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The long arm of US litigation is reaching over the Atlantic

A COURT case launched in New York this month by shareholders from England, France and the Netherlands against French media company Vivendi, alleging fraud, has struck fear into European executives worried that they too might find themselves on the receiving end of US litigation.<br /><br />It is rare for the American courts to allow foreign shareholders who bought shares on a foreign exchange to spearhead lawsuits against foreign companies in the US, and even rarer for large shareholder action claims to reach trial. <br /><br />But because Vivendi&rsquo;s former chief executive Jean-Marie Messier and former chief financial officer Guillaume Hannezo were based in the US at the time when investors accuse them of hiding Vivendi&rsquo;s true financial condition, the case was allowed to proceed. Vivendi has vigorously denied the allegations, refusing to settle and failing to get the case dismissed.<br /><br />Stuart Grant, a partner with the US-based securities litigation law firm Grant &amp; Eisenhofer, says: &ldquo;The court said that so much of Vivendi&rsquo;s operations were in the US that the US really did have an interest in making sure they complied with US securities law.&rdquo;<br /><br />But other European companies need not necessarily fear similar actions. While a UK-headquartered organisation&nbsp; with a huge US business might find that investors who bought shares in London could bring claims in America, few others would. Grant says: &ldquo;If you were going to sue Virgin Airlines, the fact that they land planes here in the US and they have a ticket office and a baggage claim, that&rsquo;s maybe not a significant enough interest in the eyes of the US courts.&rdquo;<br /><br />Another case is currently proceeding against British bank Royal Bank of Scotland in the US, where the group of shareholders suing is led by US pension funds from Massachusetts and Mississippi. Two British pension funds, North Yorkshire County Council and the Merseyside Pension Fund, are also included in the suit, as are many individual UK shareholders who have set up the RBS Action Group. The case launched earlier this year alleged that RBS falsely reassured investors that the bank was well-capitalised when in fact it was effectively insolvent.<br /><br /><strong>ENDLESS LEGAL WRANGLES</strong><br />The Vivendi case began in 2002 and after endless legal wrangles has just reached court, so there will be numerous tussles ahead for the RBS litigants as the court decides whether the bank has sufficient US operations to justify UK shareholders suing there.<br /><br />But the case highlights the opportunities for European shareholders to bring claims stateside. Christian Word, a litigation partner at US law firm Latham &amp; Watkins in Washington DC, says: &ldquo;We are seeing some indications that there are more foreign plaintiffs who are trying to bring these claims against foreign issuers in the US. <br /><br />&ldquo;Where they are able to allege significant activity in the US, they are more likely to be able to achieve their objectives. But there is always going to be room for argument as to whether something that happened in the US is going to be sufficient to justify the US courts assuming jurisdiction.&rdquo;<br /><br />The US offers an attractive arena for European litigants because of its class actions system, which allows large groups of claimants to band together to bring a single case, and also because there is no &ldquo;loser pays&rdquo; principle as there is in England, thus limiting the costs to litigation claimants if a case fails. Finally, the US system allows lawyers to bring claims on a contingency fees basis, meaning legal fees are only payable in the event of a successful outcome and are then taken out of any settlement.<br /><br />But Grant says many of these principles are now coming to Europe. &ldquo;We are seeing a lot of places liberalising,&rdquo; he says. &ldquo;Class actions are emerging in Europe, and the costs issues are being met through litigation funders, so we are going to see a lot more Europeans bringing European cases against European companies in Europe.&rdquo;<br /><br /><strong>F-CUBED</strong><br />America has always been an attractive place for foreigners to bring cases against US companies, or against any company where they bought shares on a US exchange, but cases like Vivendi may in future be dealt with elsewhere. Lawyers dub Vivendi an &ldquo;F-cubed&rdquo; case, because it involves foreign claimants who bought shares on a foreign exchange, and a foreign defendant.<br /><br />Scott Reynolds, a US partner at Lovells, the international law firm, says: &ldquo;The circumstances in which the US courts will entertain these F-cubed cases are those where there has been US conduct that forms some part of the claim, but there&rsquo;s a difference even between US courts about just how much of the alleged fraud needs to have occurred in the US in order for there to be jurisdiction.&rdquo;<br /><br />All European corporations that are listed in the US and have operations there must be mindful of the litigation risk, says John Reynolds, a partner with the law firm White &amp; Case in London. He argues that it is the nature of the beast: &ldquo;Litigation risk is something that goes with doing business in the US, whether that&rsquo;s trading, buying, selling, or selling securities. Very few companies can afford not to be in the US market, so that risk goes with the territory.&rdquo;<br /><br />The Vivendi trial may inspire fear among European executives, but the company could yet appeal the jurisdiction decision should it lose its case in court. And whether the RBS claim will be the first of many US lawsuits against British banks is yet to be seen. What is unquestionable is the increasing willingness of disgruntled shareholders to pursue these cases wherever they can.