European Shareholder Group Actions—The Role of Economic Analysis: Key Takeaways

While the legal requirements related to shareholder group actions differ across jurisdictions, economic analysis plays a central role in a number of significant issues:

• Did claimants rely on information that was affected by the alleged misrepresentations and/or omissions?
• Were the alleged misrepresentations and/or omissions material?
• To what extent was the economic loss, if any, suffered by claimants caused by the alleged misrepresentations and/or omissions?
• How should the economic loss, if any, suffered by claimants be quantified?

A carefully conducted event study is the sine qua non of the economic analysis in a shareholder group action.

Event studies often provide the foundation for the economic analysis in shareholder group actions. However, event studies are not purely mechanical exercises, and require careful judgement and analytical rigour. For example, the economist must exercise care in selecting market and industry indices and in determining the period over which the relationship between these indices and the company’s share price is estimated.

An event study is just the beginning.

An event study typically allows for the company-specific portion of share price movements to be isolated. Then, further analysis is required to determine how much, if any, of such movements are attributable to the allegations. These analyses may include evaluating such questions as:

• Is any unrelated ‘confounding’ information released concurrently? If so, are other analytical techniques (e.g. intra-day analysis of share price movements or fundamental valuation analysis) necessary?
• To what extent was the allegation-related ‘news’ that was released already in the public domain? In an efficient market, where share prices react rapidly to new, value-relevant information, there should be no reaction to the release of stale, or repeated ‘news.’

‘Back-casting’ share price movements from alleged corrective disclosures relies on several implicit assumptions:

• Equivalent disclosure: The allegedly corrective information disclosed is equivalent to what allegedly could and should have been disclosed earlier.
• Equivalent price effect: The value of the allegedly corrective information has not changed over time, given the total mix of other public information.
• No change to the nature or severity of misrepresentations: The information that defendants allegedly could and should have disclosed did not change during the claim period.

Proprietary trading models can be used to estimate the potential magnitude of the damages that might be claimed.

Aggregate damages depend on the number of shares damaged. In circumstances without data on actual trading by investors (e.g. in the pre-action stage), proprietary trading models can be used to approximate trading behaviour and to estimate the number of shares damaged. These estimates are critical in assessing the magnitude of potential claims at an early stage. In addition, they are often useful in determining aggregate exposure for potential settlement negotiations.