http://fordhamlawreview.org/wp-content/uploads/assets/pdfs/Vol_79/Ethics-Lahav_April.

pdf

Class actions present a series of dualities. There are two dominant views of the class action’s structure
and two dominant views of the class action lawyer. Some see the class action as an aggregation of
individuals, a complex joinder device and nothing more. Others view the class action as transforming
the class members into an entity. Similarly, there are two dominant views of the class action lawyer.
Many see the class action lawyer as an entrepreneur, seeking out litigation and personally benefitting
from gains accruing to class members.1 Others view the class action lawyer as a public servant or a
“private attorney general,” privately vindicating rights through lawsuits that public officials do not
have the resources to pursue.

The procedural law does not definitively adopt one of these views. In fact, looking to the law to
answer the question of what the class is, what the class members’ relationship is with counsel, and
what the lawyer’s role is vis á vis the class yields no definitive answers to these questions. This is
because the law of class actions reflects a deep ambivalence about this procedural device that can be
used to benefit class members and enforce the substantive laws, but can also be abused by lawyers
seeking to extract rent from the class.

I. TWO VIEWS OF THE CLASS ACTION: AGGREGATION OF INDIVIDUALS OR ENTITY

The two dominant schools of thought on the structure of the class action consider it to be either an
advanced joinder device, merely aggregating individual cases, or a transformative procedural rule that
creates an entity out of a dispersed population of claimants.

These two views are illustrated in Shady Grove Orthopedic Associates v. Allstate Insurance Co.,4 a
recent U.S. Supreme Court decision addressing the question of how to apply the Erie doctrine to class
actions brought under state law in federal court. 5 Shady Grove Orthopedic Associates provided
medical care to a patient who assigned to them her rights to insurance benefits under a health
insurance policy issued by Allstate Insurance. 6 Allstate delayed payment and refused to pay the
statutory interest that had accrued as a result of the late payment. 7 Shady Grove alleged that it was
owed approximately $500 in interest under New York law. 8 Shady Grove’s lawyers filed a class
action lawsuit on behalf of all the providers who had claims for statutory interest based on overdue
payments from Allstate.9 Now, instead of being confronted with a single suit for $500, Allstate faced
a collective litigation with an interest penalty in excess of $5 million. 10

The class counsel filed the lawsuit in the U.S. District Court for the Eastern District of New York. 11
The lawyers were able to file the suit there because the Class Action Fairness Act of 2005 (CAFA)
grants broad jurisdiction to the federal courts over all class actions where any class member is from a
different state than any defendant and the matter in controversy exceeds $5 million. 12 New York’s
Civil Practice Law and Rules, however, prohibits class actions for statutory penalties. 13 Allstate
argued that this required the federal court to dismiss plaintiffs’ class action since Shady Grove sought
to obtain a statutory penalty through the class action mechanism. 14 The question before the Court was
whether the class action rule is procedural for Erie purposes, such that Shady Grove could maintain its
lawsuit under Rule 23 of the Federal Rules of Civil Procedure, or substantive, so that the New York
rule would govern and require dismissal of the suit.15 The Supreme Court, in a plurality opinion,
allowed the class action certification motion to proceed under Rule 23 rather than the New York
rule.16

From the defendant’s perspective, a five hundred dollar suit—which was all Shady Grove was
permitted to maintain under the New York rule—is far different from the five million dollar suit
Shady Grove sought to maintain under the federal rule. 17 Because the absent class members had little
individual interest in filing a lawsuit, whether Allstate would face any significant liability would be
determined by the certification of the class action. 18 In the absence of the class action, Allstate was
unlikely to face more than a handful of small claims actions. 19 Accordingly, there was a lot at stake
for Allstate in the case.

A plurality of justices asserted that the class action was nothing more than a sophisticated joinder
device.20 Class actions, the opinion explained, allow plaintiffs the opportunity to bring together
lawsuits that were not economical to maintain on their own. 21 The class action mechanism did not
alter the substantive law, but instead merely aggregated cases to which the substantive law would
apply in the same way that it would in any individual case. Justice Scalia, writing for the plurality,
explained:

A class action, no less than traditional joinder (of which it is a species), merely enables a federal court to
adjudicate claims of multiple parties at once, instead of in separate suits. And like traditional joinder, it leaves
the parties’ legal rights and duties intact and the rules of decision unchanged. 22

To the extent that permitting a class action would result in greater liability for Allstate, because
individuals were unlikely to bring actions on their own, the Court explained, this was merely an
“‘incidental effect[t]’” of the procedural rule. 23 In other words, the plurality adopted wholeheartedly
the “aggregation of individuals” view of the class action.

By contrast, the dissent saw this class action as an entity, a creation that transformed the substantive
law. In the opening lines of the dissenting opinion, Justice Ginsburg wrote, “The Court today
approves Shady Grove’s attempt to transform a $500 case into a $5,000,000 award, although the State
creating the right to recover has proscribed this alchemy.” 24 The dissent saw a strong interest on the
part of the State of New York to limit class actions precisely because class actions can effect this
transformation. This required the dissent to consider the class action from the perspective of the
defendant and class counsel rather than from the viewpoint of the individual absent class members,
whose recovery remained at $500 regardless of the size of the class. This perspective is consistent
with (perhaps even required by) the entity view and it changes the outcome. Instead of a procedure
that does nothing to the substantive law, the dissent saw class actions as altering it impermissibly. The
implication of the dissent’s position is that in this case the class action rule violated the Rules
Enabling Act, which prohibits the alteration or enlargement of a substantive right. 25

Class action doctrine offers little help in choosing between the aggregation and entity views. If the
class is an aggregation of individuals, it follows that each individual has a right to participate in the
class suit just as they would in an individual litigation; class members should be permitted to choose
(or terminate) class counsel, and settlements ought not to be approved over their objection. Yet none
of these approaches are the default rule in class actions. The law does not allow class members to
choose their attorney, to fire her, or to determine her compensation. 26 Furthermore, settlements may
be adopted over the objection of class members. Absent class members cannot intervene in side
settlements reached by class counsel, defendant, and objecting class members, nor can they obtain
discovery of those settlements.27 Absent class members are not parties for purposes of conducting
discovery or making motions for summary judgment, but must formally intervene in order to have a
say, just as a stranger to the litigation would have to do. 28

They are not parties to the litigation for diversity jurisdiction purposes. 29 Defendants are not required
to file compulsory counterclaims against them.30 Defendants may contact class members for
individual settlement prior to class certification, contact that would be prohibited in individual
representation.31 Finally, a settlement or adjudication binds the entire class, precludes class members
from future litigation, and is only assailable based on the adequacy of the class representative. 32 All of
these rules favor the entity view of class actions.
https://thelawreviews.co.uk/title/the-class-actions-law-review/usa

Notable decisions in 2021 concerning class actions included the following cases.

In TransUnion v. Ramirez, the US Supreme Court considered whether either Article III of the
Constitution or Rule 23 permits a damages class action when the majority of the class did not
suffer a comparable injury to the injury suffered by the class representative.6 The Court held
that Article III only permits a damages class action for plaintiffs who have suffered a
concrete harm, not just a violation of a statutory right.7

In this case, a class of 8,185 individuals sued TransUnion in federal court under the Fair
Credit Reporting Act, claiming that TransUnion failed to use reasonable procedures maintain
accurate credit reporting files that it maintained.8 For 1,853 class members, TransUnion
provided misleading credit reports to third-party businesses; in two other claims, all 8,185
class members alleged formatting defects in certain mailings sent to them by TransUnion.9
The Supreme Court held that the 1,853 class members to whom TransUnion provided
misleading credit reports to third-party businesses 'demonstrated concrete reputational harm
and thus have Article III standing to sue on the reasonable-procedures claim'.10 However, the
Court further held that because TransUnion did not provide the internal credit files of the
other 6,332 class members to third-party businesses, those 'class members have not
demonstrated concrete harm and thus lack Article III standing to sue on the reasonable-
procedures claim.'11 Lastly, the Court held that only the named plaintiff, Ramirez, had
standing to bring claims regarding the alleged formatting defects.12

The Court explained that a plaintiff's injury in fact must be concrete, and that certain harms,
such as tangible harms like physical or monetary harms, 'readily qualify as concrete injuries
under Article III'.13 The Court further explained that a plaintiff does not automatically satisfy
the injury-in-fact requirement when a statute grants a person a statutory right in fact:
'Congress's creation of a statutory prohibition or obligation and a cause of action does not
relieve courts of their responsibility14 to independently decide whether a plaintiff has
suffered a concrete harm under Article III any more than, for example, Congress's enactment
of a law regulating speech relieves courts of their responsibility to independently decide
whether the law violates the First Amendment'.15 Because TransUnion did not send
misleading credit information to third-party businesses for the remaining 6,332 class
members (even though their internal files contained misleading or incorrect information),
these class members did not suffer a concrete harm. This is because '[t]he mere presence of
an inaccuracy in an internal credit file, if it is not disclosed to a third party, causes no
concrete harm'.16
In Jin v. Shanghai Original, Inc et al., the Second Circuit affirmed that trial courts do not
require a 'significant intervening event' to decertify a class where the class no longer meets
the requirements of Rule 23.17

In this case, plaintiff Jianmin Jin brought a class action on behalf of himself and similarly
situated employees of Joe's Shanghai Restaurants alleging wage and hour violations of New
York Labour Law and the Fair Labour Standards Act.18 The district court certified the class,
and the case moved towards trial. Five days before trial was scheduled to start, the district
court sua sponte decertified the class based on its finding that class counsel was no longer
providing adequate representation as required by Rule 23.19 In its decision, the court
identified 'numerous red flags' regarding class counsel, including the fact that class counsel
planned to call only two class members to testify as witnesses at trial.20 According to the
district court, this lack of testifying witnesses constituted a significant intervening event
warranting decertification.21 On appeal, Jin argued that the district court abused its discretion
in decertifying the class because the significant intervening event did not warrant
decertification.22

The Second Circuit affirmed the lower court. In its opinion, the Second Circuit explained that
district courts have the authority to sua sponte decertify a class if they find that the class no
longer meets the requirements of Rule 23 at any time before final judgment is entered.23 The
Second Circuit declined to resolve whether class counsel's witness list sufficed as a
significant intervening event, noting that Rule 23 does not contain any such requirement.24
As such, a significant intervening event is not required for a district court to sua sponte
decertify a class if decertification is otherwise warranted by Rule 23.

IV cross-border issues

In recent years, an important cross-border issue concerning US class actions – particularly in

the context of securities class actions – has involved the question of which claims may
properly proceed as part of a class action in US courts. In Morrison v. National Australia
Bank Ltd, the Supreme Court was asked to 'decide whether [Section] 10(b) of the Securities
Exchange Act of 1934 provides a cause of action to foreign plaintiffs suing foreign and
American defendants for misconduct in connection with securities traded on foreign
exchanges'.75 In addressing that issue, the Court applied the long-standing principle of US
law 'that legislation of Congress, unless a contrary intent appears, is meant to apply only
within the territorial jurisdiction of the United States'.76 The Court observed that 'there is no
affirmative indication in the Exchange Act that [Section] 10(b) applies extraterritorially' and
'therefore conclude[d] that it does not'.77 The Court further held that it was not sufficient that
'some domestic activity is involved in the case'.78 Rather, 'it is . . . only transactions in
securities listed on domestic exchanges, and domestic transactions in other securities, to
which [Section] 10(b) applies'.79 As a result of Morrison, class plaintiffs seeking to bring a
valid Section 10(b) claim must allege more than a domestic impact or effect; they must allege
'a manipulative or deceptive device or contrivance . . . in connection with the purchase or sale
of a security listed on an American stock exchange' or 'the purchase or sale of any other
security in the United States'.80

Morrison is widely viewed as having restored a presumption against the extraterritorial

application of US statutes, unless they explicitly so specify. That principle can impact the
availability of the US class action mechanism, in US courts, to foreign litigants.

MOST RELEVANT JOURNAL ARTICLE

https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?
article=1853&context=njilb

In 2013, India enacted one of the most robust private enforcement regimes for securities fraud
violations in the world. Unlike in most other countries, Indian shareholders can now initiate securities
fraud lawsuits on their own, represent all other defrauded shareholders unless those shareholders
affirmatively opt out, and collect money damages for the entire class.

Yet, commentators are very pessimistic that the Indian securities fraud class action will do much
good. The primary reason is that the Indian court system is notoriously unhurried. We have seen some
data that suggests it takes over six years on average to resolve some civil appeals. And that’s just the
appeal. Who will bother to file a securities fraud lawsuit if it takes a decade to conclude?

The solution to this problem in the 2013 law was to channel the securities fraud class action to a
special tribunal. Yet, this solution has been tried before in India, and we understand special tribunals
tend to quickly take on the negative characteristics of the general courts. This may be why very few
securities fraud lawsuits have been filed since the 2013 law was enacted. As far as we know, there
have been very few such lawsuits despite the fact that there are thousands of publicly-traded
companies in India.

We propose a different solution to the problem of the Indian court system: class arbitration. Professor
Vik Khanna suggested arbitration as a solution in an early article after the enactment of the 2013 law,
and we pick up that suggestion and run with it here. As we explain, although class arbitration is not
perfect, it may better facilitate robust private enforcement than the Indian court system.

II. THE INDIAN SECURITIES FRAUD CLASS ACTION

A. Background

The new Indian securities fraud class action was born of scandal. In 2009, the founder of Satyam
Computer Services, a publicly-traded Indian information-technology company, confessed to falsifying
the financial statements of the company. There were fake customer identities, fake invoices to inflate
revenue, forged board resolutions, and loans obtained through illegal means. 1 All told, the fictitious
assets and non-existent cash totaled some $1.56 billion. 2 Somehow, all of this evaded the detection of
Satyam’s auditor, PricewaterhouseCoopers.3

This billion-dollar, multi-year fraud started to fall apart when Satyam attempted to acquire two
companies without seeking shareholder approval. 4 The target companies were owned in large part by
Satyam’s founder and his family.5 When shareholders got wind of it, they objected vociferously, and
the acquisition was suspended.6 But the episode attracted the attention of regulators. 7 Eventually, the
founder, members of Satyam’s board, and other management personnel went to jail and paid fines, 8
and the company’s share price fell from INR 544 to INR 11.50. 9

What about the shareholders? At the time, Indian law did not permit shareholders to recover any of
their losses. Thus, Indian shareholders did not recoup anything from the Satyam fraud. But some
shareholders did recoup something: American shareholders. Satyam had American Depository
Receipts listed on the New York Stock Exchange. Thus, multiple securities fraud class action lawsuits
were filed by Satyam’s American investors in the Southern District of New York.10 In 2011, Satyam
and PricewaterhouseCoopers agreed to settle these lawsuits for over $150 million. 11

When there is wrongdoing like this that stretches across continents, the difference between the
American system of private enforcement and the systems of public enforcement in most other places
becomes apparent for all to see. When it does, people in other countries often do not like what they
find. That is what happened with the recent scandal where Volkswagen rigged its diesel cars to turn
off their pollution controls when they were not being tested for emissions. The 500,000 drivers in
America collected billions of dollars in compensation; the ten million drivers in the rest of the world
have basically received nothing.12 The difference was the American class action. Other countries are
now beefing up their own consumer class action devices in response. 13

The same thing happened in India. No one could understand why the Indian shareholders of an Indian
company got nothing when they were defrauded, but their American counterparts received millions of
dollars. Thus, the Companies Act of 2013 was born to bring American-style private securities fraud
enforcement to India. As we explain below, we think the Indian authorities made an admirable
attempt in this endeavor.

B. The Companies Act of 2013

Section 245 of the Act and its enabling rules permit either 100 or 5% of shareholders—whichever is
lesser—to file an application seeking to represent all other shareholders before a special tribunal
called the National Company Litigation Tribunal (“NCLT”) for fraud and other misconduct
committed by a company or its officers.14 Such an application can be filed against any type of
company, whether in the public or private sector, except or banking companies. 15 The Act also permits
an investor association to file suit on behalf of shareholders. 16

When considering whether to accept an application, the NCLT considers many of the same criteria
American courts consider when they decide whether to certify class actions 17 as well as several
additional matters.18 If the application is accepted, the NCLT is required to consolidate all similar
applications from any other jurisdiction and publish notice to the class. 19 Notice is published in
newspapers in both English and the language of the state where the registered office of the company is
located; additionally, notice is published on the company’s website, the websites of the NCLT, the
Ministry of Corporate Affairs20, the Registrar of Companies21 and the websites of any stock exchanges
the company is listed on.22 Class members have the right to opt out;23 if they do not, they have the
right to choose which lead applicant the lawsuit should proceed with; if no applicant garners a
majority, the NCLT decides.24
The Act provides shareholders with what appears to be broad relief. Not only can shareholders win
injunctive and declaratory relief25—backed up with fines and possible imprisonment if companies and
their officers fail to comply26—but they can also win American-style compensatory damages from the
company, its directors, its auditors, and others.27 Professor Khanna has worried that the damages
provision in the Act does not go far enough. He argues that most of the corporate disputes in India are
not shareholder- management disputes like in the United States, but disputes between majority
shareholders and minority shareholders, specifically majority shareholders try to exploit minority
shareholders.28 He argues that the 2013 Act offers no monetary remedy in these situations because it is
unclear whether majority shareholders owe fiduciary duties to minority shareholders, and, even if they
do, whether majority shareholders fall under the damages provision in the 2013 Act. 29 This provision
covers only the company, directors, auditors, and any “expert or advisor or consultant or any other
person” for “any fraudulent, unlawful or wrongful act or conduct . . . .” 30 He worries that majority
shareholders will not be covered under “other persons” because the “tenor” of the Act is to remedy
shareholder-management disputes.31

This surprises us. Indian public companies commonly have majority shareholders either because they
are state-controlled enterprises or because they were historically family-owned businesses. 32 This
creates a classic agency cost problem as the actions of the majority shareholder can adversely impact
minority shareholders.33 This fact must have been well known to regulators and the legislature.
Furthermore, the episode that lead to the Act—the Satyam affair—was born of an
effort by majority shareholders to take advantage of minority shareholders. It is true
that the episode ended with fraud rather than minority exploitation because the
acquisition of the target companies was stymied. But do we really think the Indian
authorities who enacted the 2013 Act were unconcerned about the events that motivated
the episode to begin with? We doubt it. It is a well-established principle to interpret
ambiguous language in statutes in light of the purposes behind the legislation. 34 If the
Indian authorities wanted to make sure the things that happened in the Satyam episode
could not happen again without shareholder compensation, it would be fairly easy to
interpret the words “any other person” and “any fraudulent, unlawful, or wrongful act
or conduct” to include majority shareholders trying to exploit minority shareholders.
Thus, we are not as worried as Professor Khanna about the breadth of the damages
provision in the 2013 Act.

C. Assessment

Compared to private enforcement mechanisms available in much of the world, the 2013 Act puts
India in the vanguard. Scholars have identified several metrics to measure how robust a nation’s class
actions are,35 and, on all but one of these metrics, the Indian securities fraud class action fares very
well. First, there is who can initiate the action: in some countries, individual shareholders are not
permitted to bring class action lawsuits so that the lawsuits must be brought by investor associations
or the government and this obviously limits their use.36 The Indian class action does not suffer this
limitation. Second, there is who is included in the class action: in most countries, class members must
affirmatively opt in to be included; this obviously limits the size and power of class actions. 37 The
Indian class action does not suffer this limitation either. Third, there is what relief can be recovered in
the class action: in most countries, compensatory damages are not available; this obviously limits the
usefulness of class actions.38 If we are right about how the 2013 Act should be interpreted vis-à-vis
minority shareholders, the Indian class action fares better, here, too. On all these metrics, we rate the
Indian securities fraud class action as one of the most robust in the world.
The one metric on which the Indian class action may not fare as well as those in nations like the
United States, Canada, and Australia is with regard to how the actions are financed. If shareholders do
not have access to adequate financing to bring their class actions, then much of the foregoing is for
naught. In the United States, Canada, and Australia, class actions are financed on contingency: either
lawyers or third parties invest in the actions and are repaid if successful by collecting a portion of the
recovery.39 This gives shareholders access to capital to fund a large portion of what we call “positive-
expected-value” actions—actions for which the expected trial judgment exceeds the class’s litigation
expenses.

It is unclear to us whether contingency financing like this will be available in India. On the one hand,
we understand contingency financing is forbidden from lawyers. 40 On the other hand, it appears such
financing may now be available from third parties; 41 if it takes off, shareholders in India may have all
the resources they need. If it does not, securities fraud class actions will have to be financed by the
shareholders themselves, with the prospect of recouping their litigation expenses under the loser-pays
rule if they succeed.42 If shareholders are widely dispersed, this makes financing difficult, especially
because shareholders are liable for the defendant’s litigation expenses if they lose. There is, however,
one provision of the 2013 Act that could mitigate the hardship of self-financing, at least to some
extent: the Act sets up a public financing mechanism. 43 Although it is too early to tell how much
money will be available or what criteria will be used to disperse it, Canada has a fund like this and it
has been used with some success.44 Nonetheless, if we were to make one recommendation to India
about how to revise the Act, it would be either to open securities fraud class actions to lawyer
contingency-financing (as in the U.S. and Canada) or to grow third- party contingency-financing (as
in Australia). With that caveat, we think the 2013 Act is an impressive attempt at private enforcement
of the securities laws.

III. CLASS ACTION ARBITRATION

A. Background

Arbitration is a well-established, private, dispute-resolution mechanism in the United States. Parties

choose whether to send their dispute to one or more arbitrators and whatever result is reached is
respected by our court system and entitled to all the same res judicata effect of a court judgment.

Although most of the disputes that go to arbitration are one-on-one disputes, it is possible to bring
class-wide disputes to arbitration, and, for a time, it was done regularly in the United States. It is not
done much anymore in the United States because the Supreme Court has ruled that companies are
allowed to ban class actions in their arbitration proceedings if they want to, forcing plaintiffs who sue
them into one-on-one arbitration.78 Because one- on-one arbitration is less threatening to companies
than class-wide arbitration, companies are now rewriting their arbitration clauses to ban class
actions.79

A separate concern is that, per a federal statute, judicial review of arbitration decisions is very
constrained. Although the AAA rules allow for appeals at three different points, judges can’t do much
on these appeals. Under the Federal Arbitration Act, judges can overturn arbitration awards only if
there has been fraud or other misconduct perpetrated on the arbitrator; mistakes by the arbitrator are
not grounds for reversal.116 This is concerning because one of the most important roles that judges
play in class actions is to protect absent class members from exploitation by class counsel and the
defendant. Absent class members do not have a role in selecting arbitrators 117—arbitrators are selected
before class certification, and, in any event, absent class members are, well, absent—and some
commentators worry the arbitrators will not look out for absent class members like judges do. 118 This
concern is magnified if the arbitrators’ compensation comes from the defendant and class counsel. 119
If courts could more meaningfully review the decisions critical for absent class members—
certification, settlement, attorneys’ fees—commentators would be less concerned. But that review is
not possible under American law.
The lack of meaningful judicial review is a concern not just for absent class members but for
defendants as well. Class action cases tend to be very high stakes because the size of class-wide
damages can threaten companies will substantial liability. If the arbitrators make a million- or billion-
dollar mistake, defendants rest more easily if they can get the mistake fixed. But, again, that is not
possible. This is one of the facts that led the Supreme Court to deem arbitration as incompatible with
class actions.120 Commentators, too, have been skeptical companies would ever prefer class arbitration
to class action litigation in court.121

IV. CLASS ARBITRATION IN INDIA?

Like the United States, Indian law respects arbitration agreements, 122 including agreements to arbitrate
fraud claims, at least those that are not of a serious or complicated nature. 123 Despite the shortcomings
listed in the previous Part, we think securities fraud class arbitration can solve many of the problems
with the Indian court system that have made commentators pessimistic about the new securities fraud
class action.

First, consider the inefficient procedural rules in the Indian court system. In arbitration, the parties
will be free to devise their own procedural rules, including rules allowing for more flexible pleadings
as well as to prohibit plentiful adjournments and delays caused by litigants who fail to appear in
person. Although class arbitration may not be any faster than class action litigation in the United
States, that is because the rules in arbitration largely mirror those in court. India, by contrast, can use
arbitration to avoid its inefficient court rules.

Second, consider the shortage of judges in Indian courts. There will be no shortage of arbitrators
because the parties will select as many arbitrators as they need and compensate them for whatever
time they need to spend on their cases.

We are less sure that arbitration can significantly change how Indian lawyers are compensated in
order to encourage them to speed cases along. We assume it would be unlawful to pay lawyers who
arbitrate with contingency fees any more than it would be to pay lawyers who litigate in court.
Nonetheless, as we noted above, we think India should rescind its prohibition on contingency fees.

Moreover, we do not believe the concerns with class arbitration in the United States should
discourage India from trying it for itself. We have already said that we believe arbitration will be
faster than litigation in India if the parties tweak the rules in arbitration. In addition, it should be
remembered that, unlike the court system, arbitration is not free to the parties: they have to pay the
arbitrator by the hour, as in the United States. We think this will make it especially unlikely sclerosis
will set in.

Nor are we concerned about the lack of confidentiality in class arbitration. There is probably too much
confidentiality to begin with in arbitration, so it is good that class members and the public can see
what is going on in class arbitration.

Finally, if the lack of judicial review in the United States is deemed a problem, then the solution in
India is simply not to adopt the constrained judicial review of the Federal Arbitration Act. But we
think India should be careful here: much of the gain of using arbitration to avoid the Indian court
system will be lost if India reintroduces the court system on appeal. As we

noted above, some appeals take six years to resolve in that court system. Thus, whatever judicial
review is allowed, it should be something less than the ordinary review of the Indian court system.

Our bigger concern is that Indian companies will have no reason to agree to class arbitration because
the Indian court system is so slow that it deters shareholders from filing securities fraud class actions
at all; why would companies wish to facilitate securities fraud actions against them by agreeing to
arbitration? They probably won’t, which means that India may have to enact legislation that gives
either side of a securities dispute the right to invoke arbitration. If the parties know that either side can
invoke arbitration, this will give both of them the incentive to specify the terms of any arbitration
beforehand. In this regard, we are recommending a different path from the one taken in the United
States where both sides must agree to arbitration. Nonetheless, we think the difference will be
necessary to bring corporations along.

And that is not the only difference we recommend. Unlike the United States, India may not wish to
give the parties complete carte blanche in fashioning procedural rules. In the United States,
companies used this powerto insulate themselves from class actions altogether; it would obviously
defeat the purpose of this entire line of inquiry if Indian companies could do the same. Thus, Indian
legislation may need to require that any arbitration for securities fraud violations includes access to
the class action device specified in the 2013 Act.

https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1213&context=book_chapters –

29
the rule in Foss v. Harbottle applies in full force in India. The holding of this case (i.e. that a
derivative action belongs to the company) means that if shareholders ratify the complained of activity
then the suit becomes infructuous, as the company has effectively said it approves of the underlying
activity. This presents an almost insurmountable hurdle for minority shareholders trying to sue
controllers, because the con- trolling shareholder can usually manage to get a majority of the share-
30
holders to ratify the complained about action (e.g. by voting the controller’s shares). Although there
are exceptions to Foss, they are rather limited (e.g. suits based on violations of the charter or under-
lying legislation, such as ultra vires acts, illegal acts, and acts obtained without a required special
resolution) or require the minority share- holder to meet difficult burdens (e.g. showing that the
31
controller obtained some benefit at the expense of the company (not the minority per se)).

In addition, minority shareholders would face challenges in identify- ing the underlying fiduciary
duties that were violated. Controlling share- holders do not owe fiduciary duties to minorities in India,
32
making a derivative suit on this basis a non-starter. Further, although directors do owe duties to the
company in India, these duties are determined by reference to the very thin case law present in
33
India. Moreover, courts can protect directors from liability under Section 633 of the Indian
34
Companies Act 1956 if it is shown that the directors acted honestly and reasonably. This, when
combined with the weaker explication of duties and likely controller ratification, leaves the derivative
suit mechanism in India with little power.

Section 245 is largely concerned with restraining the behaviour of the firm and its members rather
than compensating shareholders (Sections 245(1)(a) to (f)). The only provisions allowing for
monetary remedies are Section 245(1)(g) and (h). However, even here the remedies might be viewed
as limited, given that none of the provisions explicitly mention the controller. For example, Section
245(1)(g) allows for monetary remedies primarily against the firm, its directors or advisors for
fraudulent, illegal or wrongful behaviour. It is conceivable that controllers might be included in the
‘any other person’ language in Section 245(1)(g)(iii), but given the general tenor of the Section and
the context of this language it does not appear that controllers are the targets. Moreover, because
controllers do not owe fidu- ciary duties to minority shareholders in India, it is not clear whether their
behaviour would trigger a class action under Section 245. Indeed, the focus on whether the company
has ratified the complained of activity (Sections 245(4)(e) and (f)) and the provision requiring the
company to pay for plaintiff’s legal expenses (Section 245(5)(d)) appear poorly suited for a typical
suit brought by a minority shareholder against a controller and instead seem more suited to a typical
derivative action.

In the Indian context, the pre- existing state of both public and private enforcement of corporate and
securities laws was fairly weak, and thus attempts to revamp the area via the class action device in
Section 245 of the Companies Act 2013 were greeted with some enthusiasm. Indeed, there are good
theoretical reasons to think that private enforcement could be beneficial in India, although there may
be some limitations in light of India’s institutional and busi- ness climate.

However, the version of class actions drawn by Section 245 seems constrained in its likely
effectiveness. Monetary remedies do not seem to be the primary aim of the provision, and it is not
accompanied by other changes that would make it more likely to work in the Indian context. In
particular, the prohibition on contingency fees and the absence of fiduciary duties owed by controllers
to minorities would appear to ham- string the effectiveness of the class action provision in India.
Thus, it appears that the opportunity to enhance investor protection in India is unlikely to be much
furthered by Section 245.

Nonetheless, there may be some measures that can be taken that would be beneficial in the Indian
context, such as regulatory early warning signals and the increased use of arbitration to resolve
shareholder dis- putes. Early warning signals may help to trigger shareholder monitoring and avert
large-scale harms and arbitration helps to address a perennial problem in the Indian legal system – the
lengthy delays in the courts and tribunals. Some mix of these measures appear more likely to benefit
investors interested in the Indian markets than the current version of class actions exemplified by
Section 245.