Introduction and background of the case
On 13 July 2018, the Amsterdam Court of Appeal approved the collective settlement reached in the Dutch mass claims litigation between Ageas (Fortis’ legal successor) and several commercial and non-profit claimant organisations acting on behalf of shareholders of the former Dutch/Belgian banking and insurance group Fortis. Therewith, the settlement agreement becomes binding upon all investors who have purchased or held Fortis shares between 28 February 2007 and 14 October 2008, except upon those who opt-out of the collective settlement before 31 December 2018.
The road to the binding force of Europe’s biggest settlement between a company and its investors was not without a struggle. After years of litigation following Fortis’ 2007/2008 financial collapse, a €1.2 billion collective settlement regarding the events that allegedly affected the share price of Fortis was reached in March 2016. Subsequently, the parties to the settlement agreement jointly requested the Amsterdam Court of Appeal to approve the settlement and declare it binding within the meaning of the Dutch Act on Collective Settlement of Mass Claims (the “WCAM”), so as bind the entire ‘class’ of similarly situated Fortis shareholders. Under the WCAM, the Amsterdam Court of Appeal conducts a full review of the proposed collective settlement. The Court must (inter alia) reject a WCAM-request if the amount of the compensation awarded is not reasonable or if the interests of the persons for whose benefit the contract has been entered into (the ‘class’) are insufficiently safeguarded.
In June 2017, the Amsterdam Court of Appeal refused to approve the proposed settlement because for various reasons it did not consider the compensation scheme to be reasonable for all the members of the class (ECLI:NL:GHAMS:2017:2257 – with commentary of J.S Kortmann). The Court granted the parties the opportunity to amend the settlement agreement to account for its findings and concerns. Although Ageas and the claimant organisations had informed the Court that the proposed settlement was best deal that could be achieved at the time, the parties reached an amended and restated settlement agreement in December 2017. Ageas increased the overall settlement amount by € 100 million (from €1.2 billion to €1.3 billion). Following an oral hearing with the Court in February 2018, a second amended and restated settlement agreement was reached in April 2018, which finally satisfied the conditions for approval under the WCAM. In its decision of 13 July 2018, the Court concluded there are no grounds justifying a rejection of the WCAM-request and declared the settlement agreement universally binding (ECLI:NL:GHAMS:2018:2422).
Despite the positive outcome for Ageas and the claimant organisations, the decision to declare the settlement agreement binding does not mean that the Amsterdam Court of Appeal agrees with the entire settlement. Its critical observations regarding the compensation awarded to shareholders and the sums awarded to the claimant organisations provide an interesting insight in its view on the function of the WCAM and may have an impact on the future application of the WCAM in collective settlements.
Reasonable compensation awarded to shareholders?
Under the originally proposed settlement agreement, the class of eligible Fortis shareholders was divided into ‘active’ claimants and ‘non-active’ claimants. In brief, ‘active’ claimants were those claimants who had initiated (or had actively joined claimant organisations that had initiated) timely proceedings against Ageas and ‘non-active’ claimants were those who did not. Under the original collective settlement, active claimants would receive a substantially higher amount of compensation than non-active claimants. Moreover, under the initially proposed compensation scheme, there were separate ‘budgets’ for active and non-active claimants. As a result, non-active claimants (representing roughly 75% of the Fortis shareholders) would run a substantial dilution risk in the event of a take-up rate of 25% or higher, whereas active claimants would not run such a risk at all.
According to Ageas and the claimant organisations the distinction between active and non-active claimants was justified to discourage ‘free riding’. The intention was to reward the active claimants for their efforts that had made the settlement possible. It was asserted that without such ‘premium’, a situation would be created in which non-active claimants would have a ‘free ride’ on the basis of the efforts of other investors and would thereby effectively benefit from ‘doing nothing’. In its June 2017 interim decision, the Amsterdam Court of Appeal strongly rejected the free rider-argument as a justification for the differential treatment of non-active claimants. The Court stressed that the aim of the Dutch mass claims legislation is to ensure that large-scale loss is settled collectively as far as possible and to prevent the disadvantaged parties from having to institute separate legal proceedings. On this basis, the starting point is that potential claimants are free to await the outcome of collective actions that are instituted on their behalf. Exercising that freedom should not put ‘passive’ claimants at a disadvantage. A distinction in compensation between parties who have suffered exactly the same (alleged) damage can only be made if an objective justification can be found. In its June 2017 judgment, the Amsterdam Court of Appeal concluded that in view of the absence of an objective justification for the differences in compensation, the amount of the compensation awarded could not be considered reasonable.
Following the findings of the Court, under the collective settlement agreement that was ultimately approved on 13 July 2018, all eligible shareholders will receive the same base compensation per share and will share in the dilution risk in the same way. Active claimants are, however, also entitled to an additional one-off compensation for their costs and efforts of supporting the (collective) actions against Ageas. According to the claimant organisations, the additional compensation is also intended to cover the fee (most of the) active claimants had to pay to the claimant organisations when they joined the actions filed by those organisations. Without such additional compensation active claimants could, according to the claimant organisations, unjustly end up in a less favourable position than non-active claimants that did not incur any costs.
In its 13 July 2018 decision, the Court considered the amended scheme for compensation of shareholders reasonable and also found it justified to provide active claimants with an additional compensation to reimburse their reasonable and demonstrably incurred costs. This however does not apply to the active claimants that timely joined claimant organisation ‘VEB’. As opposed to the other claimant organisations, the VEB did not require a specific (cost-covering) financial contribution for representation in the actions against Ageas. According to the Court, in absence of real costs or expenses no objective justification for additional compensation of active claimants that have joined the VEB can be found and such compensation can therefore not be considered reasonable. However, under the WCAM, the Court is only authorised to either declare the whole settlement agreement binding or to reject the request in total and the VEB had made very clear that the additional compensation for its members was non-negotiable. Although the Court of Appeal strongly criticised the additional compensation for active VEB members, it held that – all things considered – it did not find it acceptable to let the collective settlement of the large-scale loss in the Fortis case fail on this one point and therefore chose not to reject the WCAM-request.
The Court did see cause to attach other consequences to the VEB’s conduct. The fact that the VEB stipulated an additional compensation for its ‘active’ members, that cannot be objectively justified nor considered reasonable, while presenting such compensation as a non-negotiable condition for the conclusion of the settlement agreement, brought the Court to the conclusion that it cannot be established that the interests of the persons for whose benefit the settlement agreement has been entered into were sufficiently safeguarded by the VEB. In this context, the Court also observed that the additional compensation provides an improper incentive in favour of the VEB as it serves the VEB’s own interest to retain and attract members. According to the Court, the WCAM is not intended to serve or facilitate such interests. The Court therefore rejected the WCAM-request with regard to the VEB. Therewith the Court gives a strong – but symbolic – signal. The Court explicitly underlined that the rejection of the WCAM-request with regard to the VEB has no consequences for the validity of the settlement agreement between the VEB, the other claimant organisations and Ageas, nor for the practical details, performance and execution of the settlement agreement. Together, the other claimant organisations are still sufficiently representative as regards the interests of the class of Fortis shareholders.
Reasonable sums awarded to claimant organisations?
Under the originally proposed settlement agreement, the claimant organisations would also receive additional payments of €45 million in total, of which the non-profit claimant organisation VEB would receive € 25 million. Initially, the claimant organisations did not provide any insight in their actual costs in relation to the compensation they had stipulated to receive themselves. When it became clear that the amounts the claimant organisations would receive considerably exceeded their costs, the Court noted that by accepting these amounts the claimant organisations had created the impression that they had an own interest in the settlement. According to the Court, this raised doubts as to whether the interests of the whole ‘class’ – and especially the interests of the non-active claimants – were sufficiently safeguarded. The Court stressed that it recognises the important role of claimant organisations in collective redress and noted that the mere fact that claimant organisations ask for compensation for costs and running a litigation risk is in itself not a reason to assume that the interests of the class have been insufficiently safeguarded. The lack of transparency regarding the revenues and costs of the claimant organisations however impeded the Court from making an assessment and thus left the Court with the impression that the interests of the non-active claimants have been subordinated to the own interests of the claimant organisations and their members.
The claimant organisations initially objected against a disclosure of their revenues and costs arguing that the compensation they would receive is separate from and does not reduce the compensation that Ageas is willing to make available to the shareholders. According to the claimant organisations, the WCAM-request does not concern the compensation that they would receive and therefore it falls outside the scope of the Court’s review. The Amsterdam Court of Appeal also strongly rejected these arguments. By stressing that the compensation of the claimant organisations is inextricably linked to the settlement it is requested to review, the Court continued to insist on full disclosure of costs and revenues for the purpose of its review. The Court however acknowledged that it will have to observe some restraint in its assessment of the compensation for claimant organisations.
Based on the information that was subsequently provided by the claimant organisations, the Court concluded in its July 2018 decision there is no evidence to suggest that compensation of the claimant organisations has been provided at the expense of the compensation paid to the shareholders. In view of the substantial procedural risks that the claimant organisations (and their litigation funders) have assumed for a long period of time and given that the funding costs for such high-risk investments are high, the Court finally concluded that – all circumstances taken into account – the high compensation the claimant organisations will receive from Ageas cannot be considered unreasonable.
In an obiter dictum, the Court added that in the interest of the persons for whose benefit a settlement has been entered into, it will continue to insist on disclosure of costs and revenues of claimant organisations. In future WCAM-requests it may even require the disclosure of the identity of third party litigation funders and the terms of the financing agreements made, in order to form a picture of the solvency, standing and revenue models of those funders and to establish that there are no conflicts of interests.
The decision of the Amsterdam Court of Appeal forms good news for the former shareholders of Fortis who have been awaiting clarity on their position for quite some years. The shareholders’ patience will however be further put to test since Ageas still has the right to terminate the settlement in the event opt-out notices represent an amount exceeding 5% of the settlement amount of € 1.3 billion.
The decision of the Amsterdam Court of Appeal further confirms that the WCAM is a viable way to settle international shareholder claims on a class wide basis. However, it remains to be seen whether the critical observations of the Court of Appeal regarding the allocation of the settlement amount over the various types of members of the ‘class’ and the disclosure of funding structures of claimant organisations will have an impact on the future application of the WCAM. The fact that the court gives short shrift to the differential treatment of active and non-active members of the class, may be a reason for claimant organisations to avoid the WCAM. Outside of the context of the WCAM, parties to collective settlements have the liberty to allocate the settlement amount as they see fit. The fact that the court will likely insist on disclosure of funding structures of claimant organisations and includes the compensation for claimant organisations in its assessment of the reasonableness of the settlement may also take away the incentive to request the Amsterdam Court of Appeal to declare a collective settlement binding. In this context, it should however also be noted that assessment of the compensation of claimant organisations and their funders is in line with the developments in collective redress in general. The (possible) future framework for reviewing the admissibility of a claimant organisation in a collective action in the Netherlands explicitly requires the court to assess the funding of a claim, which allows the court to require disclosure of funding structures. Likewise, the proposal for an EU directive on representative actions for the protection of the collective interests of consumers (as part of the “New Deal for Consumers”), requires full transparency about the sources of funding of claimant organisations seeking compensatory collective redress on behalf of consumers and empowers courts to assess the arrangements funding arrangements.
The post “Amsterdam Court of Appeal declared €1.3 billion Fortis collective settlement binding – will the critical observations of the Court have an impact on future use of the WCAM?” is a post of www.stibbeblog.nl.