Institutional Protection

I'm glad to say that nowadays when I meet new people the first pleasantries that we exchange are no longer concerned with what each of us does for a living.

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Today, there’s usually a whole host of other interesting topics to address first. However, when people do ask and I explain that I assist shareholders in making claims against companies involved in negligent or illegal activities that affect shareholder value, some people express doubts as to the validity, sometimes even the morality, of my activities. Even seasoned investment professionals have questioned the legitimacy of my occupation and the term ‘ambulance chaser’ is muttered from time to time.

When challenged about the professional legitimacy of what I do I start with a smile and nod, as one of my children advised me should be done in such circumstances, and then rise to the challenge. Over time I have come up with what I believe is a valid response and a strong defence of my occupation.

Caveat Emptor
I ask naysayers if they generally accept the principle of caveat emptor (the principle that a buyer alone is responsible for checking the quality and suitability of goods before a purchase is made). I then ask what they do when something they’ve bought does not work as described or develops a fault. Do they shrug their shoulders, put the object in a drawer or their garage and forget about it? Do they just accept they’ve made a purchase decision and the poor outcome is unfortunate but just one of the realities of the modern world? I stress the point that recalls are prevalent in many categories; for example, cars are subject to recall because of potentially dangerous faults that need to be remedied.

I have yet to come across anyone who believes the principle of caveat emptor is reason to accept the ‘misfortune’ of buying a faulty product and not seek recourse from a manufacturer or retailer. Most agree that they would take the object back to ask for a replacement or refund. After all, when they bought it, they were given information and an expectation that it worked as described. Indeed, they may even have undertaken research prior to their purchase and received advice and feedback about the performance of the goods they were intending to buy.

Same Principle
Once I have established that the majority of people take goods back for replacement or refund, I suggest that the same principles should apply when purchasing shares. If someone buys shares and then sees them lose value due to negligent or illegal behaviour by a company then they should be entitled to seek redress.

Most share purchasers undertake pre-purchase research into a company and buy on the basis of information published by that company on their performance and activities. All well and good. However, if a company neglects to publish information or illegally withholds information, and the subsequent uncovering and publishing of this information has a detrimental effect on the price of that company’s shares and the value of a purchaser’s investment, then there is a case to be answered.

Justifiable Reparations
Of course, investors know that shares can go up as well as down in value and poor management and bad decision making do not constitute a reason for making a claim against a company. The unreasonable or illegal withholding of information – specifically at the time shares were purchased – does constitute a valid reason. Such information may relate to defects, dangerous operating circumstances (such as faulty braking mechanisms in cars or non-regulatory exhaust emissions), illegal accounting practices, and such like. The

Zero-Sum Game
At this point those who are sceptical will often then present the zero-sum game argument. They say shareholders are shooting themselves in the foot. If they make a recovery from the company, in which they own shares, it will diminish the value of their investment. If everyone affected makes recoveries, the value of the recovery would diminish the value of shareholder value by the same amount: a zero-sum game.

In fact, it’s not such a straightforward equation. Company value is made up of multiple inputs including future earnings forecasts, market sentiment, future regulatory changes etc. Moreover, not all shareholders will claim. Access to a recovery opportunity is not fully democratic. As is the case with cars with operating defects, not everyone will bring them in for repair and the cost to the company of the repair of their defective product is not suffered in full.

As shareholder litigation seeks to remedy past wrongs and improve the company for the future, the share price generally rises post resolution too.

Non-Action is Not an Option
So, should nothing be done? Should shareholders do nothing when malpractice is discovered? Should the perpetrators of shareholder value destruction (typically the senior management) be permitted to continue to proceed without sanction? Of course, regulators may step in to halt or prosecute wrong-doing but if a shareholder has no redress for the bad behaviour affecting shareholder value, shareholder ownership will be affected in the long term. Some may be discouraged from investing in the first place. Ultimately, it shouldn’t be left to regulators alone. They exist to monitor and promote fair and efficient market functioning, and fines are an appropriate and oft-used sanction, but they are not typically distributed to the affected shareholders. If companies understand that regulators and shareholders alike will hold them to account they will be less likely to transgress in the first place.

Change for Good
An action for recovery for lost share value is also an opportunity to make changes in he corporate governance of a particular company, in an effort to improve management and leadership practices and prevent the recurrence of similar events. Recent swings in market sentiment, largely driven by environmental, social and governance (ESG) matters including climate change and the treatment of staff, means that company owners are being reminded that they have some responsibility for the actions of the company in the wider context.

I close my response to any naysayers with a simple question. The choice is yours, of course, but there are an increasing number of responsible institutional shareholders, such as pension funds, insurance companies, mutual funds, asset managers, sovereign wealth funds and major charities, that are joining in shareholder actions to recoup their losses and ensure that good corporate governance is on the same agenda as delivering sustainable shareholder returns. Could you be putting yourself at a disadvantage by not doing so?

About the author:
Anthony van den Bosch is a senior adviser at Institutional Protection (IP). He spent more than 15 years working at the Kuwait Investment Office, the world’s first sovereign wealth fund, where he managed litigation activity as Head of Operational Strategy. van den Bosch, who began working as an independent consultant in November 2021, has strong expertise in core areas of operational risk management and ‘operational alpha’ (securities financing, litigation and tax recovery).

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