Tesco moves to toss U.S. securities case – but real action is in U.K.

August 19, 2015

(Reuters) – The British grocery giant Tesco moved Monday night to dismiss a securities class action in Manhattan federal district court that alleges the company’s coverup of an accounting scheme eventually resulted in a 15 percent plummet in the price of Tesco’s American Depository Receipts. Tesco’s lawyers at Wachtell Lipton Rosen & Katz argue that because Tesco ADRs do not trade on a U.S. stock exchange – they are only sold over the counter – investors cannot sue in federal court under the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank.

According to Wachtell, this issue has already been decided, in an early post-Morrison ruling that tossed a class action against Societe Generale. That decision briefly noted that because SocGen ADRs traded only in the relatively informal over-the-counter market, those transactions are “primarily foreign.” Tesco contends that the 2nd U.S. Circuit Court of Appeals confirmed in its 2014 decision in Parkcentral Global Hub v. Porsche that investors in securities not traded on U.S. exchanges cannot sue issuers under federal law.

But in the greater scheme of securities class action litigation, the most intriguing part of Tesco’s brief probably isn’t the discussion of over-the-counter ADRs. It’s a footnote in which Wachtell said that the first U.S. firm to file a complaint on behalf of Tesco ADR holders, Scott & Scott, had dropped the U.S. case “apparently so that Scott & Scott or its client could bring litigation against Tesco in England.”

Wachtell fleshed out its mention of British shareholder litigation against the company with a bunch of exhibits detailing how three prominent members of the U.S. shareholder bar – Scott & Scott, Grant & Eisenhofer and Kessler Topaz Meltzer & Check – are devoting their time and effort to litigating abroad on behalf of Tesco shareholders rather than in the U.S. for holders of ADRs. The Tesco case exemplifies how the Supreme Court’s Morrison ruling, in conjunction with the U.K.’s Financial Services and Markets Act of 2000, has changed securities litigation against global companies. A mere 2.5 percent of Tesco’s float is in U.S. ADRs. So instead of fighting in federal court to bring claims on behalf of ADR holders, savvy U.S. plaintiffs’ firms are figuring out how to represent the vastly larger pool of ordinary Tesco shareholders.

As you probably know, the U.K.’s financial reform law gave shareholders the right to sue issuers for fraud. Shareholders in the British system must affirmatively opt in to litigation, and can’t avail themselves of U.S.-style class actions. They can, however, band together to pursue claims as a group. In the Tesco case, two firms are organizing shareholder groups: New York-based Scott & Scott and London-based Stewarts Law. Stewarts, which said its group will include only investors with 10,000 or more shares of Tesco, is working with the litigation funder Bentham to assure that its clients will not have to pay legal fees if they lose the case. Scott & Scott’s news releases indicate it will offer the same no-win, no-fee deal to investors that join its group. The Scott & Scott group will be represented by a solicitor at McGuireWoods – a firm known in the U.S. for class action defense! – and barrister Philip Marshall QC.

Grant & Eisenhofer and Kessler Topaz, meanwhile, have announced they are “preparing for potential future U.K. litigation against Tesco.” In anticipation, they said, they have formed a Dutch foundation for Tesco investors. Though investors cannot sue under the Dutch system, they can apply for approval of a class action settlement of shareholder claims, as in the 2009 Royal Dutch Shell case. By forming a Dutch foundation, the two U.S. firms have given Tesco a mechanism to resolve the U.K. litigation investors are threatening.

I talked Tuesday to Scott & Scott partner Sylvia Sokol about the Tesco litigation. She said she hadn’t read Wachtell’s brief in the U.S. case so she couldn’t comment specifically on its assertion that her firm ditched the ADR class action to litigate in the U.K. instead. But she agreed that the real action against Tesco is in England, where the vast majority of Tesco securities were traded (and where the company is under government investigation for its accounting practices).

Sokol said Scott & Scott is talking to both American and international shareholders, mostly institutional investors although it hasn’t set a minimum stake for its group.

Neither her firm nor Stewarts has yet filed a group action for Tesco shareholders. Unlike the U.S. system, in which one investor or shareholder group is designated to lead the case, the U.K. system permits more than one group of shareholders at a time to bring claims.

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