Practical scenario

Company X, a publicly listed company, makes a number of incorrect and misleading statements/disclosures about the products that it manufactures and the state of its financial accounts. When the misleading nature of those statements comes to light it: (a) becomes clear that the product which the company has been manufacturing is potentially harmful to the public; and (b) the share price drops by 25%. Company X’s regulator subsequently investigates the issues and it transpires that the board of directors of Company X were aware that the statements the company issued regarding the products and the accounts were false.

What are the main causes of action that are likely to be pursued by shareholders, bondholders and/or consumers acting as a group in your jurisdiction in order to bring a claim against Company X and/or its directors?

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Australia
  • Listed companies are required to comply with the "continuous disclosure" regime under the Australian Stock Exchange Listing Rule 3.1 and section 674 of the Corporations Act. Under these provisions, the Corporation is required to advise the market of information of which it was, or ought to have been, aware which might materially affect its share price. Information is likely to have a material affect if it may influence persons in deciding whether to buy, sell or retain shares in listed entities. The Corporations Act also contains provisions prohibiting misleading or deceptive conduct.

    While these are the main causes of action that are likely to be pursued against Company X, there are a number of other provisions under the Corporations Act that proscribe the conduct of directors. Such provisions are sometimes, but not always, pleaded against directors in shareholder class actions in Australia.

    This response has been prepared by Clayton Utz, which has agreed to Simmons & Simmons making it available on elexica. Please contact Colin LovedayAlexandra Kennedy-Breit and Andrew Morrison if you have any questions.

Denmark
  • Based on the specific scenario, the main causes of action which are likely to be pursued by the different parties, may be as follows:

    • Shareholders/bondholders: All shareholders, including minorities, may file a class action against the company and the board and management with a claim in damages. The damages claimed will essentially correspond to the loss suffered by the shareholders. The computation of loss may, however, cause difficulties and the burden of proof lies with the plaintiff. In the event that the claim is made regarding shares subscribed based on statements in a prospectus the loss will be easier to compute since it is easier to establish the entry point and pricing, however, there will also in this instance be complicating factors.
    • Consumers will likely be able to join a class action law suit filed by the Danish Consumer Ombudsman, which is able to act on behalf of such a group of consumers. The consumers may, however, also file a class action law suit without the involvement of the Danish Consumer Ombudsman.

    In both cases the claims that may be filed are claims relating to personal injuries (and consequential losses resulting from this), economical loss due to defective products (this loss may me the specific cost of the defect product and, potentially, consequential loss due to the defective product).

    This response has been prepared by Mazanti-Andersen Korsø Jensen, which has agreed to Simmons & Simmons making it available on elexica. Please contact Lars Lüthjohan Jensen if you have any questions.

England and Wales
  • For consumers of Company X’s products, the Consumer Rights Act 2015 permits "opt out" collective actions against corporate entities for anti competitive behaviour.

    Otherwise, actions for breaches of statutory duty or negligence by Company X or its directors may be brought by or on behalf of a number of parties; there are various “opt in” procedures which enable several similar claims against a defendant to be dealt with together, such as multiple joint claimants, a Group Litigation Order (GLO) or a representative action.

    In the financial services context, the Financial Services and Markets Act 2000 (FSMA) contains a variety of provisions which would allow an aggrieved consumer or customer to claim damages against the authorised firm and/or the persons responsible for the breach, depending on the circumstances. For example, FSMA 138D allows private individuals who have suffered loss as the result of breaches of the FCA and PRA rules to claim against the authorised firm, section 90 of FSMA provides those who have suffered loss as result of a misleading statement in a prospectus or offering document with a right of action against those responsible, and section 90A of FSMA provides a right of action against the issuers of securities to those who have suffered loss as a result of a misleading statement or dishonest omission in certain published information relating to securities, or dishonest delay in its publication.

    Establishing breach of the FSMA provisions may be easier than establishing an equivalent claim in tort, for instance in certain circumstances there is no need to establish reliance on the statements in question. The general increase in regulatory enforcement against regulated entities in the UK means that a great deal of material which might be used by shareholders to establish a claim has already been uncovered as part of a regulatory investigation.

France
  • Under French law and as far as shareholders are concerned, they would not be entitled to bring a class action against Company under the terms of article L. 423-1 of the French consumer code as such action could only be brought to Court by a consumer protection association.

    However, company shareholders could form an association to represent their interests and initiate an “ut singuli” action before the Court, pursuant to article L. 225-1201 and article L. 225-252 of the French Commercial Code2). Article L. 452-1 of the French Monetary and Financial Code3 grants the same right to authorised shareholder defence associations of publicly traded companies.

    It will be necessary for the sharehaolder to prove that he suffered a personal loss in relation to the breach committed by the company’s directors. Pursuant to French case law in this matter, the loss suffered by the shareholder in relation to the breaches committed by the company’s directors must be distinct from the company’s loss (see for example Cour de Cassation, Commercial Section, 15 January 2002, n°97-10886).


    1 Article L. 225-120 of the French Commercial Code:

    I- In companies whose shares are admitted to trading on a regulated stock market, shareholders whose shares have been registered for at least two years and who hold at least 5% of the voting rights may form associations to represent their interests within the company. In order to exercise the rights to which they are entitled under Articles L. 225-103, L. 225-105, L. 823-6, L. 225-231, L. 225-232, L. 823-7 and L. 225-252, such associations must have notified the company and the French Financial Markets Authority [Autorité des Marchés Financiers] of their legal status.
    II. - Where, however, the company's capital exceeds 750,000 Euros, the share of voting rights to be represented pursuant to the preceding paragraph is reduced according to the number of the voting rights relating to the capital, as follows:
    1° 4% over 750,000 Euros and up to 4,500,000 Euros;
    2° 3% over 4,500,000 Euros and up to 7,500,000 Euros;
    3° 2% over 7,500,000 Euros and up to 15,000,000 Euros;
    4° 1% over 15,000,000 Euros.

    2 Article L. 225-252 of the French Commercial Code

    The directors and managing director shall have individual or solidary responsibility to the company or third parties either for infringements of the laws or regulations applicable to limited companies (sociétés anonymes), or for breaches of the constitution, or for tortious or negligent acts of management. If more than one director, or more than one director and the managing director, have participated in the same acts, the court shall determine the share to be contributed by each of them to the compensation awarded.

    3 Article L. 452-1 of the French Monetary and financial Code :

    “Properly declared associations having as their explicit purpose, as defined in their company constitutional documents, the defence of investors in financial securities or financial products may bring legal proceedings before any court, even though the filing of civil actions, in relation to facts which cause direct or indirect prejudice to the collective interests of investors in general or to certain categories of investors.

    Said associations are:
    - approved associations, as determined by decree after seeking the opinion of the Public Prosecutor and the Autorité des Marchés Financiers, where they can prove six months' existence and, throughout said period, at least two hundred members paying their contributions individually and where their executives meet conditions of respectability and competence determined by decree;
    - associations which meet the criteria for holding voting rights defined in Article L. 225-120 of the Commercial Code, if they have sent their company constitutional documents to the Autorité des Marchés Financiers.

    Where a practice contrary to the laws or regulations is likely to compromise the rights of investors, the shareholders' associations referred to in the first paragraph may apply to the court for an order compelling the individual or legal entity responsible to comply with said provisions and end the irregularity or eliminate its effects.

    The application shall be brought before the presiding judge of the regional court having jurisdiction at the place where the company has its registered office, who shall give an immediately enforceable summary ruling. The presiding judge shall be competent to hear and determine objections of illegality. He may, even without consultation, take any protective measure and impose a coercive fine payable to the Trésor public for execution of his order.”

Germany
  • Usually the board members would be only liable for their conduct to the company and to shareholders, bondholders and/or consumers. In cases of intentional deception, however, damages can be claimed according to tort law.

    The shareholders can individually sue the members of the board of directors. Each claimant can then apply for a test case according to KapMuG. The competent court will not decide on each individual right to the asserted claims but only clarify legal questions that affect all claimants equally. In this case, such question could be whether or not the board of directors intentionally misinformed the shareholders. The individual trials that have been temporarily suspended will continue after the test case and determine the individual claim of each shareholder.

    Consumers affected by the product could claim damages according to German tort law. Those claims cannot be filed in a collective suit. Consumer protection associations could take action on behalf of a group of consumers that is affected by the product. However, they cannot claim damages for the consumers but only obtain an injunction that the company has to refrain from selling those harmful products. Individually each consumer could claim compensation for any damage to his/her own health that has been caused by the product.

Israel
  • Consumers of the product manufactured by Company X may bring a class action on the grounds of misleading disclosures regarding the product they bought, as well as on the grounds that such misleading disclosures prevented them from having free will to choose the product they want to consume in comparison to other products.

    Shareholders have three main options:

    • Bring a private damages lawsuit as for their losses resulting from a drop in share price.
    • Bring a derivative action against the company's officers and directors actions. Much like class actions, a shareholder who wants to bring a derivative action has to file a motion to get court approval to deliberate the case as a derivative action. The request will be heard by a judge who examines whether the shareholder satisfies the evidential burden required for a derivative action. In ruling on the request, the court determines whether the plaintiff is a shareholder or a director in the company, whether the plaintiff had made a prior plea to the company in writing, and whether the plaintiff has good intentions. Once the court approves it, the case will be heard as a derivative action.
    • Bring a class action for the damages resulting from a drop in share price due to the company's officers and directors' actions.

     

    Bondholders may also bring a class action for their damages due to the company's officers and directors' actions. The bondholders’ representative, such as the bond trustee, may also bring a class action or regular lawsuit seeking damages for the bondholder resulting from a drop in share price. Note that, according to article 267 of the Companies Ordinance, 5743-1983, if a temporary liquidator has been appointed to the company no proceedings shall be continued or initiated against the company without permission from the court, and will be subject to any conditions imposed. In other words, if the actions complained of are what caused the liquidation, an action against the company (itself, as opposed to against office holders etc) cannot proceed without the court's permission.

    This response has been prepared by Gornitsky & Co which has agreed to Simmons & Simmons making it available on elexica. Please contact Noam Ronen if you have any questions regarding this briefing.

Italy
  • In this case, shareholders and bondholders and/or consumers acting as a group could start legal proceedings against Company X pursuant to the Italian Consumer Code (Art. 140-bis of Law Decree 206 - 06 September 2005).

    The collective claim must be filed with the competent court where the company’s registered office is located (a requisite of article 140-bis of the Consumer Code). The claim also has to be provided to the public prosecutor’s office, which however may only intervene with regard to the admissibility phase of the claim.

    The first step in the process of Italy is to filter claims according to whether they are admissible or not. Indeed, the Consumer Code requires that the class action start with an initial hearing on the admissibility of the claim. A claim will be considered inadmissible if it is evidently lacking grounds, if there is a conflict of interest, if the judge does not confirm that the claims of the individuals forming the class action are homogenous, and finally if the claimant representing the class is unable to adequately protect the interests of said class.

    An inadmissibility decision may be appealed within 30 days of the decision.

Netherlands
  • Shareholders, bondholders and consumers are, in principle, all eligible to bring a collective claim against both Company X and its directors. Such a claim would be based on tort or breach of contract, and Dutch jurisprudence shows that many of such claims have been brought in recent years. A high standard applies to establishing the personal liability of individual directors towards parties outside the company on the basis of a wrongful act/tort; it must be shown that the relevant acts or omissions of those directors are sufficiently serious so as to attract personal blame.

    Many share and bondholders are already organised in representative associations like the Vereniging voor Effectenbezitters (VEB) (Investor’s Association). The VEB is known for representing shareholders in relation to scandals and frauds, for example relating to the BP, Imtech and Fortis affairs. The VEB has initiated legal proceedings against Volkswagen following the diesel scandal that came to light in 2015. The VEB aims to represent all Dutch shareholders in Volkswagen, or investors who hold Volkswagen shares through Dutch bank accounts or via Dutch brokers, and suffered a decrease in the value of their shares as a result of the scandal and consequential collapse of the price on the stock market. Perhaps cases against directors may follow. Another association, Stichting Volkswagen Audi Claim, aims to represent consumers on a "no win no fee" basis for their loss with regard to the trade-in value of their Volkswagen vehicle. Another example of consumers collectively represented by an association was the case in which the Stichting Loterijverlies (Association Lottery loss) held the Foundation for the Exploitation of the Dutch State Lottery liable for misleading statements. The Dutch Supreme Court, as the highest court, declared the statements of the State Lottery misleading and thus unlawful. Pursuant to this judgment, and mindful of the prohibition to collectively seek damages, individuals had to pursue individual damages or a settlement with the State Lottery. Earlier this year, State Lottery settled with the individual consumers for an amount of €30m.

New Zealand
  • The first point to note is that shareholders, bondholders and/or consumers acting as a group will have any cause of action that they would have had individually. In that sense, there are potentially a large number of causes of actions available.

    The best prediction of the causes of action such groups would invoke is past-precedent. In Houghton v Saunders shareholders took a representative action based on identified misleading statements in the prospectus. They pleaded four causes of action:

    • Breach of s9 of the Fair Trading Act 1986
    • Breach of the Securities Act 1978 (superseded by the Financial Markets Conduct Act 2013, in particular sections 82 and 101)
    • Tortious negligence, and
    • Breach of fiduciary duties.

     

    Additionally, consumers would be able to bring proceedings under:

    • ss9 and/or 13 of the Fair Trading Act 1986
    • Tortious negligence, including for “failure to warn”
    • Negligent misstatement
    • Consumer Guarantees Act 1993, and

     

    Depending on the specific circumstances, other causes of action may also be available. For example:

    • depending on where the company is listed, a breach of the relevant listing rules (for example, the NZX Listing Rules) can form the basis of a cause of action - however, such breaches are more commonly pursued by the Financial Markets Authority
    • shareholders (and sometimes creditors) can bring actions for breach of directors’ duties under the Companies Act 1993 where directors have knowingly or recklessly endangered the company’s financial position, and
    • in some industries, bespoke legislation will have rules applying to the supply of defective goods. For example, there are six Product Safety Standards that apply to specific product types (including children’s toys and bicycles); food products must comply with the Food Standards Australia New Zealand; and electrical goods are bound by the Electricity (Safety) Regulations 2010.

     

    This response has been prepared by Chapman Tripp, which has agreed to Simmons & Simmons making it available on elexica. Please contact Michael Arthur and Shayne.Misselbrook@chapmantripp.com if you have any questions regarding this briefing.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.