European Litigation Trends

Profession:Freshfields Bruckhaus Deringer
 
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Article by Gillian Eastwood, Stéphane Bénouville, Christian Duve, Enrico Castellani, Hub Harmeling & Vicente Sierra

An overview of collective actions and D & O liabilities in England, France, Germany, Italy, the Netherlands and Spain

Introduction

Litigating in Europe is a complex process. The EU comprises 27 different member states, each with its own national laws and court structures. Moreover, there are fundamental differences in the nature of the legal systems between member states: the common law system is in the minority, with the majority of member states being founded on a civil law system.

In common law jurisdictions, cases and statutes are the primary sources of law. In England, as in the US, there are many areas of law governed almost exclusively by common law, for example, contract and tort. There is a strong adherence to the doctrine of precedent; decisions of superior courts in the home jurisdiction are binding on lower courts and the decisions of foreign common law jurisdictions are often referred to as 'persuasive authority'.

By contrast, statute is the primary source of law in civil law jurisdictions. Courts decide disputes based on an interpretation of relevant statutes and there is little reference to decided cases, although some reference is still made to decisions of superior courts. Moreover, procedural law in civil law jurisdictions differs markedly from common law jurisdictions. For example, most civil law jurisdictions have no equivalent of the US discovery process, and many operate an inquisitorial, as opposed to adversarial, procedure, with the result that litigators do not necessarily have tools such as crossexamination at their disposal.

EU laws and courts add an additional overarching layer of complexity. National courts are required in certain circumstances to refer to EU courts where questions of interpretation of EU laws arise, and national courts are obliged to interpret domestic laws in a manner consistent with EU laws.

This guide does not seek to give a detailed overview of the litigation framework in Europe. Rather, it aims to provide an overview of particular litigation trends and developments in the areas of collective actions and the liabilities of directors and officers in each of England, France, Germany, Italy, the Netherlands and Spain.

England

Collective actions

The English civil litigation system does not allow US-style class actions. However, the Civil Procedure Rules, which specify the procedure that should be followed in English civil litigation proceedings, provide for two forms of collective action: group litigation orders (GLOs) and representative claims.

An application can be made to the court for multiple claims involving common or related issues of fact or law to be dealt with by way of a GLO. A GLO is a case management tool designed to manage multiple claims efficiently. It does not ensure finality of claims; potential claimants should opt in to the GLO proceedings, but a failure to do so does not prevent them bringing a claim at a later stage. However, subsequent claims brought might be delayed pending the outcome of the GLO.

Where more than one person has the same interest in a claim, it may be brought as a representative action. It is also open to the court to order that a claim be continued as a representative action. Only the parties represented in the proceedings will be bound by the court's decision, although decisions can be enforced against parties who were not represented with the court's permission.

Representative claims have been used infrequently to date. However, in July 2006 the Department of Trade and Industry published proposals, entitled Representative Actions in Consumer Protection Cases, to allow designated bodies to bring actions on behalf of named consumers. These proposals are still at a very early stage.

Directors' duties and liabilities

The rules governing the duties that directors owe their companies have been codified in the Companies Act 2006 (the Act). Parts of the Act dealing with these issues are expected to come into force in October 2007. The Act also introduces a new statutory right for shareholders to sue directors in the company's name (known as the 'derivative action'), in certain circumstances. Concerns have been expressed about the potential impact of these changes on directors' liabilities.

Directors' duties

At present, the rules governing directors' duties come from several sources. The general duties they owe to their company are governed by common law and have been developed over many years in case law and supplemented by statute. The Act sets out a new statutory statement of directors' duties, described as their 'general duties', in place of the common law and replaces, and to some extent rewrites, part X of the Companies Act 1985.

Although the government has described the statement of general duties as a codification, it is not exactly the same as the existing law. Some of the language used to describe the general duties in the Act is different from the language used previously and may lead to differences in approach when the new rules are interpreted by the courts.

There are seven general directors' duties in the new statutory statement.

To act in accordance with the company's constitution and to use powers only for the purposes for which they were conferred. This replaces existing, similar duties.

To promote the success of the company for the benefit of its members as a whole. This replaces the common law duty to act in good faith in the company's interests.

To exercise 'independent judgement'. There is no equivalent duty at common law, however, directors are currently under an obligation not to fetter their discretion to act or to take decisions - this aspect of the general duty replaces this obligation.

To exercise reasonable care, skill and diligence. This replaces the existing duty of care and skill.

To avoid conflicts of interest, except where they arise out of a proposed transaction or arrangement with the company. At present, if a director allows his personal interests, or his duties to another person, to conflict with his duty to the company, unless shareholders consent to the conflict:

the company can avoid any relevant contract; and

he must account to the company for any 'secret profit' he has made out of the arrangement. The new duty replaces this old rule.

Not to accept benefits from third parties. There is no express duty to this effect at common law. It appears to derive from the current duties to act in the company's interests and the rule dealing with conflicts of interest.

To declare to the company's other directors any interest a director has in a proposed transaction or arrangement with the company. At present, a conflict of interest arising out of a transaction or arrangement with the company is dealt with by the general rule on conflicts of interest, described above. In future, such a conflict will be covered by this new duty of disclosure.

Promoting success

One of the most significant differences between the current regime and the new provisions is the requirement that a director must 'act in the way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole'.

In deciding how to promote the success of the company, the directors are required to have regard 'amongst other matters' to the:

likely long-term consequences of their decisions;

interests of the company's employees;

need to foster the company's business relationships with suppliers, customers and others;

impact of the company's operations on the community and the environment;

desirability of maintaining a reputation for high standards of business conduct; and

need to act fairly as between the members of the company.

The introduction of this list of factors has caused some concern. However, although all of the listed factors must be considered by directors for each decision that they take, in many cases it will be enough for them briefly to conclude that a particular factor is not relevant, and move on. Helpfully, the government has made clear that this new provision is not intended to impose additional bureaucratic burdens on companies, and is intended to reflect what is already widely regarded as good practice. The Act also provides that current common law rules should be considered in interpreting the new provisions. It may be that, although this new duty is framed in very different terms from the current law, the courts will nonetheless apply it in a similar way.

Independent judgement

Fears have also been expressed that the new requirement for directors to exercise 'independent judgement' may prevent individual directors, particularly, non-executives, from relying on the judgement of others in areas in which they are not expert. The government confirmed that directors will continue to be able to do this, and to delegate matters to committees, provided they exercise their own judgement in deciding whether to follow particular advice or to accept someone else's judgement on a matter.

Derivative action

At present, shareholders only have very limited rights to bring actions against directors. The Act introduces a new statutory right for shareholders to sue directors, in the company's name, and to recover on the company's behalf loss suffered as a result of a director's negligence, default, breach of duty or breach of trust. Shareholders will also be able to claim, in the company's name, against third parties implicated in any breach in very narrow circumstances, where the damage suffered by the company arose from an act involving a breach of duty on the part of the director (for example, for knowing receipt of money or property transferred in breach of trust or for knowing assistance in a breach of trust).

This new statutory right, known as a 'derivative action', will undoubtedly make it easier for shareholders to sue directors. Considerable concern has been expressed that this, together with...

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