Join our community of smart investors

Group claims pose growing risk to companies

New rules and litigation financing options bringing both risk and reward for investors
February 24, 2022
  • Group claims on the rise, with major companies often the target
  • But new rules and funding mechanisms mean shareholders could find redress from major corporate failures more readily

English courts are hearing a rising number of group claims, which threaten companies with huge damages bills and reputational damage. However, the same mechanism gives investors a chance to salvage some cash in the wake of corporate disasters.

According to a new study by analytics company Solomonic, 122 group claims were issued in the High Court in 2021, up from 96 the previous year. These figures refer to cases where multiple claimants join forces to seek a remedy against the same defendant – often a large corporation.

Until recently, the viability of collective redress was limited in England and Wales, compared with the likes of the US and Australia. However, the rapid growth of third-party litigation funders – such as Burford Capital (BUR) and Litigation Capital Management (LIT) – has made such cases more feasible. Sensing an opportunity, more US-based class action law firms, such as Milberg, are also setting up shop in Europe. 

Litigiousness is also on the rise: over 350 cases relating to professional services were issued in the High Court last year, 21 per cent more than in 2020. The total number of High Court commercial disputes commenced in 2021 stayed roughly the same, at 5,255.

There are various mechanisms for bringing collective actions in English courts. Opt-out procedures – which automatically aggregate claimants unless they withdraw their names – are now permitted in competition law cases, for example, allowing huge groups of people to get involved. The power of this model is evident in the mammoth group claim against Mastercard (US:MA) brought on behalf of 46mn card holders, and with a potential value of £14bn. 

While it’s still early days, the rise of class actions could have significant implications for corporate risk – and shareholder returns – with companies facing huge damages bills and expensive legal fees. Several of the cases that have been brought so far have been valued in the billions.

However, group actions can also offer investors the chance to claw back some cash. Wirecard, for example, is facing multiple class actions in Germany, brought by investor groups. 

So far, many claims have related to the ‘diesel-gate’ emissions scandal, while BHP (BHP) is facing a $7bn lawsuit brought by 200,000 Brazilian claimants, following the 2015 dam collapse in Brazil. The Supreme Court has also ruled that two Nigerian communities can bring legal claims for clean-up and compensation against Shell (SHEL) and its Nigerian subsidiary in the English courts.