The Times: Class action splits the global investors

by John Heaps and Alexander Davidson

April 27, 2004

The fallout from the overstated reserves

THE investors’ class action against Shell and its directors in the US highlights the differences between the English and US legal systems — raising key issues for investors in global businesses.

The Shell case stems from the announcement on January 9 that Royal Dutch Petroleum Company was to writedown its proven oil and gas reserves by about 20 per cent. The claimants argue that Shell and its directors knew the company’s reserves were overstated and issued false and misleading financial statements, resulting in the value of its shares being artificially inflated.  

Those claims have now been strengthened in the recent days by the conclusions of an internal report for Shell prepared by an independent US law firm. The claimants therefore claim they overpaid for their shares and seek to recover their alleged losses.

The class action is a powerful tool in US litigation. It means that through a single set of proceedings defendants can be faced with potentially massive aggregate liability, which inevitably encourages settlement. Cases can also be run on a contingency fee basis, resulting in no up-front costs to individual claimants. The class must be clearly defined so that individuals can be assessed for membership. However, while members must have suffered actual loss or injury and have a personal cause of action against the defendants, they are not required to be individually identified, or even identifiable.

In Europe, no country has yet permitted class actions in the American sense, but some allow group actions whereby similarly situated claimants can pursue their claims in a common action in one court. In England, the courts use Group Litigation Orders (GLOs) to manage claims that give rise to common or related issues of fact or law. They are by their nature often well publicised: examples include the MMR vaccine damage claims and the deep vein thrombosis litigation. However, claims are individually issued and each will be considered on its particular merits.

In view of these significant differences, it is perhaps surprising that membership of the class in the Shell action is intended to extend beyond US investors in US-traded shares. The case is brought in the District Court of New Jersey, and alleges violations of US federal securities laws and accounting rules, including the filing of false information in periodic public reports with the New York Stock Exchange (NYSE) and the US Securities & Exchange Commission (SEC).

The main defendants are Royal Dutch Petroleum Company N.V., a public company incorporated in the Netherlands; and The Shell Transport and Trading Company plc, incorporated in England. Royal Dutch is listed on the NYSE but its shares are traded principally on the Amsterdam Stock Exchange. Likewise, Shell Transport is listed on the NYSE but the principal market for its shares is the London Stock Exchange.

The complaint document seeks to include within the class all investors, wherever they may be based and regardless of the stock market on which their shares are traded, on the basis of violations of the securities laws in the US and the fact that Shell carries on business in New Jersey. The situation therefore arises where the US proceedings propose to include UK investors, buying shares in a UK public company on the London Stock Exchange, and with no connection with the US, in a US class action founded on breach of US securities laws.

At this stage the action has not yet been granted class status and it remains to be seen whether the court will restrict the scope of the class or refuse class status entirely. However, should the class be approved, the question arises as to whether UK investors in Shell might find themselves party to proceedings in the US that they would have no right to bring as individuals.

Perhaps even more interestingly, if the Shell class action is in the end restricted to US investors, and in due course succeeds in compensating them for substantial losses that it is more difficult or impossible to recover in other jurisdictions, a large compensation payment to US shareholders could well have a negative impact on the overall capital value of the group and thereby the value of shares traded in London and Amsterdam. These are changing times for global business disputes, and the Shell case will be watched with great interest

The author is head of litigation and dispute management at Eversheds