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Harbour View Quarter 2 2016

Featuring topical articles by guest authors and the Harbour Team.

harbourlitigationfunding.com


Contents Page 3 – 6

A new asset class? Shareholder class actions in the UK Richard Leedham, a partner in Mishcon de Reya’s Dispute Resolution department, addresses the growth of shareholder class actions in the UK.

Page 7 – 9

Shareholder class actions – the causation debate S tephen O’Dowd, Harbour’s Senior Director of Litigation Funding, considers the ongoing causation debate in this rapidly evolving area.

Page 11 – 14 —

Predictive coding’s iPhone moment?

 Oliver Glynn-Jones, head of Berwin Leighton Paisner’s Commercial Dispute Resolution group, senior associate Robin Ganguly and knowledge development lawyer Nick Pryor, consider the implications for the use of predictive coding technology of two recent English High Court decisions.

Page 15 – 16 —

Harbour news


ARTICLE ONE – A NEW ASSET CLASS? SHAREHOLDER CLASS ACTIONS IN THE UK

A new asset class? Shareholder class actions in the UK Richard Leedham, a partner in Mishcon de Reya’s Dispute Resolution department, addresses the growth of shareholder class actions in the UK.

“F

Drivers

or the loser now will be later to win, for the times they are a changin”

1. Class actions work where multiple parties

(Bob Dylan 1964).

have the same cause of action and their

There is no doubt that interest in class actions in

claims give rise to common or related issues

the UK is at an all-time high. In this article, we look

of fact or law. They are therefore particularly

at the drivers and trends behind this, and look

well-suited to causes of action that naturally

ahead to how things might develop. Are the times

group a large number of potential claimants

really changing?

together, such as personal injury, product liability and financial misselling claims. All of

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ARTICLE ONE – A NEW ASSET CLASS? SHAREHOLDER CLASS ACTIONS IN THE UK

those types of claims have been on the rise in the UK, the last group undoubtedly being driven by the post-2008 revelations

“Interest in class actions in the UK is at an all-time high.”

of some of the practices of sectors of the financial industry. 2. Shareholder class action cases are on the rise. The class action regime has been in place in the UK since 2000 and like all new things, has taken some time to bed in. There have in fact been 94 Global Litigation Orders (the English Court’s process of certifying a

high, i.e. the misrepresentation threshold

class action) since 2000, with more in the

or above, and issues arise as to reliance

pipeline. There has also been increased

and the measure of loss, provided misleading

interest in the UK since the US Supreme

statements/omissions can be made out, the

Court decision in Morrison in 2010 severely

claims are relatively straightforward to launch.

limited the extraterritorial application of US securities laws. There are records of only

3. One then turns to how such claims can be

2 reported GLOs making it to Court in the

funded, and another trend is the rise in the

first 10 years of their existence, but now in

UK of the litigation or third party funder.

2016, two of the biggest cases before the

Harbour are one of the more established

English courts are the claims (both class

players, but there have also been new

actions) brought by thousands of retail and

entrants over the last few years, perhaps

institutional shareholders against RBS for

as private and institutional wealth seeks a

its 2008 rights issue and Lloyds for its 2008

better return than the derisory rates available

acquisition of HBOS. Tesco faces a well-pub-

post-crash in most money markets. As

licised claim from its shareholders in respect

the funders develop more expertise, and

of losses suffered following disclosure of how

greater flexibility on their returns, so

it accounted with its suppliers. A recent case

clients have more options. And funders

against directors of Cattles plc over its 2008

have undoubtedly embraced the current

rights issue settled just before trial. All of these

class action claims – of the 4 cited above,

cases turn on the interpretation of Section

all are/were funded in whole or in part.

90 (for rights issue claims) and section 90A (for statements to the market) of FSMA 2000,

4. This leads to another key development and

a relatively recent statute on which there

change – the stealthy growing involvement

is as yet no case law. However the remedy

of the institutional claimant. It was certainly

is startlingly simply put: on the basis a

the case a few years ago that on the face

misleading statement or omission can be

of it wealthy corporates would not consider

made out, investors can recover their losses

working with a litigation funder – why would

suffered as a result. Whilst the bar is relatively

they pay away a share of their damages to

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ARTICLE ONE – A NEW ASSET CLASS? SHAREHOLDER CLASS ACTIONS IN THE UK

a third party? Well just as the core group of

entities

UK funders are now well (if self) regulated

economies of scale and maximum power

and litigation funding is seen as perfectly

over the defendant that the class action

respectable and mainstream, so too it

can bring.

recognise

the

value

of

the

is entirely valid for a GC to advise the Board that litigation funding can not only

5. And increasingly do corporates of all sizes,

de-risk a piece of litigation, but that legal

who answer to their shareholders, have any

departments can become profit centres

choice about at least considering bringing

rather than just a cost to the business.

such claims? Remember the high bar,

Funding often comes hand in hand with

certainly for Section 90/90A claims, and

After

cover

the need even in “standard” misselling

the downside risk of losing and paying

claims to demonstrate reliance and loss.

the defendant’s costs, and corporates

It is nowhere near good enough to simply

now

their

argue the investment went wrong. But if

returns on claims that otherwise they

the criteria are there, corporate investors

might not bring at all. Funding works

face a difficult decision, particularly in

particularly well with failed invest­ m­ ent

these days of shareholder activism, in not

claims where the corporate who invested

participating in

may have significant assets on its balance

where they were misled, or purchases

sheet but its investment vehicle – be it a

of products that were miss-sold to them.

The

see

Event

a

way

insurance

of

to

maximising

actions over investments

fund or nominee shareholder – may not. It might be thought that corporates would

6. Part of that analysis, i.e. should a claim be

be adverse still to participating in class

brought, is a consideration of the regulators’

actions, but we see increasingly that such

change of approach. Again looking at financial claims, and undoubtedly driven by post-2008 events, there are now far greater levels of enforcement action and

“It is entirely valid for a GC to advise its Board that litigation funding can not only de-risk a piece of litigation, but that legal departments can become profit centres rather than just a cost to the business.”

invest­ i gatory activity by the FCA, all of whose findings are public and often lay the ground work for later civil claims. To put the increase in context, the FCA reports on its website total fines increasing from £474m in 2013, to £905m in 2014, to (for the UK) a staggering £1.4 billion in 2015. The regulator’s interest in wrong doing underpins an increasingly strong voice, not just from activist shareholders, but from institu­tional investors who are prepared to take an active

stance

if

they

been misled by a company.

5

feel

they

have


ARTICLE ONE – A NEW ASSET CLASS? SHAREHOLDER CLASS ACTIONS IN THE UK

7. Finally, the lawyers. Perhaps driven by the changes to the litigation landscape after the 2013 Jackson reforms (conditional fee agreement success fees and ATE premium are no longer recoverable from losing party), there has been a discernible shift to Claimant firms actively targeting potential clients for class actions and “book building”. Current examples are the potential claims against VW, which although they may well in fact progress in Germany, have seen various UK firms showing

interest and marketing

their services to potential clients. Information about claims are made available on their web sites, help lines set up. All of this would have been anathema to the profession only a few years ago.

In addition, some institutions are put off funding claims with external funders due to the perceived high returns some funders want; do not want to join in a large group of smaller retail investors and individuals

The future

I

who may have personal motives for bringing claims; are concerned over the drain such cases inevitably

t is premature to talk of an explosion of

make on management time and the possibility their

shareholder class actions fuelled by the factors

asset managers may have to give evidence in Court;

highlighted above and the ability English firms

and generally may be unconvinced that their in

now have to offer contingency fees – here known

house litigation teams can ever be profit centres.

as Damages Based Agreements. The relatively high bar under FSMA, and the fact that if a Claimant

All valid concerns, some of which will be worked

loses it must pay the Defendant’s costs, are both

through by the market as cases progress, some

significant limiting factors. It is also fair to say that

determined by the facts of individual cases. But

whilst smaller shareholders may see class actions as

investors of all shapes and sizes need to give serious

a cost effective way of bringing claims, particularly if

thought to the options that are out there where

they are funded, often a claim needs the involvement

they have been misled over their investments or

of large institutional investors to gain serious

other obvious claims present themselves, and think

traction. Whilst some are perhaps ahead of the

about the consequences of not actively considering

curve in seeing action on the right claims as laying

such claims. Shareholder class action litigation is

down a marker for an often ill-disciplined stock

one cost-effective way of asserting those rights

market, others understandably are concerned

and is certainly here to stay in the UK.

as being perceived to be encouraging “US style”

Dylan, as usual, may be right.

securities litigation.

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“At the heart of the causation challenge is the issue of reliance.�

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ARTICLE TWO – SHAREHOLDER CLASS ACTIONS – THE CAUSATION DEBATE

Shareholder class actions – the causation debate Stephen O’Dowd, Harbour’s Senior Director of Litigation Funding, considers the ongoing causation debate in this rapidly evolving area.

I

t is difficult to establish a shareholder claim in any jurisdiction. Outside of the US, there are additional challenges, owing to a paucity of

judicial guidance. Of these additional challenges, causation is arguably the most significant. At the heart of the causation challenge is the issue of reliance. A public company may be liable for breach of its continuous disclosure obligations because it made misleading statements to its market. However, an investor who acquired shares that were overvalued due to the company’s misconduct might have no remedy, because he cannot show that he relied on the company’s misconduct when making his investment decision. Establishing individual reliance in this way can be problematic, especially in a class action where the class comprises hundreds or thousands of investor members. One answer to the problem is to adopt the theory of an efficient market when determining causation. Such a theory is based on the premise that the share price of a public company reflects all known, relevant information about that company. In the context of a shareholder action, efficient market theory renders the question of reliance by individual investors moot, save where it can be shown that an investor was indifferent to actual knowledge he had about the misconduct of the company he invested in.

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ARTICLE TWO – SHAREHOLDER CLASS ACTIONS – THE CAUSATION DEBATE

The US courts have firmly adopted efficient market theory in relation to questions of causation in shareholder actions. That position was recently reaffirmed by the US Supreme Court in Halliburton Co. v Erica P. John Fund, Inc. However, the position is less certain in other jurisdictions. In Australia, which enjoys a similarly welldeveloped class-action regime to the US, there is an ongoing debate about causation and reliance in relation to shareholder class actions. Class members will typically argue for efficient market theory, and defendants will argue for individual reliance. These arguments are left unresolved because the vast majority of such claims settle. As a result, new claims lead with an applicant who can establish individual reliance just in case the courts refuse to adopt efficient market theory. Recent Australian decisions suggest that the causation debate is likely to be settled in favour of claimants. In Caason Investments, the Full Federal Court granted leave to the claimants to plead efficient market theory, and in HIH Insurance Limited (in liquidation), the Supreme Court of New South Wales actually adopted the theory. Pro-defence commentators in Australia have been

“Investors… must continue to navigate uncertainty over the correct approach to causation.”

quick to point out that Caason is not determinative and that HIH is merely the first instance decision of a single judge. In short, the debate will continue until such time as Australia’s High Court delivers its verdict. Until then, aggrieved investors in Australia, and in other jurisdictions, must continue to navigate uncertainty over the correct approach to causation. But with claims in this area rapidly evolving, we should expect more certainty in short order.

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“In time…it is likely that predictive coding will become more than just a legitimate alternative – it will increasingly become the only viable option.”

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ARTICLE THREE – PREDICTIVE CODING’S IPHONE MOMENT?

Predictive coding’s iPhone moment? Oliver Glynn-Jones, head of Berwin Leighton Paisner’s Commercial Dispute Resolution group, senior associate Robin Ganguly and knowledge development lawyer Nick Pryor, consider the implications for the use of predictive coding technology of two recent English High Court decisions.

A

pple did not invent the smartphone; nor

the UK market has been slower to arrive, but all

did Google. The concept of a networked

this is changing. Predictive coding is suddenly

portable device had been around for at

attracting significant press attention, finding

least a decade before Android and the iPhone were

traction in a number of larger law firms, and

announced in 2007. So why did they catalyse an

securing judicial support through two significant

entire industry at that particular moment in time?

High Court decisions in quick succession (in

A big part of the answer is down to smart design

Pyrrho Investments Ltd v MWB Property Ltd

choices. But the most critical factors were all external:

& Ors [2016] EWHC 256 (Ch) and the BCA

a growing demand for persistent connectivity in

Trading case). Is predictive coding experiencing

our work and personal lives, the advancement

its “iPhone moment”, when market forces

of key technologies such as low power mobile

accelerate it towards mainstream adoption?

chipsets and touchscreens, and the fact that high speed 3G networks had just reached critical mass.

The market forces are undoubtedly there. The

The technology matured just as the demand and

judicial support in Pyrrho and BCA Trading has not

potential opportunity arose, and the success is such

come out of nowhere; the changes to CPR Part

that mobile platforms have now wholly supplanted

31 brought about through the Jackson Reforms,

traditional computing in many aspects of our lives.

and in particular the disclosure menu in CPR 31.5(7), emphasised the need to find alternative

Arguably a similar story is true for predictive

ways to resource disclosure in a proportionate

coding as the inevitable successor to manual

manner. This was supported by the introduction

document

of cost budgeting, and the redoubled emphasis

learning

reviews. principles

The

essential

underpinning

machine predictive

on proportionality in CPR 1.1(2).

coding have matured, and predictive coding as a commercialised product has been available in

For a brief time, many practitioners continued to

US litigation for a number of years. Demand in

favour familiar approaches to standard disclosure

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ARTICLE THREE – PREDICTIVE CODING’S IPHONE MOMENT?

– perhaps attempting to drive down costs by

objectively superior results at markedly lower

near-shoring, off-shoring, or outsourcing their

cost (in the BCA case using predictive coding

review teams. However, those approaches create

was estimated to be two and a half times

their own challenges in sustaining quality and

cheaper than a traditional manual review). It

accountability for the review (see West African

empowers the legal team to identify quickly

Gas Pipeline Company Ltd v Willbros Global

the most likely significant documents, and to

Holdings Inc [2012] EWHC 396 (TCC)), and in any

make much more informed decisions about the

event only go part of the way towards meeting

review. For example, predictive coding does not

the challenge of maintaining proportionality in

simply produce a binary categorisation of each

the face of accelerating data growth.

document as relevant or not; it grades according to confidence. This enables the solicitor to

An EDC study from 2012 estimated that there

determine what would be a proportionate

would be a 50-fold growth in enterprise data

percentage of the full dataset to subject to

between 2010 and 2020. Of course, this growth

human review (to verify and correct the results,

is exponential not linear, meaning that the vast

sweep for privilege, and so on) prior to disclosure.

majority is still ahead of us. It won’t be long before

This cost/benefit analysis, and assessment of

the volume of potentially relevant documents in

proportionality by reference to the overriding

an average mid-size commercial dispute will be

objective, can be precisely calibrated using the

greater than the most exceptional outliers of a

system’s “recall” and “precision” figures.

few years ago. And of course all of these factors are compounded by the fact that clients are

The mechanics of how this assessment should

under increasing financial pressure following

be conducted are currently left to the judgement

the economic downturn, and quite rightly expect

of the parties and/or direction of the court on

litigation to be resourced ever more efficiently.

a case-by-case basis. In time, some standard

All of this necessitates a fundamental rethink about how document review is conducted. Predictive coding is the obvious answer. It is a proven technology; Master Matthews’ judgment

“An EDC study from 2012 estimated that there would be a 50-fold growth in enterprise data between 2010 and 2020.”

in Pyrrho listed ten factors in favour of its adoption, and could find no argument against. Nor should a party feel compelled to secure buy-in from their reluctant opponent, as the order in the BCA Trading case demonstrates. The arguments in its favour in suitable cases are so manifest and compelling that there really is no credible basis for challenge. However, the true power of predictive coding is that it does much more than simply delivering

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ARTICLE THREE – PREDICTIVE CODING’S IPHONE MOMENT?

practices are likely to evolve. For example, it may

predictive coding in UK litigation. However, it will

be that the number of documents for manual

almost certainly encourage much more dialogue

review can be agreed in advance (for example,

and agreement between parties, with more

10,000 documents in an original population of one

explicit choices made regarding what is and is not

million), as a reflection of what would be deemed

accepted as proportionate. This has to be a good

proportionate in the case; the court could then

thing. In time, as the courts and practitioners

set aspirational percentages for the level of recall

become more comfortable with the technology,

and precision to be achieved before that review

and as data volumes trend towards unmanageable

takes place. Or, conversely, the recall figure could

volumes at all scales of litigation, it is likely that

become the primary focus for discussions – since

predictive coding will become more than just a

this is the most explicit recognition that document

legitimate alternative – it will increasingly become

review is not (and never has been) about “leaving

the only viable option for many cases. Standard

no stone unturned”.

disclosure may remain standard practice for a little while longer – but just as with smartphones

It is hard to say at this stage what norms and

in 2007, widespread adoption of predictive coding

practices will develop around the application of

suddenly feels inevitable and imminent.

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“Document review is not (and never has been) about leaving no stone unturned.�

14 15


HARBOUR NEWS - NEWS FROM INSIDE HARBOUR LITIGATION FUNDING

Harbour news

T

his quarter has seen a slew of activity to

the annual Inter Pacific Bar Association Conference

continue to cement Harbour’s presence

in Kuala Lumpur, where Susan spoke to an

in the Asia Pacific region. Susan Dunn

engaged audience on the positive impact third

travelled to Hong Kong and Kuala Lumpur in

party funding can have on managing costs. A

April, spending a successful week with Ruth

jurisdiction not well known to Harbour previously,

Stackpool-Moore, Head of the Hong Kong office,

Malaysian practitioners proved to be dynamic and

reinforcing existing relationships as well as

enthusiastic in their welcome, adopting a positive

building exciting new ones with firms, experts

attitude to the facilitation of funding there.

and liquidators in particular. A highlight of her time in Hong Kong was Susan’s presence as the

Ruth has also been active elsewhere in the

guest of honour at HK45’s Supper Club, designed

region, travelling several times to Australia and

to foster informal and informative discussion

Singapore respectively. Closer to home, Ruth

with young and up and coming members of the

spoke to members of the American Chamber

Hong Kong arbitration community.

of Commerce in Hong Kong in June about third party funding and why it is a genuinely useful

The week also included Susan and Ruth attending

commercial tool.

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HARBOUR NEWS - NEWS FROM INSIDE HARBOUR LITIGATION FUNDING

Funding remains prohibited in Ireland…for now

H

arbour has agreed to fund Persona Digital Telephony Limited (“Persona”) and Sigma Wireless Networks Limited

(“Sigma”) in relation to their Irish High Court proceedings against the Minister for Public Enterprise, Ireland, the Attorney General and Denis O’Brien. On 20 April 2016, the Irish High Court dismissed Persona’s and Sigma’s motion for approval of Harbour’s funding. Persona and Sigma are preparing their appeal. Numerous jurisdictions around the world have now approved the use of litigation funding, recognising both its value in enabling parties to have access to the courts by covering the expenses of litigation as well as maintaining their growth as global centres for dispute resolution. It is disappointing that access to justice is being denied in Ireland for the plaintiffs in this important case, as well as for other plaintiffs in need of litigation funding, simply because a third party is paying the legal bills. It is difficult to understand why this should be so controversial.

The Harbour Team expands

W

e shall be announcing four new

Harbour View will provide profiles and details

appointments to the Harbour Team

of how the range of our capabilities continues

in London and Hong Kong over

to expand.

the next few weeks and our Quarter Three

Watch this space!

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The information, materials and opinions contained in this publication are for general information purposes only; are not intended to constitute legal or other professional advice; and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Neither Harbour Litigation Funding Limited nor any other of its related entities accepts any responsibility for any loss which may arise from reliance on information or materials contained in this publication. If you wish to find out more about the information in the materials published, please contact Billie Peel on +44 (0)20 3 829 9320.

Featuring topical articles by guest authors and the Harbour Team.

harbourlitigationfunding.com

Harbour View Q2 July 16  
Harbour View Q2 July 16