Fund managers face legal leverage

Peter Ford, partner, Nabarro Nathanson

Derek Sloan, partner, Allen & Overy

Andrew White, partner, Rowe & Maw

Unilever's legal team is currently locked away in high-level talks, weighing the merits of a potential legal action against Mercury Asset Management (MAM).

The action would be taken to recover money lost by MAM as a result of the underperformance of Unilever's company pension scheme. Frustrated trustees of the scheme are set to bring the action against the investment managers responsible for the fund.

This radical action by the Anglo-Dutch fast-moving consumer goods giant is the first of its kind.

Why is it that fund managers expect to have less of a duty of care than doctors or lawyers? What are the ramifications of this radical action likely to be on the overpaid fund managers?

And will it spark a wave of legal claims by litigation-happy corporations who will sue as soon as they are unhappy with their fund's performance?

Peter Ford, pensions partner at Nabarro Nathanson, says: "I think fund managers will be looking to take greater steps to exclude liabilities brought against them, making the trustees even more vigilant. They charge an enormous fee linked to the amount of the fund, regardless of how well it performs."

Ford also says that this is the first time that trustees have thought of taking legal action as well as sacking the managers, if indeed they have done that. "The trustees want them to do more for their money," he says.

"If Unilever wins, it will be on a narrow margin and on a breached term of investment, rather than poor performance of a fund which failed to reach the set benchmark," claims Ford.

He adds that lawyers will benefit financially from this litigation.

"There will inevitably be more work for lawyers as any litigation means more work. And if fund managers are looking to exclude their liabilities this will entail the use of our services."

Allen & Overy pensions partner Derek Sloan is reluctant to agree with this view. "I don't regard more litigation as good news. The role of lawyers is to assist clients in achieving business objectives in relation to pension matters. I don't think lawyers are trying to increase their business."

Sloan says that even though this is quite a new type of action, it is unlikely to set precedents for further actions.

"Any claim of this kind will be a rare event. You have to establish that investment managers have acted outside their mandate, and failed to observe limits on the investments," he says.

"If it is just a question of poor stock selection, then one has to take the good with the bad – it will be hard to establish they have been negligent."

"It's quite likely to be a difficult action for the trustees of pension schemes who are merely bringing an action based solely on poor performance, because investment managers don't guarantee anything," claims Sloan.

He suspects that the action by Unilever will not start a trend. "I will be surprised if this is part of a trend, but unfortunately, if it is, it will spark a reaction against investment managers."

Andrew White, partner at Rowe & Maw, says: "It is unusual for a law suit to be brought as sacking is the normal course of action. Unilever has gone a stage further."

In contrast to Sloan, White takes the view that if Unilever is successful it will result in a trend.

"If the action is successful, there is a danger that investment managers will spend more time protecting themselves against liabilities."

"Other organisations that have lost money may well jump on the bandwagon, particularly if Unilever gets a good deal from MAM. If this happens, fund managers will want to look at their contracts," he says.

"The fund managers are used to their performance being judged financially – now it may be judged legally," says White.