Across Europe activist investors are flexing their muscles. The call by U.K. hedge fund Children's Investment Fund Management for the breakup of ABN Amro has led to a takeover battle for the Dutch bank. New York hedge fund Atticus Capital is still turning up the heat on German stock exchange operator Deutsche Börse. And British money manager Hermes Pensions Management is advocating the breakup of U.K. insurer Prudential. Leading that effort is Hermes CEO Mark Anson, who was hired away from the California Public Employees' Retirement System, an activist U.S. pension fund, in February 2006.
Even as these and other agitators strike fear in European boardrooms, a growing number of European money managers are embracing activism in the U.S. According to a study released in May by shareholder advisory Þrm Institutional Shareholder Services, they are doing so by employing a thoroughly American approach: the class-action lawsuit.
The ISS report, "Accountability Goes Global," notes that international institutional investors Þled lead-plaintiff motions in 12 percent of new federal securities class actions in 2006. That Þgure was down from 16 percent in 2005 -- but up substantially from 7.6 percent in 2004 and 6 percent in 2003.
German asset managers are leading the charge, seeking lead-plaintiff status in 50 of 182 legal motions tracked by ISS from January 1, 1996, to March 31, 2007. They were followed by money managers from Canada (39 Þlings), Israel (18 Þlings), Austria (13 Þlings) and Italy (13 Þlings).
German Þrms that pursued the most lead-plaintiff motions include Activest Investmentgesellschaft, now part of Italy's Pioneer Investments, which manages E232 billion ($321.3 billion) in assets. It won lead-plaintiff status in ten cases. DekaBank Group, whose units manage E187 billion, served as lead plaintiff in seven cases and Metzler Asset Management, which runs E38 billion was lead plaintiff eight times.
Why have German asset managers adapted to U.S. litigation with such gusto? One reason, say observers, is that it is simply less costly than German legal action. Under U.S. law, for instance, attorneys collect fees only if the suit is successful. But in Germany, legal costs can represent a substantial up-front outlay, and losers are liable for the other party's fees.
"The Þnancial risk stops us from going to court in Germany," says Stefanie Buchmann, head of legal affairs at Frankfurt-based Metzler. "We could lose everything."
Metzler is currently a lead plaintiff in Þve class-action lawsuits in the U.S., including cases against clothing maker Levi Strauss & Co., education company Corinthian Colleges and Molson Coors Brewing Co. Buchmann says Metzler plans to become even more active in the U.S. by possibly opting out of class-action suits altogether to pursue its own claims -- a potentially higher-risk, higher-reward legal strategy.
"This is a new idea that our lawyers have just presented to us," says Buchmann.
Another Þrm identiÞed in the ISS study is Frankfurt-based Union Investment, which manages E160 billion and in 1999 became one of the Þrst European money managers to Þle for lead-plaintiff status in the U.S. In April a federal judge in Austin, Texas, appointed Union lead plaintiff in a high-proÞle complaint against U.S. computer maker Dell. The German fund manager alleges that earnings manipulations caused the stock to drop; press reports put its losses at $20.25 million, but Union won't conÞrm that Þgure.
"German law requires us to protect our clients' investments," says Joachim von Cornberg, Union's head of legal affairs. "What started as a public relations exercise has become a necessity."
For many international investors, litigating against U.S. corporations carries low political risk. And it's easier to become actively involved in a claim if a firm has no ties to the company, says Christoph Palffy, legal and tax counsel at Raiffeisen Kapitalanlage-Gesellschaft in Vienna, the asset management arm of Raiffeisen Zentralbank Österreich, an Austrian commercial and investment bank. Raiffeisen was appointed colead plaintiff in 2005 in a case against auto-parts maker Delphi Corp. in which it alleges $7 million in losses. The Þrm also claims that former Delphi executives manipulated earnings reports to inflate the company's stock price after it was spun off from General Motors Corp. in 1999.
"We're gaining experience with the Delphi case," says Palffy, who adds that it will take a couple more years to settle.
In contrast to the German and Austrian money managers that are flexing their legal muscle, institutional investors in the U.K. -- which boasts Europe's biggest pension market -- still prefer to negotiate behind closed doors. U.K. investors sought to become lead plaintiff in the U.S. in just Þve cases during the period covered in the ISS study.
Adam Savett, who wrote the report and heads up ISS's securities class-action unit, says that U.K. investors dislike suing companies they invest in and are suspicious of U.S. law Þrms. In addition, he says, there is a "tremendous reluctance in the U.K. to embrace the class-action concept and the contingency fees that go with it," given that such fees may total as much as 25 percent of any settlement. "It's a foreign concept," he adds.
U.S. law Þrms have helped fuel the interest in class-action suits, observers say. Many U.S. Þrms are cultivating clients in Germany and Austria as a springboard for tapping into investor discontent in the rest of Europe. Union Investment's Von Cornberg, for example, says that over the past six months, he has received several calls and letters from U.S. lawyers pitching their services.
Last year U.S. courts settled securities class-action lawsuits worth a record $18.3 billion, more than double the amount in 2005. Once settlements are divided among all the funds that are party to a case, there's often little left over for the individual investors whose money was lost. But as long as the costs of legal action remain low, such cases are bound, increasingly, to take on a distinctly international flair.
REPORT NAME: "Accountability Goes Global"
AUTHOR: Institutional Shareholder Services
DATE PUBLISHED: May 2007
KEY FINDING: Global investors sought to become lead plaintiffs in about 12 percent of federal securities class actions in 2006.