As Shareholder Litigation Rises, Non-U.S. Companies Must Take Heed

In this Bloomberg Law article, partners Matt Solum and Richard Boynton analyze the proliferation of securities lawsuits and how companies listed outside of the U.S. should monitor the trend and prepare for the potential spread of shareholder litigation. 

Shareholder litigation has long been a cost of doing business in the US, and is now gaining traction in the UK. Companies listed outside the US should prepare for potential adverse developments that may result in follow-on shareholder litigation.

The basis for these actions is Section 90A and Schedule 10A of the Financial Services and Markets Act of 2000, which creates a right for shareholders to sue UK-listed companies for publishing misleading information to the market. Section 90A may be considered roughly analogous to Section 10(b) of the Securities Exchange Act in the US, which similarly provides a right of action for misleading statements to the market and has long been a source of shareholder litigation.

One such Section 90A case went to trial in the UK in June. The UK government accused Serco Group, a British multinational corporation and large government contractor in the defense and criminal justice sectors, of overbilling practices. Serco allegedly charged the government to monitor criminal offenders who were, in fact, dead. The allegations led to years of proceedings and repayment of £68.5 million ($89.8 million) to the UK government and £19 million in fines to the Serious Fraud Office.

The UK government made its original accusations against Serco in 2013, and in the following year, the company’s share price declined by about 70%. A group of shareholders sued Serco under Section 90A in 2019, alleging losses in reasonable reliance of the company’s published statements, which, according to the shareholders, contained misleading statements or omissions, or dishonestly delayed publishing information.

Significant litigation efforts spanned for years, including hearings that clarified procedural differences between claims for direct reliance and claims for indirect reliance. The case was the first of its kind to go to trial in the UK. Though the matter ultimately settled mid-trial on confidential terms, the case’s advancement to the trial stage was a milestone in the history of securities litigation.

The fact pattern of Serco follows a playbook familiar to securities litigators in the US, where companies are routinely sued for securities fraud following any sort of government enforcement action. In the US, most of these stock drop suits are dismissed at the pleading stage, though some occasionally proceed to later stages where they are settled with hefty fee payments to the plaintiffs’ lawyers.

The proliferation of securities suits in the US creates an effective tax on doing business here, as companies face the constant threat of shareholder litigation that creates enormous financial risk for a business and its insurers.

While this type of litigation has mostly been considered an American phenomenon, there is reason for companies in other jurisdictions to take heed of its potential spread.

In Europe, securities plaintiffs have secured 10-figure settlements, including 1.43 billion euros ($1.58 billion) that was recovered for shareholders in the Germany and South Africa-listed Steinhoff International following allegations of massive accounting fraud, and 1.3 billion euros from Benelux-based Fortis N.V. following allegations that it misled investors about its solvency status.

Also, following the Serco settlement, shareholders have launched a Section 90A claim against the UK-listed company Entain Plc to compensate them for losses caused by the drop in share price following allegations of bribery at the former Turkish subsidiary of the group.

Companies based outside the US should note this trend and prepare for the possibility that a substantial drop in their share price may prompt suits for “fraud”—even where the fraud theory lacks merit and is unsupported by evidence. Specifically, they should:

• Monitor shareholder lawsuits in their jurisdiction to understand whether any particular theories of liability gain traction with courts, or result in substantial settlements or judgments
• Work carefully with counsel in their jurisdiction to ensure that disclosures to shareholders comply with relevant law and won’t be considered false or misleading
• Consider the possibility of shareholder litigation filed as a follow-on to any event which may prompt a drop in share price, such as the public disclosure of civil or criminal liability
• Work with their insurers to understand their coverage for shareholder litigation