Shareholders Rights Actions and Litigation Funding. Andrew Hogan

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1 Shareholders Rights Actions and Litigation Funding Andrew Hogan

2 One of the few intangible benefits of the Credit Crunch and subsequent recession was to make the banking profession more unpopular with the public than the legal profession and to shine a spotlight on a lot of their more dubious activities, including some actions which were outright criminal. Earlier this year a number of former bankers from HBOS were jailed in consequence of their activities relating to the impaired assets unit of that bank, unhappily inherited by Lloyds. A lurid account can be found here, in that most guilty of pleasures, the Daily Mail: Where there is a crime of this nature, there is undoubtedly a civil action and the Daily Mail dutifully reported on the multi-million pound claim instituted by that former staple of the BBC s light entertainment division Mr Noel Edmonds. That action has not reached its conclusion and compensation claims from other victims are doubtless yet to come. But this case is only a tip of one particular iceberg in a sea of financial mis-selling shareholders rights action and civil fraud claims brought out of the wreckage of the Credit Crunch. Many of these claims, which can be very substantial, are backed by litigation funding which is a necessary element in causing group action or large commercial claims to gain critical mass. Litigation funding is used to pay for expensive expert evidence, to partly fund the fees of expert commercial counsel who typically work on a partial CFA basis, with base fees due in any event and above all to purchase ATE insurance, the existence of which buttresses arguments that the potential adverse costs liability of any individual claimant to group litigation should be several and not joint. The role of a solicitor acting for claimants who bring large scale litigation backed by litigation funding can assume elements of project management as financial implications, the operation of litigation management agreements, and problems of co-ordination of a cohort of many thousands of clients can consume large amounts of time. Litigation funding is often central to points raised in interlocutory skirmishing, as lawyers acting for defendants will see that its existence both fuels the litigation brought against their clients, but also presents an opportunity to derail litigation if the benefit the claimants can draw from it can be curtailed. The litigation funder (whose identity may not be apparent) may also form a tempting target both for a security for costs application and a source of non-party costs, should any ATE policy prove inadequate. 2/5

3 Some of these considerations were seen at work, in the Royal Bank of Scotland Shareholder Rights Issue litigation, which reached its conclusion this year, in particular there were two lengthy judgments of Hildyard J, which dealt with issues such as the disclosure of an ATE policy, whether litigation funders should be identified, and whether security for costs should be ordered against a litigation funder. In the first of these judgments The RBS Rights Issue Litigation [2017] EWHC 463 (Ch) the Judge had little difficulty in determining both that there was jurisdiction to order disclosure of the identities of litigation funders, but also that there was a low threshold for making such an order: 33. As to (a) above, I am not persuaded that the Court should require to be satisfied, as a condition of making an order disclosing details as to the funder(s), that the applicants have unequivocally determined to bring an application for security for costs once the details are revealed. 34. Such a test would be inimical to the sensible application of the jurisdiction which not only serves to thwart any attempt by a defendant to obtain security against the claimant s third party funder under CPR 25.14, simply by refusing to provide details of the funder s identity, but also to enable an applicant properly to consider the merits of an application against the particular funder concerned having regard to its position, whereabouts and substance. Furthermore, such a test would be difficult to apply since it calls for what is likely to be speculation as to true and settled intent, whereas such issues are seldom black and white. The more difficult part of the application dealt with whether the Court should order the disclosure of an ATE insurance policy: English law, unlike federal law in the USA has often taken the view that insurance arrangements are irrelevant, and for example, liability insurance policies are not disclosable documents, as a claimant must take his defendant as he finds him including the risk, that that defendant might lapse into insolvency. Nonetheless, there are various cases in the law reports where disclosure of ATE policies has been ordered under the general rubric that such disclosure is necessary for particular instances of case management, an approach that could be said to represent an unhappy fudge between the general rule of English law and a reluctant recognition, that perhaps (whisper it) the American rule is to be preferred. Hildyard J refused to order disclosure of the ATE insurance policy, first noting: 109. Thus, I accept that generally an ATE policy, which does not impact on the issues in the case now that the premium can no longer be recovered as part of a costs award, will not be relevant. However, there may well be exceptions: for example, where the ATE policy has been deployed in the course of the proceedings whereby to influence or impact on a decision (procedural or otherwise) such as it has been in the present case (see below). That is especially likely, as it seems to me, in the context of group litigation where the considerable benefit to claimants of several liability has been obtained. More 3/5

4 generally, I would add that, to my mind, the court will in such a context tend to be more amenable to such disclosure as the price of the other benefits, and to ensure that claimants themselves have transparency. And then concluding: 122. In my judgment, there is some force in the Claimants contention that this limb of the application is to some extent in contrived clothing. It is said to be a matter of case management, rather than going to enforcement, because it would flush out a possible defence to an application, and assist the Defendants whether to bring it at all. But the case management characterisation and rationale is still ancillary to enforcement; and the true or at least primary objective is demonstrated by the form of order sought, which is premised not on the documents being needed for case management purposes, but only that there are efficiencies in making the Claimants determine now their defence to an uncertain application for security which may not be pursued anyway and further or alternatively may be demonstrated (by reference, for example, to the position of the funders) to be unwarranted. I do not think it would be right to exercise case management powers to put the Claimants to an election in respect of a potential application for security for costs to which there may well be other answers, and to which the ATE policy may not be a complete answer anyway. Sometime thereafter the case returned to court before Hildyard J to deal with the further application pursued on behalf of the Bank, for security for costs against the litigation funders and reported in a judgment at In the Matter of the RBS Rights Issue Litigation Third Party Funders Security for Costs [2017] EWHC 1217 (Ch). He summarised the criteria by which such an application should be assessed in these terms: 19. The potential exposure of litigation funders to orders for costs against them at the end of the day does not, of course, of itself mean that an order for security for costs should be granted. At such an interlocutory stage the court must assess not only whether it is sufficiently clear that the criteria for the potential imposition of liability are fulfilled, but also whether there is a sufficient basis for interlocutory intervention. Of particular relevance in assessing whether an interlocutory order against a non-party under CPR 25.14(2)(b) to secure a contingent liability pursuant to section 51 is appropriate and just will be (1) Whether it is sufficiently clear that the non-party is to be treated as having in effect become in all but name a real party motivated to participate by its commercial interest in the litigation; (2) Whether there is a real risk of non-payment such that security against the contingent liability should be granted; (3) Whether there is a sufficient link between the funding and the costs for which recovery is sought to make it just for an order to be made; 4/5

5 (4) Whether a risk of liability for costs has sufficiently been brought home to the nonparty, either by express warning, or by reference to what a person in its position should be taken to appreciate as to the inherent risks; (5) Whether there are factors, including for example, delay in the making of an application for security or likely adverse effects such as to tip the overall balance against making an order. The Court then went on to order security for costs against one funder of the claim, but not another, applying the principles to the particular evidence of each funder s position that was before it. Perhaps the most interesting part of the judgment relates to the careful analysis of the ATE position, what this might mean for a shortfall in recovery of the defendant s costs and the fact that delay (these applications were made in 2017), with a trial only months away was not treated as a showstopper, for the purposes of determining the application. Andrew Hogan October 2017 The author can be reached at andrewhogan@ropewalk.co.uk. His blog on costs and litigation funding can be found at You can subscribe to the blog by entering your address in the form on the right hand side of the homepage. Disclaimer: The information and any commentary on the law contained in this article is provided free of charge for information purposes only. The opinions expressed are those of the writer(s) and do not necessarily represent the view of Ropewalk Chambers as a whole. Every reasonable effort is made to make the information and commentary accurate and up to date, but no responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by the writer(s) or by Ropewalk Chambers. The information and commentary does not, and is not intended to, amount to legal advice to any person on a specific case or matter. You are expressly advised to obtain specific, personal advice from a lawyer about your case or matter and not to rely on the information or comment contained within this article. 5/5