As we have previously noted (here and here), Dutch Foundations (or Stichtings) have been considered a useful tool in seeking recovery for losses on foreign securities. After the Morrison decision closed U.S. courts to claims for purchases of shares of foreign issuers on non-U.S. exchanges, investor advocates sought to use Dutch Foundation effectuate a recovery. Under the Dutch Civil Code, Foundations may negotiate global settlements of investor claims and/or bring suit in the Netherlands to recover for alleged securities fraud. Last year, for example, a foundation negotiated a €1.2 billion settlement with Ageas, the successor-in-interest to Fortis Holdings, over claims that Fortis misled investors. Prior to that, a Dutch Foundation had also forged $58.4 million settlement with Converium covering claims that Converium misstated its financial condition, and a $340 million settlement with Royal Dutch Shell covering transactions on non-U.S. exchanges. Currently, an investor Foundation has asserted claims in the Dutch courts against Volkswagen relating to the Dieselgate scandal.

Recent developments, however, have put the continued viability of Dutch Foundation actions into question. As we wrote here, in June of 2016, a Dutch court dismissed a foundation’s claims because, in the court’s view, the foundation failed to sufficiently safeguard the interests of its members from the foundation president’s potential conflict of interest. Then, the Court of Justice of the European Union (“CJEU”) issued a decision in Universal Music International Holding BV v Schilling that limited the jurisdiction of courts in EU countries, such as the Netherlands. The Universal Music decision addressed Regulation 44/2001, under which defendants must be sued in courts of the member state where they are headquartered, or, for tort-based claims, the place where the harmful event occurred. The CJEU concluded that pure financial damage to a bank account cannot by itself give rise to jurisdiction in the member state where the bank account sits. The CJEU thus held ““It is only where the other circumstances specific to the case also contribute to attributing jurisdiction to the courts for the place where a purely financial damage occurred, that such damage could, justifiably, entitle the applicant to bring the proceedings before the courts for that place” (par. 39).

More recently, the Dutch court has applied the Universal Music case to limit the ability of a foundation to bring suit against BP p.l.c. in the Dutch courts. After settlement negotiations apparently failed, a Foundation representing the interests of BP retail shareholders filed an action against BP in Amsterdam, relating to BP’s alleged misstatement concerning its safety protocols leading up to the Deepwater Horizon oil spill and its alleged misstatement concerning the spill flow-rate. The Foundation sought recovery for investors who had invested in BP shares through a Dutch financial intermediary or account.

Relying on the Universal Music decision, BP argued that the Dutch court did not have jurisdiction to hear the Foundation’s claims. The Dutch court agreed. First, it noted that because BP was domiciled in the United Kingdom, jurisdiction would only lie in the Netherlands if it was the place where the damage occurred. Looking to the Universal Music decision, the Court reasoned that granting jurisdiction in the place where the damage occurred is an exception to the “main rule” that jurisdiction only lies in the place where defendant is domiciled. It further ruled that such an exception should be construed narrowly to apply to situations where a close connection existed between the court where the claims were brought and the place where the damage occurred. It held that the mere existence of a securities account in the Netherlands did not establish a close enough connection to establish jurisdiction in the Dutch courts.

The impact of these decisions on the ability of Dutch foundations to negotiate binding settlement is still murky. The Civil Code provision allowing a Dutch Foundation to effectuate a global settlement (Article 7:907-910) is different from the one allowing for a Foundation to file suit (Article 3:305a), and the Dutch court’s decision in BP may be limited to Article 3:305aactions.  What is clear is that, if preliminary settlement negotiations fail, the ability of a Dutch foundation to bring suit in the Netherlands against defendants not domiciled in the Netherlands may be severely limited. The consequences of these rulings can be unfortunate for investors who have no other realistic redress. For example, in BP neither the SEC Fair Fund, nor the class settlement, included purchasers of BP common stock, which trades in London. The BP Foundation seemed to be a viable method for purchasers of common stock to recover some losses. For many investors, the alternative of filing a separate action without any claims under the U.S. federal securities laws was not a realistic. So the rulings could inadvertently benefit many companies whose common stock is traded in jurisdiction that lack a legal mechanism similar to the U.S. class action process.