Comment on the use of litigation vehicles in the Netherlands en

The Steinhoff case again put the spotlight on the use of litigation vehicles in the Netherlands. Through this contribution we would like to provide an overview of the three main procedural techniques available to structure a securities action in the Netherlands, and to share our practical experience of this.

i. The Dutch claim organisation model

Promoters of the Dutch claim organization model (e.g., a Dutch foundation – Stichting in Dutch) generally emphasize the fact that investors who join a claim organization can supposedly stay passive during the lawsuit. In reality, however, only a declaratory judgement on liability can be obtained by the claim organisation as a result of its legal initiative. In other words, no damages can be awarded to investors who support a claim organisation. Where a positive judgement on liability is obtained by the claim organisation, investors still have to file subsequent legal proceedings on an individual basis in order to claim damages.

Based on our experience, we see three main drawbacks to the use of Dutch claim organisations:

1. Under Dutch law, Dutch claim organizations are entitled to conclude global, opt-out settlements that benefit not only investors who support the claim organization, but also investors who decided to remain entirely passive. Therefore, investors who do not undertake their own individual actions or investors who support the claim organisation are completely dependent on the outcome achieved by the claim organisation.
2. The interests of a Dutch claim organisation are not necessarily aligned with those of international institutional investors who have suffered material losses. Institutional investors have a fiduciary duty to seek an optimal recovery of their losses, whereas a claim organization has a statutory duty to seek a recovery of losses for all victims, whether they are supporters of the claim organisation or not, and irrespective of whether they have taken active steps to recover their losses.
3. There is an inherent conflict between the duty of a Dutch claim organisation to represent all affected investors in the world, and the organisation’s contractual obligation to seek the recovery of its clients losses if it has entered into individual contracts with clients, which is very often the case.

ii. The assignment of claims model

Similar to the claim organisation option, the assignment of claims model is generally touted as a way for investors to remain anonymous since a Claim- Special Purpose Vehicle  (“SPV”) can then act as the sole named plaintiff.

The assignment of claims model works as follows: Each investor assigns its legal claim for damages to a special purpose vehicle that is specifically incorporated for the purposes of the litigation. This can be a corporation under Dutch law (e.g., BV/NV – a form of Dutch corporation) or a Dutch foundation or association (i.e. the Claim-SPV). Investors’ claims can be assigned by each individual investor signing a specific agreement with the Claim-SPV. In the proceedings the Claim-SPV can then act as a single plaintiff, litigating on behalf of all the individual investors that assigned their claims to the Claim-SPV. The individual investors do not become plaintiffs in the proceedings, the Claim-SPV acts on their behalf. This model gives the Claim-SPV a high level of control over the investors and their legal claims. Due to the assignment of claims, investors no longer have ownership or control over their claims, and they cannot freely decide to withdraw from the litigation if they no longer want to continue.
In practice, the alleged advantages of the assignment of claims model rarely materialise. The following defences are generally raised by the adverse party vis-à-vis the Claim-SPV model:

1. Defendants will request to the court that the Claim-SPV presents all the names and addresses of the investors that assigned their claims to the Claim-SPV. The courts always grant such a request because the defendants must be able to ascertain the plaintiffs behind the Claim-SPV in order to prepare their defence.
2. Defendants will also request at an early stage of the proceedings that the Claim-SPV presents all agreements governing the assignments of claims in order for the defendants to review their validity.
3. Defendants will argue that the Claim Code (Dutch soft law regarding the corporate governance of litigation vehicles in the Netherlands) is applicable to the Claim-SPV, and that the Claim-SPV is not compliant with the provisions of the Claim Code. Although such argumentation might be successfully rebutted, the Claim Code’s relevance in collective proceedings has increased significantly over the last five years.
4. Defendants will request that, since Claim-SPVs generally do not own assets, it should deposit sufficient funds in a third party account to cover the defendants’ legal and court fees, should the court decide in favour of the defendant and order the Claim-SPV to pay such fees.
5. Finally, the assignment of claims model does not have any advantage in terms of the amount of work and the level involvement required by investors that participate in the action. As is the case for plaintiffs litigating in their own name (see below), the Claim-SPV must illustrate, amongst other points, (a) the amount of losses suffered, (b) the capacity of the investor to claim compensation, and (c) the causality between wrongdoing and losses suffered by the investor, for each investor that assigned its claim.

iii. The group action model

In this model, claims are filed on an individual plaintiff basis in the framework of a group action, i.e. a group of investors are named as plaintiffs in the same litigation and before the same judge.

As far as sophisticated institutional investors are concerned, we believe that this is the best option available in the Netherlands, since named plaintiffs remain free to decide what is in their own or in their clients’ best interests at all stages, and they are not bound by what a Dutch claim organisation or a Claim-SPV believe is a satisfactory solution.

For instance, where a lawsuit has been started by a claim organization, a group action is the most efficient way to leverage the plaintiffs’ position in light of the Dutch legal environment, because such a group of investors – depending on their reputation and the size of their losses – may influence a potential global opt-out settlement and negotiate a premium, or alternatively object to a settlement by opting-out of the global settlement and negotiating better terms by advancing in their litigation.

Compared to the claim organisation and Claim-SPV models, the group action option requires more intensive work from the funder/lawyer (i.e., a proper description of each plaintiff, an individual assessment of the losses, amongst other requirements) and strong back-office operations since one size does not fit all investors.  We strongly believe that, when it comes to Dutch shareholder actions, the interests of our clients are best served through the group action model, which is the most straightforward approach that can be tailored to satisfy the individual needs and interests of our clients.

• Edouard Fremault: edouard.fremault@deminor.com
• Joeri Klein: joeri.klein@deminor.com