CLAIMS against company directors by groups of disaffected shareholders are on the rise in the United States, reversing a five- year downward trend. But how much do directors in London have to fear from the looming credit crisis here? According to Dan Bailey of Ohiobased law attorneys Bailey Cavalieri, class-action claims under US federal securities laws "are filed against corporations and their directors and officers almost reflexively following a sudden drop in the company's stock price or immediately following the announcement of disappointing financial results".
The price of settling these claims has increased dramatically in recent years, he adds, with some directors facing heavy personal losses for simply failing to keep an eye on the business.
More such class actions have been launched in the US during the first 10 months of 2007 than in the whole of 2006, when 118 claims were brought.
Ed Smerdon, a partner in the London firm Reynolds Porter Chamberlain, says the country's subprime mortgage crisis was one reason for the increase.
Even so, US claims are still not as high as they were six years ago.
"Securities class actions are driven by share-price drops, and so a return to 2001 when there were 497 such actions will happen only if there is an economic downturn affecting share prices generally or significant problems in a particular sector," Smerdon adds. The
US legal system is particularly attractive to shareholders looking for someone to cover their losses. As I mentioned last week, courts there can "certify" a class of claimants to include, for example, every shareholder who has not opted out.
The losing side in the US does not have to pay the winner's legal costs, so there is no financial deterrent to bringing a weak claim. On the contrary, claimants may be encouraged to sue: if a defendant decides to settle a "nuisance" claim rather than rack up the costs of defending it, the claimant's lawyer will pocket a substantial percentage.
In England and Wales, every company director is now required by the Companies Act 2006 to act in a way that he or she "considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole". …