Small shareholder groups often use websites to provide a forum for letting off steam, writes FRANK DILLON, but what legal options do they have when their investments turn sour?

A GROUP of disgruntled shareholders in publicly quoted services company Newcourt Group has established a website to share information and to discuss legal options. One of the prime movers in this group, which claims it has more than 120 members, is UK pensioner Leslie Dean.

Dean says that earlier this year he invested about £17,000 of his self-administered pension fund in Newcourt, which has interests in security, facilities management and recruitment. He says he has a fund of about £100,000 and dabbles in shares, generally in smaller cap stocks in the London market.

Last month David Carson of Deloitte was appointed receiver of Newcourt by Bank of Ireland and the company’s shares were suspended in Dublin and London. The group had been attempting to restructure debts of €36 million, while three of its subsidiaries were sold by the receiver last week.

According to Dean, the group has written to the board of Newcourt and others expressing concern about what is sees as a lack of transparency about the company’s affairs, but is unhappy with the responses it has received to date.

“We have received little or no information in regard to a wide range of queries we have about the company. The group met a solicitor in the last few days for an initial discussion about our options and we are consulting our wider membership now about our next move,” Dean says.

The Newcourt receiver declined to comment on the matter when contacted by The Irish Times.

The Newcourt Shareholder Action Group is an example of a growing phenomenon of interest groups being set up, usually by smaller stakeholders, to try to strengthen their position.

These groups often use websites to provide a forum for letting off steam but, in extreme circumstances, what legal options do such small shareholders have when their investments turn sour?

As with any litigation, legal firms must assess actions on the basis of potential success and should be advising clients against taking vexatious claims or claims seeking to bring moral pressure on directors or companies.

Unlike the situation in the US, in Ireland it is not possible to take a class action, where a large number of individual claims are brought into one representational suit.

However, is it possible for plaintiffs to instruct a single firm to represent their interests, an approach that generally lowers the legal costs involved.

Where a legitimate cause of action exists and a loss has been suffered, there are a number of causes of action open to shareholders, according to Abigail St John Kennedy, partner at law firm Evershed Sweeney O’Donnell.

Under market abuse regulations adopted in 2005, these include an action for compensation for loss caused by market manipulation of the price of a financial instrument and there is also the possibility of a common law action for damages or an account of profits in respect of breach of fiduciary duty, she explains.

“If a company is in liquidation, there are a number of remedies for shareholders including bringing an action under the Companies Act 1963 against any officer of a company who was knowingly a party to the carrying on of a business in a reckless manner, or with an intent to defraud creditors or any other person, or for any fraudulent purpose,” St John Kennedy says.

“If proved, the officer can be personally liable for the debts of the company.”

The Office of the Director of Corporate Enforcement, together with the Garda Fraud Squad, is investigating a number of high-profile cases in respect of possible criminal offences committed by directors under Irish company law, including fraudulent misstatement of company accounts, she notes.

Prof Niamh Brennan of UCD Smurfit School says there has been a relatively low level of shareholder activism in Ireland over the years.

Where shareholders have had concerns over a firm, they have tended to ditch their investments quietly rather than voice concerns that could potentially damage the share price in the case of a plc, she observes.

A broader problem she sees is that small shareholders have relatively fewer rights compared with larger ones.

“Larger shareholders have a disproportionate degree of power compared to smaller ones. They have opportunities to use instruments such as ‘tunnelling’ to extract more value from enterprises.”

Examples of such “tunnelling” practices, Brennan continues, include employing family members at inflated salaries, engaging in contracts such as rental agreements where there is a conflict of interest and promoting vanity projects.

A further problem for small shareholders is the general inadequacy of the audit system to provide a truly forensic analysis of a company’s financial status.

“Auditing is an extraordinarily broad-brush high-end process,” she adds. “The degree of materiality is surprisingly high for those who have not been involved in it.”

The lack of formal shareholder organisation in Ireland is something else that is surprising, according to Roger Lawson of the UK Shareholders Association. He says Ireland is out of step with the European norm in not having a shareholders rights association such as his.

His shareholders association is a not-for- profit body, funded by subscriptions, which has provided support to a number of shareholder action groups, including shareholders of Northern Rock, Bradford Bingley and Lloyds Bank.

According to Lawson, the most important thing for shareholder action groups is to mobilise quickly where problems arise in companies. “You want to have something in place where a vote is about to take place – at a extraordinary general meeting, for example,” he says. “You can influence outcomes by removing a director or making it clear that you would vote down a resolution that you are unhappy with, as happened in the case in Northern Rock.”

The Northern Rock shareholder action group is one of the larger such groups, numbering 40,000 registered members out of 100,000 on the share register, according to Lawson. These members are asked to pay an average subscription of about £20 although larger shareholders are invited to contribute more.

“Raising money is necessary but not always easy,” Lawson says. “Shareholders, especially larger ones, feel that they have lost out already and can be reluctant to commit financially but if you can get an institutional shareholder on board, that’s a great help.”

Fighting legal battles – often against large corporates with much greater resources – is an onerous task but sometimes the issues are settled without recourse to the law.

“Directors like to decide things themselves behind closed doors and don’t like being held up to scrutiny,” Lawson adds. “The oxygen of publicity can be very effective and can sometimes bring them to the senses.”