On 15 December 2017, new amended regulations came into force in KSA, and a class action regime is now in force in respect of securities disputes. In this article, we look at the key features of this new class action regime and what practical effect this will have on KSA listed companies, management individuals and other stakeholders. The provisions refer to "existing and new suits" which could be suspended and then added to a class action. It appears therefore that the regulations will apply retrospectively to ongoing cases.
The background to the introduction of this new regime
In our last update, we set out the changes that were rapidly taking place in KSA with the government encouraging foreign investment in the KSA economy and into listed KSA companies; see link here.
In order to boost investor confidence, the country has introduced a wave of changes by regulators and government authorities; from an anti-corruption drive to a recent spate of enforcements leading to the suspension of licences by the Saudi Arabian Monetary Agency. The Capital Markets Agency (CMA) has been a particularly active regulator, investigating trading and accounting irregularities in listed companies and pursuing misrepresentation issues during IPO listing.
The introduction of a class action regime paves the way for increased multi-party securities litigation, such as multiple shareholder or investor claims. This change also makes it administratively easier for courts to deal with multi-party litigation.
A summary of the new regime
The new regime came into force when the existing regulations (The Resolution of Securities Proceedings Regulations) were amended and a new chapter (Part 11) with 25 articles in it was added (the "Amended Regulations"), introducing a new class action regime.
The scope of these new rules relate to securities disputes progressed as civil claims only. It is worth noting that the court also has jurisdiction to pursue criminal actions such as insider trading and fraud, but the criminal process is not impacted by this new regime.
For an applicant to become part of a "class", he must demonstrate that his suit is identical to other suits "in terms of legal bases, merits and the subject matter of the requests". Notably, similarity is not sufficient and the suits must be identical. There is no clarity as yet on what test the applicant must satisfy to demonstrate that his case is the same on merits as other cases as this indicates that an assessment of merits must take place before the case can be added to the class. This can be contrasted with other class action regime across the world, such as the US where the test is in fact that there are common questions of law or fact amongst the class rather than whether the merits are identified.
Under Article 50 of the Amended Regulations, the Committee for the Resolution of Securities Disputes (CRSD Committee), which is a quasi-judicial authority that determines securities disputes, shall have the discretion to decide whether a class action suit should be registered. Factors that will inform the CRSD's decision include whether individual suits might result in conflicting decisions or may result in the unfair treatment of members within the group. Issues of practicality and efficiency will also be a factor, pursuant to Article 50.
Once a class action suit is registered, documents relating to it will be made available to the public. There will then be an opportunity for at least 90 days for other members to apply to join the class.
The decision to approve a class action suit must be made within 90 days of the announcement of the first request. There should be at least ten requests that have been filed (in that period) for the class action suit to be approved.
Under Article 53, any existing suits or new suits identical to the matters within the class action can be suspended by the CRSD, so that these suits are joined to the class action suit. However, if a party has been added to a class action suit as a Plaintiff, he/she can withdraw from it with needing the Defendant's approval, without prejudice to his/ her right to continue litigating the suit individually. Article 53 refers to suspending "existing and new suits". This indicates that if there are suits ongoing prior to this class action regime coming into force, which could now be part of a class action; it may be possible for the committee to suspend existing claims and add them to a class action, under the new regime.
Each class action shall have a lead plaintiff who shall be appointed by the members of the group and shall represent the interests of all the members.
As one of the key reasons behind this change is to improve efficiency and court administration of handling multiple claims, Article 62 provides that the committees will have full powers in managing the suits and in issuing any orders or decisions to ensure fairness and quick decisions.
There is a provision within Article 64 of the Amended Regulations for the lead Plaintiff and the Defendant in the class suit to enter into a settlement agreement to end the class action. There are rules in force around settling the class action, such as ensuring that at least 30% of the group approves the settlement and that the committee approves the settlement. Those members who do not wish to accept the settlement can withdraw from it and continue to litigate individually.
The impact of these changes
The key reasons for this new regime appear to be: (i) a recognition that to encourage foreign investment into KSA, there must be confidence in the expediency of the court/ committee process connected with securities disputes and the requirement for consistent decisions and (ii) the need to facilitate administrative ease for the CRSD so that multiple claims can be dealt with together.
This change may also signify an expectation that with more foreign investment in listed Saudi companies and increased securities activity, there is a higher chance of complex claims arising, especially multiple investor or shareholder claims.
Some issues remain to be clarified, such as whether the process of registering class actions will be fair, if a merits test is conducted at the outset. There are also further issues to be resolved over time with regards to the CRSD processes.
Management individuals and insurers of stakeholders (such as auditors and management individuals) should however take note of this change which may signify the expectation of increased regulatory activity and consequent litigation in KSA in the coming years.
However, notwithstanding the above, we consider this new regime to be a welcome change, which will ease the process of multiple party litigation; and seek to make the handling of a claim more efficient and consistent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.