The litigation in England surrounding the failure of RBS is particularly telling – the retail investor base took the lead, but it is actually the institutional shareholder participation that is likely to gain the company’s attention and change the mood music.
The institutional investor community is likely to have greater legal remedies at their disposal because, in many instances, key shareholders are able to have almost a direct line to the company – and it follows that representations will be made to them that have not been made to the retail investors. Issues of reliance between the two groups are also likely to be different. Losses are also vastly higher.
It is therefore likely that shareholder claims will get off the ground and get to the attention of a company’s chief executive, rather than its general counsel, only if institutions step up to the plate. It is only when corporate claims are ventilated in the boardroom that progress will be made.
The power of the activist investor is clearer than ever before. The activity of the short-seller Gotham City almost brought two public companies to their knees, and the threat of focused litigation has to be seen as a specific weapon in the armoury.
Past attitudes of fund managers –either to take the losses on the chin or to wait for the stocks to recover – are now no longer acceptable when significant losses, if grouped together, can actually lead to engagement from a corporate and a swift settlement.
There is no better way for a new broom to sweep up than by seeking to isolate past misconduct and agreeing a resolution with investors.
Such behaviour can change the approach to corporate governance and lead to a revival of company fortunes. In this way, litigation can lead to a clean-up of market misconduct.
Jeremy Marshall is chief investment officer at Bentham Europe
The RBS case: key points
The RBoS Shareholders Action Group is pursuing legal action on behalf of thousands of investors who lost money subscribing for shares during the 2008 RBS rights issue.
As it states on its website: “We believe the directors of the bank acted improperly by misrepresenting the underlying strength of the bank at the time and by omitting critical information from the prospectus. This led to thousands of shareholders taking part at an over-inflated price.”
It also claims that:
• The true purpose of the rights issue was not disclosed. Whereas it was inferred as an attempt to improve ratios, the bank was actually strongly advised by the Financial Services Authority [FSA, now the FCA] to shore up a balance sheet that had been critically damaged by its acquisition of the Dutch bank ABN AMRO.
