Dutch decision has implications for global class actions

(Editors Note: This post is by Robert J. Giuffra, Jr., Richard C. Pepperman II, Robert A. Sacks, John L. Hardiman, and Robert M. Osgood of Sullivan & Cromwell LLP.)

Summary
In an important development for class action suits in the United States and internationally, the Amsterdam Court of Appeals recently upheld a settlement between Royal Dutch Shell and a group of more than 150 institutional investors from 17 European countries, Canada, and Australia. The proposed settlement originally emerged in 2007 after Royal Dutch Shell side-stepped a class action filed in U.S. District Court that sought to include claims from both U.S. and non-U.S. investors, by independently pursuing a settlement in The Netherlands with the non-U.S. claimants.

This settlement under Dutch law intersects with recent limitations on subject matter jurisdiction in U.S. courts for claims brought by “foreign-cubed” plaintiffs under U.S. securities laws. A mechanism to settle group claims in The Netherlands may influence U.S. courts to place further limits on jurisdiction for foreign plaintiffs, while also providing a way for foreign issuers at risk of jurisdiction in the U.S. to effectively settle collective claims outside of the U.S.

Background
In 2004, Royal Dutch Shell investors brought a securities fraud class action suit in the U.S. District Court for New Jersey alleging injury from Shell’s intentional overstatement of oil reserves. The suit followed Shell’s announcement in February of 2004 that it had recategorized 20 percent of its total proven reserves base, and an ensuing internal audit which uncovered an email from a Shell executive stating, “I am becoming sick and tired about lying about the extent of our reserves issues.”

In addition to U.S. shareholders, the class included “foreign-cubed plaintiffs” (foreign shareholders, suing a foreign corporation, regarding stock purchased on a foreign exchange). After the U.S. class, represented by the Bernstein Liebhard law firm, rejected a settlement offer from Shell in 2006, Shell’s attorneys approached Grant & Eisenhofer, another U.S. class action law firm, to obtain a settlement “class” of non-U.S. claimants out of the U.S. litigation. In early 2007, Shell announced a $352.6 million settlement with a group of non-U.S. shareholders comprising 150 institutional investors. The settlement provided for $47 million in legal fees.

The settlement announced in 2007 was expressly contingent on: (1) the U.S. District Court deciding not to certify the non-U.S. claimants as part of the class in the U.S., which occurred in November of 2007 when the District Court dismissed the foreign-cubed plaintiffs for lack of subject matter jurisdiction; and (2) the Amsterdam Court of Appeals approving the settlement under the Dutch Act on Collective Settlement of Mass Claims, which was just announced on May 29, 2009.


The U.S. District Court’s dismissal of the foreign-cubed plaintiffs from the U.S. action is one of several recent decisions in the U.S. limiting the availability of the U.S. securities laws as a basis for claims by foreign class members. The District Court found that Shell did not “engage in any fraud-related activity targeted at the Non-U.S. Purchasers within the United States.” [1] Importantly, the U.S. District Court also considered the proposed Dutch settlement in concluding that a dismissal of the non-U.S. plaintiffs would not be unfair because such a holding “does not leave the Non-US Purchasers without an alternative recourse to address their alleged injuries.” [2]

The reasoning of Shell was furthered in 2008 by a unanimous decision of the United States Court of Appeals for the Second Circuit. In Morrison v. National Australia Bank, 547 F.3d 167 (2d Cir. 2008) (“NAB”), the Second Circuit held that U.S. courts lacked subject matter jurisdiction over foreign-cubed claims brought in the United States where the non-U.S. company’s executives: (a) made decisions concerning the content of alleged misstatements to investors from abroad and (b) issued those statements from abroad. The foreign-cubed plaintiffs dismissed from the NAB case filed a petition for certiorari with the U.S. Supreme Court in March of 2009, and, signaling interest in the international reach of U.S. securities fraud laws, the Supreme Court recently invited the Solicitor General’s views on the case.

The Dutch Decision
Under the Dutch Act on Collective Settlement, a group of claimants can seek approval of a collective settlement which is binding on all members of a class who do not affirmatively “opt out.” The settlement agreement must be between one or more potentially liable entities and a foundation or association representing the interested group of claimants. The Dutch statute is significantly more limited than U.S. class action procedures because it does not provide a mechanism to bring or maintain class actions seeking monetary damages under the statute, and, instead, only authorizes the Amsterdam Courts to certify settlements between a defendant and an organization representing the interests of injured parties. However, the ability to bind putative class members who do not opt out of the settlement makes The Netherlands a powerful arena for the resolution of class action claims, in contrast to other European countries with more restrictive rules.

With implications for global class actions, the Amsterdam Court of Appeals determined that it had jurisdiction not only over Dutch petitioners but also over all of the non-U.S. shareholders. The Brussels I Regulation and Lugano Convention clearly permit the combination of claims when they are “so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.” (See Article 6 Section 1 of the Brussels I Regulation and Lugano Convention) However, the fact that the Court also found jurisdiction over shareholders domiciled outside of The Netherlands in countries that do not participate in the Lugano Convention indicates that the Dutch courts may be willing to entertain broader jurisdiction over claims with a nexus to The Netherlands.

In evaluating the settlement under the Dutch Act, the Court also considered the extent notice was provided to all potential plaintiffs, the reasonableness of the relief provided for in the agreement, and whether the Dutch associations adequately represented the claimants.

Implications For Non-U.S. Companies
The approval of the Shell settlement may have the following implications for foreign companies facing potential exposure under U.S. securities laws:

• The availability of a class action settlement mechanism in The Netherlands may be a factor that continues to influence U.S. courts to reject jurisdiction over foreign-cubed claims, because those claims can be settled abroad;

• Where there is a serious risk that a U.S. court might exercise subject matter jurisdiction over foreign-cubed claims, it might behoove many foreign issuers to seek settlement negotiations with European investors in Europe, with the possibility of using Dutch courts to approve binding settlements. In so doing, foreign companies may reduce the risk and expense of litigating in the U.S. system. Furthermore, the reduction in class size and resulting damages may diminish the incentive for U.S. plaintiffs’ lawyers to bring class action suits on behalf of U.S. investors alone;

• Where there is no serious risk that a U.S. court might exercise subject matter jurisdiction over foreign-cubed claims, foreign issuers remain in a comfortable position, because the few European statutes that might allow investors to bring securities fraud claims as a class are narrow and largely unproven; and

• If foreign investors instead bring individual actions against foreign issuers in foreign courts, the Amsterdam procedure could bring about a shift in negotiating power for foreign defendants who want to neatly settle groups of claims without the inconvenience of managing individual suits brought in multiple jurisdictions.

Footnotes:

[1] In re Royal Dutch/Shell Transp. Sec. Litig., 522 F. Supp. 2d 712, 721 (D.N.J. 2007).
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[2] Id. at 724.
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