The key findings of a Cornerstone study reveal the effectiveness for investors of combining securities actions with parallel derivative actions in the US and also offer an opportunity to explore the international contrast in the area of derivative actions, and in particular to examine Europe’s more complex and restrictive derivative action framework.
A recent study by Cornerstone Research reveals that U.S. securities class actions with parallel derivative actions often result in more favorable outcomes for plaintiffs. (The study is available at Parallel Derivative Action Settlement Outcomes: 2023 (cornerstone.com)) The combined pressure from both actions appears to enhance the leverage of investors, resulting in better settlements or resolutions. The study underscores an important dynamic in the U.S. legal landscape, but the study also offers an opportunity to highlight differences between the U.S. and European legal systems regarding investor recourse.
In the U.S., derivative actions allow shareholders to sue on behalf of the corporation for harm caused by directors or officers, often in conjunction with securities class actions. These suits may create dual legal pressure, leading to stronger negotiating power. The Cornerstone study suggests that this approach results in higher settlement amounts and more favorable terms for plaintiffs in many cases. The difference in settlement amounts is non-trivial. As the study notes,
“Securities class actions with accompanying derivative claims are typically associated with higher settlements than those without accompanying derivative claims. A 36% premium is observed based on the median settlement amounts for cases that settled between 2019 and 2023.”
The European Context: Limited Options for Investors
In contrast, in Europe, though collective investor actions are available in various jurisdictions, securities class actions are less common. Derivative actions, where shareholders can pursue claims on behalf of the company, are even less common and, furthermore, are generally far more restricted. Where they do exist, derivative suits face significant legal and procedural hurdles, making them difficult to pursue. This limits the scope of combined pressure strategies that are more prevalent in the U.S.
For instance, in Germany, derivative actions are possible but are subject to strict conditions under the Aktiengesetz (Stock Corporation Act), making them rare in practice.[1] Similarly, France allows derivative suits under the Code de Commerce, but shareholders are poorly incentivized to bring such suits, so they are seldom filed.[2] In the UK, the Companies Act 2006 allows derivative claims, but these too face considerable barriers, including the requirement for court approval to proceed.[3]
Without the ability to easily file derivative actions, European investors lack the dual-action leverage that can drive favorable outcomes in securities litigation, as indicated in the Cornerstone report. This disparity highlights the need for continued discussion around investor rights and legal reform in Europe, where streamlined and accessible derivative claims could bolster investor protections and improve case outcomes.
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[1] See, e.g., Limitations on Derivative Actions in Germany and Japan to Prevent Abuse - PDF download
[2] See, e.g., ECGI - Preliminary Procedures in Shareholder Derivative Litigation: A Beneficial Legal Transplant - PDF Download “… France has few suits even without a formal minimum threshold, likely because of a lack of incentives and access to information.”
[3] See, e.g., Derivative Claims Under the Companies Act 2006: In Need of Reform? - PDF download
Written by:
Michael Watson
Senior Legal Counsel
