America Merrill Lynch in London and in New York and previously worked as a Consultant for Bain & Company in Chicago.