On The Case

Dutch court approves $1.5 billion Fortis shareholder deal – but there’s a catch

(Reuters) - Grant & Eisenhofer issued a press release Friday, hailing a Dutch appellate court’s approval of a $1.5 billion shareholder settlement with the international insurance company Ageas, the successor company of Fortis, a Dutch-Belgian financial services business that allegedly over-invested in U.S. mortgage-backed securities before the subprime crash. As G&E’s press release pointed out, the Fortis settlement – which follows seven years of litigation – is the biggest-ever for shareholders suing in Europe.

So why do lawyers for G&E and its partner in the Fortis case, Kessler Topaz Meltzer & Check, say the Fortis case will discourage Dutch securities litigation?

The answer, alas, is complicated. But it’s also really important for investors in non-U.S. companies like Volkswagen.

As you know, the U.S. Supreme Court ruled in 2010’s Morrison v. National Australia Bank  that U.S. securities laws don’t apply to foreign-traded shares, eviscerating U.S. securities class actions against companies listed on foreign exchanges. After Morrison, most investors had to look overseas if they wanted to sue non-U.S. companies for fraud. But few international jurisdictions have mechanisms like U.S. class actions. (Dechert published a really helpful primer in January on the state of shareholder litigation around the world.)

In Europe, as I’ve explained, England, Germany and Holland all have relatively well-established procedures for investors to band together to sue corporations for fraud. Germany and England require shareholders actively to assert claims in order to obtain damages. So, for instance, investors have recovered more than $1 billion from Royal Bank of Scotland through “group litigation orders,” but only if they sued the bank. In Germany’s system, which also requires shareholders to opt in, the courts choose a representative shareholder to litigate liability, but other investors have to prove their own reliance and damages. Volkswagen is currently defending a representative shareholder case brought by a group of institutional investors suing over the company’s emissions cheating scandal.

Holland’s laws are subtler. In essence, shareholders can’t sue corporations for collective damages (though they can bring class-action-like declaratory judgment claims.) But a corporate defendant can enter global, opt-out shareholder damages settlements with special Dutch foundations called stichtings. In other words, Dutch law doesn’t allow shareholders to litigate collectively for damages but does allow them to settle collectively.

That was the procedure Ageas used to reach a proposed shareholder settlement in March 2016. The Fortis successor company negotiated an agreement with four different shareholder foundations and announced a deal “aimed at settling all Fortis civil legacies.” The settlement proposed to resolve the claims of all eligible investors who chose not to opt out. But, critically, not all investors were to be treated equally in the proposed Fortis deal – “active” shareholders who had brought claims against the company were slated to receive more money than passive investors who didn’t.

In June 2017, the Amsterdam Court of Appeal more or less rejected the proposed settlement, holding that the deal did not bind investors absent from negotiations with Ageas. The court’s primary objection was to the settlement’s preferential treatment for active shareholders. Ageas and shareholder groups reentered negotiations. In the revised settlement they submitted to the Amsterdam appeals court in December 2017, Ageas kicked in a bit more money – and shareholder groups agreed all investors would be entitled to the same base damages. Those were the terms the court accepted on Friday.

A $1.5 billion payout may seem like a good reason for investors to continue relying on Dutch collective settlements in securities fraud cases. It’s not, according to G&E partner Olav Haazen and Kessler Topaz partner Darren Check. They told me Monday that the revised terms of the Fortis deal will actually discourage institutional investors from using the Dutch system.

The problem, they said, is the Amsterdam appellate court’s insistence on equal treatment for shareholders who brought claims and passive investors who didn’t. (Haazen calls them free riders.) The Fortis ruling, according to the lawyers, tells institutional investors not to bother with the expense of joining a Dutch stichting seeking a global settlement: They – and their lawyers and funders – won’t be rewarded for the effort with a premium on their recovery, so they might as well avoid the cost and let someone else pay.

In the past, Dutch courts have allowed plaintiffs’ lawyers who represented lead shareholders’ groups in stichting settlements to seek fees based on the entire recovery for investors. The Fortis decision calls that precedent into question. (The ruling is in Dutch so I’m depending on the lawyers’ interpretation of its holdings.) The decision, Check said, “does not allow you to be compensated for the entire settlement. This is now the way going forward.”

Haazen, who speaks Dutch and teaches civil procedure at the Netherlands’ Leiden University, said the Amsterdam court may not have entirely killed fees for funders and lawyers based on the collective investor recovery. But he said the Fortis court has made clear that negotiated fees – even those a defendant has blessed – will be scrutinized by the court and evaluated as part of its assessment of the settlement’s reasonableness.

The result, Haazen predicted, will be that fewer big-money investors will sign up for stichtings pushing for global securities settlements. Defendants, he said, will be negotiating from strength, if they negotiate at all. “A foundation case might achieve a classwide opt-out settlement,” Haazen said in an email. “But it would negotiate from a weak position and trigger a race to the bottom.”

Big, sophisticated investors, Haazen said, will still be able to recover from corporate fraudsters, because big damages claims will continue to attract funders and plaintiffs’ lawyers. He contends the victims of the Fortis decision will be small investors who are entitled to recovery under Dutch stichting settlements but can’t realistically bring their own securities fraud claims under English or German statutes.

Check said the stichting model “still has life,” but that “the idea of a stichting as an all-purpose panacea – it’s just not there.”

A cautionary note: Grant & Eisenhofer and Kessler Topaz have an interest in encouraging investors to litigate securities fraud claims rather than pursuing global settlements through the stichting procedure. In the VW case, remember, their clients are pursuing collective claims in an opt-in case in the German courts. Other plaintiffs’ firms, meanwhile, are pushing for VW to settle with all of its shareholders through the Dutch stichting process.

A partner at one of those firms, Bernstein Litowitz Berger & Grossmann, told me the Amsterdam appeals court was exactly right to insist on both equal treatment for all Fortis shareholders and transparency on fees for the lawyers and funders who negotiated with the company’s successor. Jeroen van Kwawegen (also fluent in Dutch) said the Fortis court didn’t change stichting lawyers’ ability to ask for fees based on the global recovery, just demanded that fee arrangement be disclosed.

He also disputed Haazen’s “free rider” theory. “The Dutch system is a mass settlement system,” he said. “To look at it as a system to incentivize plaintiffs’ lawyers is the wrong way to think about it.” Institutional investors, he said, join legitimate settlement stichtings to have a voice in negotiations with defendants, not because of the prospect of fees based on collective recovery.

Either way, the Fortis decision gives institutional investors in foreign companies more to think about as they consider fraud claims. “It’s complicated,” Check said. “I spend more of my time talking to non-U.S. investors than anything else at this point.”