Page 76 - The Economist

76 Finance and economics The Economist December 9th 2017
Shareholder litigation contingent on a successful settlement.
Funders and specialist law firms often
Laying down the act as co-ordinators for suits brought by in-
law vestors. Thatisimportantin countries such
as Britain and Germany, where collective
cases generally require investors to opt in
to legal action. The American system, in
contrast, binds all potential claimants un-
Europe’s courts are gaining popularity less they explicitly opt out.
among investors seeking legalredress
Thatisone reason whythe Netherlands
IKE the ghosts that haunted Ebenezer has become something of a magnet in Eu-
LScrooge, the scandals of years past— rope for disgruntled investors. Since 2005,
summoned up by angry shareholders— it has allowed collective settlements on an
will not let companies rest. In Britain this opt-out basis. A common model is for
year, the Royal BankofScotland (RBS) paid shareholders, including foreign institu-
£900m ($1.2bn) to settle a long-running in- tions, to be represented by a foundation
vestor lawsuit related to the bank’s behav- which suesthe companyon theirbehalf in
iour at the time of the financial crisis of return for a share of any settlement. Such
2007-08. Also in Britain, Lloyds Banking arrangements won payouts of $353m from
Group faces litigation. And it is not just Shell in 2007, followinga write-down of its
banks. Investors in Britain sued Tesco, a su- oil reserves. But for cases involving foreign
permarket chain, for losses caused by an companiesthe Netherlandsmayhave little
A joint enterprise accounting scandal in 2014. In Germany to offer. Acase againstBPafterthe Deepwa-
and the Netherlands investors are seeking ter Horizon spill was thrown out in 2016.
2 Combustion is not the only risk. The compensation from Volkswagen (VW), a An investor case against VW might fail the
cash is also a magnet for robbers. And Fred carmaker, forfailingto disclose its manipu- jurisdiction test, too.
Timpner, head of the Michigan Associa- lation ofdiesel-emissions tests. Practical obstacles to taking action re-
tion of Police, worries that untraceable Securities litigation is on the rise in Eu- main, says Harry Edwards, a partner at
cash is “ripe for public corruption”. Hold- rope for two main reasons. The first is that Herbert Smith Freehills, a London law
ers are tempted to bribe city, county and America is less hospitable than it was to firm. Outside the Netherlands, opt-in sys-
state authorities forlucrative permits. such cases. Until 2010 harm suffered byfor- tems mean investor interest has to be
Insurance is another problem. Growers eign investors could be included in Ameri- drummed up. Adverse-cost insurance and
cannot buy federal crop insurance, and can lawsuits. That changed with a Su- fundingmaybe available, butthe litigation
most private insurers shun the market for preme Courtrulingon Morrison vNational will secure backing only ifthe expected re-
fear ofpenalties. CannaCraft’s ruined crop Australia Bank, which held that the losses turns are high enough. And in continental
was worth $2.5m. Some insurers now cov- ofso-called “f-cubed” plaintiffs—foreign in- Europe, unlike Britain and America, plaint-
er cannabis grown indoors, but premiums vestors who bought shares in a foreign iffs cannot force companies to disclose all
are high, says Patrick McManamon of one company on foreign exchanges—would relevant facts—so cases are harder to win.
of them, Cannasure, of Ohio. It has been have to be excluded. Nor in Europe is there access to trials by
kicked out of at least five banks—“I kind of Once, all the shareholder litigation jury. This may favour companies, which
lose track,” he says. against VW would have taken place in see such trials as unpredictable, and some-
California’s Treasury hopes to taxmari- America, says Jay Eisenhofer ofGrant & Ei- times settle cases to avoid them. Despite
juana sales, predicted to be worth nearly senhofer, an American law firm. The Mor- the rise in litigation, it is hardly open sea-
$7bn next year. In November, a working rison ruling, however, meant that the cur- son in Europe fornuisance claimsfrom dis-
group it convened to lookat how to collect rent American class-action suit has largely gruntled shareholders. 7
it securely advised state agencies to hire ar- been limited to municipal pension funds
moured couriers. It also recommended that held VW’s American depository re-
openinga state bankforpot money. ceipts (a proxy forits shares).
That is unlikely. Abid by Colorado to le- The second reason for the increased
galise marijuana banking is bogged down popularity of Europe as a venue for litiga-
in court. Moreover, police have an incen- tion is a proliferation of financing options.
tive to keep pot money unbankable. Re- In Europe, claimants must shoulder legal
markably, forfeiture laws let police depart- costs for both sides if they lose. These can
ments seize cash and pocket much of it if be astronomical: RBS is said to have spent
they suspect it includes proceeds from £100m on its shareholder lawsuit, which
crime. No crime need even be charged. was settled before it even went to trial.
In theory, cryptocurrencies such as bit- Financing from litigation-funding spe-
coin should be safer from cops, crooks and cialists is an increasingly common way to
combustion. On February28th tradingwill coverthe costsofa lawsuit. According to re-
begin for a new digital currency called search by RPC, a London law firm, the 20
PerksCoin. By next summer roughly 5,000 largest funders ploughed £723m into Brit-
pot dispensaries in America and Canada ish lawsuits in 2016, up from £437m in 2011.
will accept PerksCoin payment by smart- Both the action in Germany against VW
phone, says Daniel Cheine of CannaSOS, and the British Tesco lawsuit are being fi-
the Toronto firm behind it. Bythen, a rise or nanced by Innsworth, a funding specialist,
fall in PerksCoin’s initial unit value of 80 backed by an American hedge fund. An-
centsshould hintatwhethercryptocurren- otheroption isto buyinsurance against the
cies are indeed how pot-growers will stop risk of adverse costs. Premiums can either
theirmoneygoingup in smoke. 7 be paid upfront (often by funders) or be