June 26, 2024

Navigating the Rise of UK Class Actions Implications for Private Equity

Elliot Brownlee, Catherine Campbell, Oliver Middleton, Robin Spedding, Huw Thomas, David Walker

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Latham & Watkins LLP

As collective redress actions rise, sponsor and corporate statements are under high scrutiny, with an industry developing to take advantage.

Class actions, long a staple of the US legal landscape, are now gaining momentum in the UK. Private equity firms should take note: Heightened regulation and mandatory disclosures — particularly in take-private deals involving publicly listed companies — are fuelling this rise. The maturing procedural framework, including opt-out competition claims, recent legal reforms, market volatility, the availability of litigation funding, and increased scrutiny from consumers, investors, and activists are further driving this trend.

The plethora of routes to bring a class action in the UK provide potential claimants with a range of options to choose from — placing sponsors and portfolio companies at risk of litigation. Our expert cross-border teams, with extensive class action experience, are actively engaged in some of the largest cases in the English courts. As class actions can be very costly, sponsors and portfolio companies need to engage meaningfully and early.

Shareholder Spotlight

Shareholder claims are gaining traction. The UK’s legislation has expanded to cover a wider array of listed company disclosures, increasing the potential for shareholder claims. Private equity firms must be cognizant of these developments. In the context of take-private deals, for example, historic claims could be raised against the company in future years (such claims typically are not pursued in the UK until right at the cusp of the expiration of limitation periods).

The complexity and cost of shareholder actions necessitate strategic legal counsel and proactive risk management. While the first UK shareholder action trial took place in 2022, providing some guidance for future claims, questions remain about materiality thresholds, the requirement for investors to prove reliance on company statements, the management of disclosures, and the nature of the liability regime. Sponsors should engage with external counsel to safeguard decision-making processes and avoid creating unnecessary documents that could be disclosable in future litigation.

Other UK Class Action Developments

Sponsors and portfolio companies should also watch for class actions in environmental, social, and governance (ESG), where mandatory climate-related financial disclosures could lead to shareholder claims, and in competition law, where “opt-out” class actions are more prevalent. Data-intensive sectors are also vulnerable to an uptick in claims due to increased regulation.

Investors and activists, sometimes backed by litigation funders, are finding innovative ways to frame complaints as shareholder claims or under competition law, even when issues are not directly related to misleading investors or anti-competitive behaviour. For example, claims may be based on a company’s failure to meet ESG standards, claims, or adopted goals, alleging that the market was misled about ESG compliance or that non-compliant behaviour resulted from an abuse of a dominant position. A cross-practice approach is essential in responding to such claims.

The UK also has an increasingly mature litigation funding market combined with a large number of boutique claimant-side law firms and US law firms with experience in pursuing claims. Shareholder class actions are particularly attractive to litigation funders as the returns can be significant. We are even seeing non-traditional funds looking for avenues to fund litigation and gain a share of this ever-increasing market.

Mitigate Risk by Engaging Early

The first line of defence is ensuring that all disclosures and announcements are accurate, defensible, and supported by good internal record-keeping and governance, in order to audit and evidence the basis for making the statements. This is the case even in respect of seemingly anodyne statements (for example around having good corporate governance structures in place). Class action risks can be managed by managing communications internally (e.g., with the board, so its members can validly sign off on disclosures and help to assuage the concerns of senior individuals, such as directors, who could find themselves targeted with personal liability for certain statements being made) and externally (e.g., with the market, target investors, and insurers). Expert outside counsel can help to review the accuracy, scope, and framing of disclosures and other announcements, mindful of the potential for future claims.

Conclusion

Although the UK is still in the relatively early stages of usage and management of class action processes, its legislation is moving closer to the US system through the introduction of opt-out class actions in competition law and developing jurisprudence regarding other ways of the courts managing group litigation, which removes some of the burden of forming a claimant class. Clearly, class actions remain viable, potentially highly lucrative, and increasingly attractive. As claimants continue to push boundaries in seeking paths to redress, sponsors need to get ahead of the curve.

COMMON GROUNDS FOR UK CLASS ACTION

Shareholder claims brought under Section 90A Financial Services and Markets Act 2000 allow investors to target listed companies that publish information containing misleading statements or omissions. This provision addresses misinformation disseminated to the market as a whole, such as in annual reports or press releases, rather than misrepresentations communicated to specific investors. There are similar claims available pursuant to Section 90 FSMA regarding misleading statements or omissions in listing particulars (with lower thresholds).

Common law claims have, to date, focused on alleged breaches of a tortious duty owed by directors of a company to shareholders to use reasonable skill and care when communicating with shareholders (i.e., a duty to ensure the communications contained no material misrepresentations and omissions). Such a claim may also allege that directors owe an equitable duty to provide shareholders with sufficient information to enable them to make informed decisions in respect of matters on which shareholders are voting (e.g., at an Extraordinary General Meeting).

Competition claims often arise from allegations that a company has breached competition law or engaged in anti-competitive behaviour, such as price-fixing, market sharing, or abuse of a dominant position. Claimants seek to recover overcharges and other losses caused by such infringements.

Data claims typically arise from a failure to protect personal data, leading to unauthorised access, loss or misuse of data, in violation of the Data Protection Act 2018 (which is the UK’s implementation of the General Data Protection Regulation). However, various other causes of action can form the basis of these claims, including misuse of private information, breach of confidence, or negligence. The most significant compensation claims often stem from cyber-attacks.

ESG claims can cover a broad spectrum of litigation, including disputes relating to human rights, climate change, securities, and the sustainability of products and services. There are various types of actions, including breach of directors’ statutory duties and breach of environmental or securities regulations, that could be brought by a range of claimants.

TYPES OF UK CLASS ACTION

Opt-in Class Action

Potential claimants elect to join a class of similarly affected individuals. These claimants are identified in the proceedings, and authorise the claim to be brought on their behalf. Group litigation orders fall into this type of class action.

Opt-out Class Action

A claim is brought on behalf of all individuals within a specified class (i.e., sharing a similar characteristic). They are party to the claim unless they choose to opt-out. Representative actions and collective proceedings orders fall into this type of class action.

This post was prepared with the assistance of Emma Bunting in the Hong Kong office of Latham & Watkins.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.