During a May 2014 trip to London, I had the pleasure of meeting with various attorneys who do work with institutional investors such as pension funds. While I did not have a chance to convene with Attorney David Seidel, our guest interviewee for this blog post, I did meet with his colleague, senior attorney and Chairman of the Institutional Investors Tort Recovery Association ("iiTRA"), Robin Ellison. Robin was kind enough to describe the fluid and important pension governance happenings in the United Kingdom ("UK") and Continental Europe. Having done work with multinational corporations and knowing that numerous plan sponsors have cross-border retirement plan concerns, Robin's insights were extremely enlightening.

In a subsequent conference call with Robin and his colleague, General Counsel David Seidel, I was the beneficiary of information once again. Both Robin and David shared news about UK and European litigation trends, notably in the investment fiduciary duty and shareholder rights areas. It seems that there is a lot going on. In the spirit of knowledge-sharing (since Good Risk Governance Pays is an educational blog), Attorney Seidel agreed to talk about one such important happening, notably class action opt-outs. Check out his comments below.

Q: Would you please explain the nature of a class action opt-out?

A:  In a class action lawsuit, the Court defines who qualifies as a member of the class and who would therefore be entitled to participate in any settlement or judgment. In a class action opt-out, a member of the class elects not to participate in the class action and instead initiates a separate lawsuit for its own benefit.

Q: In your experience as a solicitor in England and Wales, a barrister and solicitor in Ontario, Canada and now an executive with the iiTRA, when is an institutional investor likely to opt out of a class action settlement?

A: A pension fund, endowment, foundation or other type of institutional investor would only do this if that organization believed that an opt-out would result in a higher payout. In our experience an institutional investor is likely to consider opting out of a class when the estimated recognised losses are significant, i.e. at least in the tens of millions of dollars.

Q: Have you observed an increase in the frequency of institutional investors that are opting out of class actions?

A: Based on our work at iiTRA with a number of UK and European institutional investors, we have not seen an increase in opt-outs. To the contrary, we have noted a trend in increased participation in class action matters generally.

Q: Why do you think that trend is occurring?

A: For one thing, European insitutional investors are more likely to have larger holdings in European companies. Second, the impact of Morrison v. National Australia Bank ("Morrison") cannot be underestimated. Decided by the U.S. Supreme Court on June 24, 2010, the outcome of that case has frightened many non-U.S. investors. Recall that the Court opined that "U.S. law against securities fraud does not apply to investment deals that occur outside the country, even if they have a domestic impact or effect." There are now limited rights for European institutional investors to participate in federal class actions in the United States. While one might think that Morrison could have opened the door to more opt-out cases, it has not. UK and continental European funds are less likely to have sufficient investments in any one American company that would result in a loss sufficient to warrant consideration of an opt-out or alternative litigation. Finally, the legal systems throughout Europe are quite different to the one in the United States. There are no opt-outs in the UK or European Union ("EU"). For example, the UK equivalent to a class action is a group action where institutional investors must be a named plaintiff and an active litigant in order to participate in any settlement or judgment.

Q: Are there particular types of cases where you believe an opt-out is more likely to occur?

A: In our experience, the consideration of opt-outs depends on the nature of the case and its likelihood of success as well as the level of an institutional investor's recognized losses.

Q: Does the opt-out possibility make it easier or harder for a defendant(s) to resolve a dispute?

A: There is no hard and fast rule to arrive at a resolution. According to recent research, on average, most securities class actions are settled within 3.5 years. Some will be resolved during a longer timeframe while others will be resolved sooner. Generally, opt-outs will follow alongside the main class action. Every case will depend on the facts pleaded, the nature of the claim, the disclosures received, the applicable limitation period and the levels of co-operation between opt-out counsel and the lead counsel in the class action. Taken together these factors will determine whether a case will be settled and, if so, the likely timing for any settlement. 

Q: How does the opt-out possibility impact the economics of a dispute resolution for those institutional investors that seek not to opt out?

A: Again, there are a number of factors to consider. What we often see is a defendant company that tries to arrive at a global settlement, one that will apply to the class action and the opt-out action(s). If the settlement "pot" is to be divided, the economics will depend on how many institutional investors have selected to opt out as well as the size of the certified class.

Q: Do you see a lot of opt-out decisions that are focused on corporate governance reform?

A: In an ideal world, we would like each settlement to include terms that improve overall practices that are advantageous for shareholders.

Q: What is the role of iiTRA with respect to class action settlements?

A: iiTRA is an independent intermediary between the institutional investor and Plaintiffs' Counsel. The institutional investors with whom we work receive the following benefits as relates to seeking to enforce their rights as shareholders:

• We provide advice as to whether members should become involved in a litigation at all. This entails an assessment of the legal strength of the claim and the reputational issues. iiTRA’s function is to guard the reputation of institutions and eliminate participation in specious claims.
• We help to ensure the proper selection of attorneys as well as keeping legal fees (i.e. their compensation) in check. We focus on reducing expenses in seeking plaintiffs. 
• By operating as a collection of institutional shareholders, iiTRA exploits its bargaining power to reduce costs and management time. We share legal information with our members and help to mitigate the kinds of media exposure and related risks which an institutional investor, operating on its own, is likely to encounter.
• We file proofs of claim against settlements, when necessary.
• We provide assistance in determining what action is necessary in relation to potential opt-outs and where alternative litigation is required (whether in the U.S. or elsewhere) by arranging legal expenses insurance. The goal is to limit or eliminate costs of abortive or unsuccessful actions.
• iiTRA facilitates opportunities for its members to exchange views and determine policy in relation to litigation.

Q: Does iiTRA play a role in advising its institutional investor members to opt out?

A: As explained above, we have yet to become aware of a case in the United States where an institutional investor has had sufficient losses that would entice that institutional investor to opt out. That said, opt-outs are always presented to institutional investors for their respective consideration when reviewing American securities class actions.

Q: What is your view of the role of an independent fiduciary with regard to an opt-out? Do you recommend that institutional investors engage an independent fiduciary to vet opt-out terms?

A: iiTRA is an independent intermediary that manages the investment litigation rights of the institutional investors with whom we work. We do not provide legal advice although we do have a number of lawyers within the company. We retain other advisors – including independent fiduciaries – when circumstances necessitate.

Q: What would you like institutional investors to know about opt-out best practices?

A: The institutional investors we know continue to express concern about the legal, financial and reputational risks of opting out.

David, on behalf of Good Risk Governance Pays readers, I want to thank you for your time and some fascinating perspectives about institutional shareholders and dispute resolution activity.