In uncertain times, in-house counsel face mounting pressure to take a proactive approach to contentious issues. And with group actions on the rise, GCs are increasingly aware they must be prepared for such claims, as well as their associated costs.
Recent years have seen the group actions market begin to take off in earnest, after the RBS rights issue litigation demonstrated it was possible to bring high-value shareholder class actions to trial in the UK. The development of the regime in the UK and EU has seen claims brought across a wide array of sectors, with the focus varying hugely from claim to claim, and given the growing emphasis on ESG, it is unsurprising that group actions are seen across all three elements of that acronym.
In the environmental sector, six water companies are facing legal action on behalf of over 20 million households due to alleged non-reporting of pollution incidents. As social consciousness continues to rise, high-profile claims have included the Tesco equal pay case, with thousands of workers demanding fair treatment. And in the governance space, securities class actions have been on the rise, with a group of global investors taking on Glencore last year over the company’s bribery conviction.
At the same time, the group claims trend is being embraced by a growing number of litigation boutiques, often in tandem with litigation funders. Despite the industry facing turbulent times following this July’s Supreme Court decision in PACCAR, with swathes of funding agreements having to be reformulated as a result, few see fundamental threats to the funding model, and the impact of the funders on the group claim industry is unquestioned. According to Travers Smith disputes partner Stephanie Lee: ‘There are some challenges with structuring litigation funding in the right way, but they aren’t insurmountable. There’s a significant market of funders and the claimant Bar looking to bring cases, and the fact that there are people out there actively looking for claims to bring, and incentivised to find them, can be a scary prospect for in-house counsel’.
On whether the rise of group claims is driving the growth in funding, or the reverse, Signature Litigation partner Becca Hogan argues it’s ‘a bit of both’.
‘Without funding, there would be no group claims because you wouldn’t have the quantum base to withstand the costs involved’, she notes. ‘The courts also have a role to play – they’ve shown an increased willingness to hear these types of claims in recent years.’
This, along with a general increase in consciousness and shareholder activism, is propelling the popularity of class actions – a key concern for in-house counsel across all sectors. Bryan Cave Leighton Paisner (BCLP) partner Ravi Nayer says the liberalisation of group litigation and class actions is ‘a worry to every single in-house counsel – it impacts every single GC of a listed FTSE 100 company.’
On the types of claims that are posing a threat, Nayer adds: ‘A particular challenge [for in-house counsel] is that there are these increasingly novel claims coming through, whether that’s shoehorning a case into the CAT CPO regime or stretching the boundaries of the duty of care in tort, which mean that it is much harder to identify where the risks might lie’.
But these concerns are not universal. Those taking a more reassuring tone include Shoosmiths national disputes head Alex Bishop, who notes that concerns have not yet been borne out by the number of claims issued over recent months. ‘Looking at the data, in 2019 you had 83 group claims issued, with 134 in 2021, and 144 in 2022. As of mid-October, there have been 47 across the major courts in England and Wales. It could be an anomalous year, but my contention would be that you need to be aware of group claims – but not alarmist’.
Considering the macroeconomic environment, it is potentially unsurprising that volumes of group claims have fallen this year, with law firms, companies, and litigation funders alike feeling the pinch. The high-interest rate environment has left funders increasingly scrutinising the quantum of claims they are funding to ensure their investment is sensible. The challenges posed to an industry largely established during a low-interest rate environment have also seen investors seeking out other asset classes, again leaving less capital available for litigation. That the confluence of these issues and the PACCAR judgment may be a primary factor behind the drop-off in claims is a point acknowledged by Bishop, who concedes that the market may bounce back.
What do in-house counsel need to be aware of?
In terms of what in-house counsel need to keep front and centre of minds, one key consideration is the veracity of statements or information included in prospectuses. S90 Financial Services and Markets Act 2000 (FSMA) claims have been on the rise, with Nayer commenting that ‘we’ve seen the securities class action space increasing since 2014’. Shareholder activism is largely seen to be on the rise, with claims brought by over 400 institutional shareholders against Glencore over the inclusion of misleading information in prospectuses a notable example.
With companies also increasingly under pressure to include information about their approach to ESG, particularly on the environmental side, the importance of accuracy and transparency is paramount. Aleksandra Schellenberg, global legal head of sustainable finance at UBS explains: ‘The new rules and regulations increasingly require detailed explanations of companies’ business models and their strategies, including plans to ensure that those business models and strategies are consistent with the transition to a sustainable economy. This means that companies which have publicly announced their sustainability related aspirations will need to evidence how they ‘walk the talk’. Lack of full consistency between what they say aspirationally – including their targets – and underlying activities may increase greenwashing-driven litigation risks.’
Companies also need to be aware of growing scrutiny on supply chains. Colt deputy GC Alessandro Galtieri notes typical risks posed by a high-interest rate environment, explaining how the pressure to cut spending may lead to damaging decisions for corporates. ‘When cost-cutting is on the agenda, you can end up with suppliers that are less reputable than you would usually use – you may end up with unscrupulous actors, and so proper due diligence is crucial.’
Another trend for in-house counsel to keep abreast of is the changing attitude of the courts to interpreting contracts. Oran Gelb, head of banking litigation at BCLP, cautions: ‘In-house lawyers need to be careful not to simply copy and paste commonly used phrases or language into their contracts, without considering what they mean and whether they are appropriate for that contract. The trend we’re seeing is towards a more literal interpretation.’
On a more optimistic note, there is evidence that courts are demonstrating an appetite to strike out unmeritorious claims. With criticisms over the expenses associated with disputes, and parties choosing alternate jurisdictions for litigation, calling into question the attractiveness of London as a destination, judges are being bolder, and taking the opportunity to be more robust. Post-Brexit, the inclination is for English courts to remain attractive, and with added motivation to clear the Covid backlog cited as likely drivers behind a increase in summary judgments being issued.
What can in-house counsel do?
Notwithstanding questions over the takeup of class actions, there are a number of steps in-house counsel should be taking to mitigate risk. Considering all potential types of group action and being aware of evidence that could cause problems down the line is more important than ever. While GCs cannot of course fully mitigate the risk of litigation, there are preliminary steps that should be taken nonetheless.
Many lawyers stress the importance of carrying out risk exercises, and absorbing the cost in advance to mitigate risks of litigation going forward, despite budgetary concerns. Lee recommends ‘getting ahead of the game’.
‘Conduct a risk assessment exercise to establish where you’re most vulnerable,’ she urges. ‘You have to ensure you have robust governance systems and mitigation steps in place, to put yourself in the best possible position should a dispute arise. This might be a difficult sell internally if there isn’t an immediate threat, but it can be done in an economically sensible way, and spending money now will likely save money in the long term’.
While many in-house counsel may believe they already have adequate risk mitigation systems in place, the extent to which this is true is questionable. Bishop notes: ‘Most GCs perceive that their businesses are well prepared for any risk of litigation, but when we ask specific questions, most businesses haven’t looked at their dispute avoidance policies. For example – do you have a WhatsApp policy? Most of them don’t.’
For Schellenberg, the key takeaway is for in-house counsel to ‘continue to monitor and analyse cases to learn what went wrong and why – and educate senior management so that they have a solid understanding where the risks are and how we can mitigate them.’