On 16 June 2017, the Court of Amsterdam refused to approve the settlement reached in a Dutch mass claims procedure between Ageas (Fortis’ legal successor) and four claimant organisations (VEB, Deminor, SICAF and Stichting FortisEffect) concerning allegedly false or misleading statements by Fortis during the financial crisis in 2007 and 2008. The €1,2 billion settlement was the largest of its kind in Europe. The main rationale for the court’s decision? The court held that the distinction in compensation between “Active Claimants” (those who filed a legal procedure or registered with any of the claimant organisations) and “Non-Active Claimants” (those who didn’t) was unjustified and that the fees for claimant organisations were exorbitant.
This means that Ageas and the claimant organisations will have to renegotiate their settlement agreement and address the concerns of the Court, if they want to have an agreement that is binding on all potential claimants.
Ageas NV/SA is a Belgian company that is mainly active in insurance. It is also the legal successor of Fortis, a Dutch/Belgian group that was active in banking and insurance, after a restructuring that was caused by the financial crisis.
The dispute between Ageas and the claimant organisations relates to several allegedly misleading statements by Fortis towards its investors during the period of 2007-2008. An important aspect of the story was the takeover of the Dutch bank ABN-Amro by an international consortium consisting of Royal Bank of Scotland (RBS), Banco Santander and Fortis. The ABN-Amro deal caused Fortis to issue new shares to finance the transaction and also had a major impact on its solvability.
In the end of September and early October 2008, Fortis’ shares plummeted due to the financial crisis, and the Belgian, Dutch and Luxembourg governments had to intervene. In the end, the Belgian banking activities were nationalised by the Belgian government and sold to BNP Paribas, and the Dutch banking activities were nationalised by the Dutch government.
After the crash of Fortis’ shares, several investors filed legal proceedings against Fortis. Specifically, they made three allegations that supposedly caused harm to the Fortis shareholders:
- In September 2007, Fortis made misleading statements relating to the impact of the American subprime mortgages in the prospectus and press release concerning the issuance of new shares to finance the ABN-Amro deal;
- The plans to strengthen the solvability of Fortis after the takeover of ABN-Amro were made public on 26 June 2008, but should have been made public earlier;
- The communication of Fortis during the period of the government interventions (28 September – 3 October 2008) was inaccurate or incomplete.
Several claimant organisations started amassing claims and filing legal proceedings, including the parties to the settlement agreement: DRS Belgium CVBA (Deminor Recovery Services), VEB (Vereniging van Effectenbezitters), SICAV (Stichting Investor Claims Against Fortis) and Stichting FortisEffect. After a mediation procedure, Ageas and the four claimant organisations reached a settlement agreement on 14 March 2016.
The mass claims procedure
Such a settlement can be declared binding on all potential claimants by the Court of Amsterdam in accordance with article 7:907 of the Dutch Civil Code, which was introduced by the Act on the Collective Settlement of Mass Claims (“Wet Collectieve Afwikkeling Massaschade”). If the court approves the settlement, all potential claimants can request the compensation that was agreed, but can no longer file a suit on this basis. However, they can also opt-out of the settlement if they prefer to continue with their own legal proceedings.
On 20 May 2016, the parties to the settlement agreement in the Fortis case filed a request to have the settlement approved by the court. However, several others filed complaints against the settlement, challenging especially the amount of the compensation in it. The most important of these opponents is a competing claim organisation, ConsumentenClaim.
Dutch law stipulates several conditions for approval of a settlement by the court: the amount of compensation should be reasonable, the claimant organisation should be representative for the interests of the claimants, the group of potential claimants should be sufficiently large, etc.
In this case, the court rejected the settlement. To understand why the court took this decision, we’ll take a closer look at the compensation arrangement under the settlement.
The settlement agreement stipulates a maximum compensation of €1.203.700.000, which is to be distributed between the “Eligible Shareholders” (shareholders that held shares in Fortis at any moment between 28 February 2007 and 14 October 2008), according to three main principles:
(1) The amount of compensation differs depending on during which period the shares were held or bought. There are three periods (21 September 2007 – 7 November 2007; 13 May 2008 – 25 June 2008; 29 September 2008 – 3 October 2008), which correspond to the three allegations that were made against Fortis. These periods start with the (alleged) misleading statement and end at the moment when the correct information becomes public and the market corrects itself.
(2) Shareholders who bought shares during one of the three periods (“buyer shares”) are awarded twice as much per share as shareholders who simply held shares during one of these periods (“holder shares”). The rationale behind this is that the incorrect communications of Fortis caused an inflation of the market price, which caused a loss for the shareholders which bought shares at the inflated price when this price was corrected downwards. For shareholder who simply held shares during this period, it is much more difficult to prove that the communications caused a loss for them, especially since shares of other banks were plummeting as well. The increased legal uncertainty concerning the compensation for holder shares is reflected in a lower amount of compensation under the settlement agreement.
(3) Finally, the settlement agreement distinguishes between “Active Claimants” and “Non-Active Claimants”. Active Claimants are those claimants who filed a legal proceeding before the settlement was announced and/or who registered with one of the claimant organisations that were a party to the settlement agreement. Non-Active Claimants are those who didn’t.
Under the settlement agreement, the amount of compensation for the Active Claimants is about 50% higher than for the Non-Active Claimants. In addition, there are two additional compensation amounts, but one of these additional compensations is only available to Active Claimants, while the other is subject to a cap that is twice as low for Non-Active Claimants as for Active Claimants. Finally, the total amount of compensation for Active Claimants is capped at €18.7 million, while the amount for Non-Active Claimants is capped at €6.9 million, even though the number of shares held by Non-Active Claimants is actually estimated to be three times higher.
Settlements should not distinguish between Active and Non-Active Claimants
The Amsterdam Court does not have a fundamental problem with the first two principles, but takes issue with the third, the distinction between Active and Non-Active Claimants.
Ageas and the claimant organisations that settled argued that the distinction between Active and Non-Active Claimants was justified because it remedies a “free rider problem”. Without this distinction, shareholders would have no incentives to make an effort and incur costs to file a legal proceeding and/or register with a claimant organisation, because they would receive the same benefits anyway. The additional compensation for Active Claimants should be regarded as a premium which awards their efforts in reaching a settlement.
The court forcefully rejects this free rider argument. It considers that the goal of mass claims legislation in the Netherlands was to facilitate collective settlement of mass claims and to prevent separate legal procedures. From this follows that the simple fact that shareholders awaited the result of the collective settlement cannot be considered as “free rider behaviour”. The amount of compensation should only be based on the amount of harm suffered. The parties do not prove that the Active Claimants made more costs than the Non-Active Claimants that would justify a higher compensation. With this decision, the court strongly protects the equality between Active and Non-Active claimants.
Fees for claimant organisations should not exceed reasonable costs
The court also vehemently criticized the amount of the fees that were to be paid by Ageas to the claimant organisations. Under the settlement agreement, VEB would receive €25 million, Deminor €10,5 million, FortisEffect €7 million and SICAF €2,5 million. Collectively, this would amount to a fee of €45 million, approximately 3,7% of the total settlement amount.
The court refers to the “Claimcode”, a (non-binding) corporate governance code for claimant organisations, which stipulates that claimant organisations should act in the interests of the claimants they represent, without seeking profit for their own account (principle II). The court considers Deminor, FortisEffect and SICAV as commercial organisations that do not comply with the Claimcode, but still allows them to proceed alongside the non-profit association VEB.
The court does not remain blind for the free rider problem in shareholder litigation either and allows. It holds (nr. 8.39): “the court acknowledges the societal importance of collective actions. Financing should be found for this. [A claimant organisation] can in principle claim a compensation for its reasonable costs from the liable party […]. However, it is required that claimant organisations are transparent and open about this.”
The court rules that the claimant organisations acted insufficiently transparently about their fees and to what extent these are a compensation for reasonable costs. It concludes from the oral hearing that it is likely that the fees exceed the costs of the proceedings and external advisors and will lead to a profit for the claimant organisations. VEB even acknowledged this more or less explicitly, by stating that the fee will also contribute to its “war chest” that allows it to file claims in other cases. Indeed, only €6 million out of the €25 million VEB would receive would compensate the costs that VEB made.
On the basis of the reasoning discussed above, the court concludes that the compensation arrangement was unreasonable and it does not declare the settlement binding. It does allow the parties to the settlement agreement to adjust the agreement to take into account the concerns of the court.
Questions for reflection
Where does this leave us? The decision nicely illustrates the complexity of shareholder litigation. It shows that shareholder litigation, which is meant as a solution for the agency problem between management and shareholder, introduces a new agency relationship between the claimant organisations and the class of shareholders.
This leads to the question: is shareholder litigation beneficial for society? In the Fortis case, it is the corporation (and for up to €290 million its insurer) that is paying compensation to the old shareholders, which basically amounts to a transfer of wealth from one group of shareholders to the other. If we consider that shareholders should be properly diversified, as corporate finance theory recommends, the net benefits for shareholders are neutral and this may seem like a case of “robbing Peter to pay Paul” (or: a “money cycle”).
Shareholder litigation is supposed to prevent wrongdoings by managers, but in the Fortis settlement, managers don’t pay anything. Quite the contrary, the settlement agreement contains an explicit release of liability in favour of directors and officers of Fortis (clause 5.1.1), even though criminal proceedings against some of them are still pending in Belgium. Cui bono? Who benefits from this system? The attorneys and the claimant organisations who were hoping to reap huge fees from the case.
This decision also illustrates the wariness of European countries of introducing a “claim culture” as in the United States. Contingency fees are prohibited for attorneys and shareholder litigation is mainly left to non-profit associations. But even in the United States, recent cases have tried to restrain frivolous shareholder litigation by reviewing attorney fees more carefully (see for example the Trulia decision).
This does not imply that shareholder litigation should be abolished. From an ex post distributional perspective, compensation of the shareholders of Fortis does matter. In addition, it seems likely that shareholder litigation can still deter management misbehaviour, even if they do not pay the damages themselves, due to reputation effects and potential criminal liability.
But it is essential that the representatives of shareholders have the proper incentives. The ruling of the Amsterdam Court in the Fortis case is only the beginning of an answer. Mass claims actions are expensive and a consistent system for financing them should be designed. The court agreed that claimant organisations should be reimbursed for their reasonable expenses in managing claims. But what is a reasonable expense? Does this only include the litigation costs and the costs of external advisors? Or can the claimant organisations also receive a risk premium? If a risk premium would be denied, claimant organisations would be structurally lossmaking, as not all cases that they undertake can be expected to succeed. This could lead to an under-enforcement of corporate and securities laws. In its conclusion, the court briefly hints that the fee for the claimant organisation could “potentially include a reasonable profit increment” (nr. 10.9). The €1,2 billion question is of course: how far can you go with this? The decision of the court does not provide a conclusive answer, but attaches a lot of importance to transparency.
In conclusion, the decision of the Amsterdam Court will probably be a setback for the shareholder of Fortis who were looking for compensation. Almost 10 years after the facts, they still haven’t seen a dime, and it remains to be seen whether Ageas and the claimant organisation will reach a new settlement agreement. But the decision might also be a good thing from a broader perspective, if it marks the beginning of a more sophisticated legal regime that balances the adequate financing of shareholder litigation with avoiding excessive agency costs in the shareholder-representative relationship. But there is still a long way to go …