The BBC has this morning reported that US litigation lawyers Scott and Scott are in “active discussions” with financial institutions in the UK about a possible legal claim against Tesco.
It is likely that the proposed claim will be similar to the ongoing US litigation which was commenced at the end of October by a group of financial institutions led by the Texas based Irving Fireman’s Relief and Retirement Fund. The members of the class action who had purchased Tesco US depository shares in Tesco have claimed that misstatement of Tesco profits had resulted in a loss of value to shareholders.
Funding large scale multi-party litigation in the US tends to be less challenging than in the UK. In US litigation the losing party is not usually exposed to the cost of the victor’s legal fees and it is often suggested that this results in a more speculative approach towards litigation. It is likely that in addition to their “active discussions” with UK financial institutions relating to possible claims, Scott and Scott have spent some time since last Autumn negotiating UK funding arrangements and damages based fee agreements with UK lawyers.
Although this is an early stage in the potential UK litigation the threat of a large class action on behalf of institutional shareholders will not be welcome news for the troubled retailer. News of the litigation had an impact upon share price which fell as trading opened this morning and if the litigation progresses it may increase volatility in share performance.
One of the more troubling aspects of the proposed litigation is that it appears to rely upon the proposition that the misstatement of profits was a conscious attempt to mislead markets. If this is the case, it may be that any resulting compensation claims will not be covered by insurance and will be met by the business, resulting in an immediate loss of value to existing shareholders.