Two recent decisions involving securities class actions and their funding show how fluid the area remains, writes Professor Pamela Hanrahan. 

    The High Court’s decision in BHP Group Ltd v Impiombato [2022] HCA 33, handed down in October, answers an important question about the laws governing securities class actions in Australia. It confirmed that the class members — that is, the people entitled to compensation if the claim eventually succeeds — can include investors outside Australia. This cleared the way for foreign shareholders to remain involved in the long- running case arising indirectly from the collapse of the Fundão dam in Brazil, in 2015.

    The Fundão dam contained tailings from an iron ore mine operated by Samarco, a joint venture between BHP and Vale SA. Its collapse in November 2015 sent an estimated 40–50 million cubic metres of tailings waste into the Rio Doce basin, killing 19 people and polluting 668km of waterways. Work to rehabilitate the area — including through the Renova Foundation established and funded by BHP — is still underway.

    Since the disaster, BHP has faced legal proceedings around the world, including in Brazil, the United States, and the United Kingdom. The UK case — which was the subject of an important decision by the UK Court of Appeal in July 2022 — remains on foot, seeking compensation in the English court for individuals, municipalities, private businesses and other institutions in Brazil affected by the collapse.

    Unlike the UK proceedings, the Australian case does not involve the Brazilian victims. Instead, it seeks compensation for BHP shareholders — in Australia and overseas — for losses suffered when the BHP share price fell significantly in the aftermath of the disaster. It is based on allegations that BHP breached its continuous disclosure obligations between August 2012 and November 2015, by failing to announce to the ASX information it had about risks at the site. Following the High Court’s decision, the case will now go back to the Federal Court to be dealt with on the merits.

    Securities class actions

    Class actions are used in a range of settings, not just securities cases. They allow for the efficient management of legal claims where many people have suffered loss that is attributable to the same person’s conduct, and which raises a substantial common issue of law or fact. 

    Rather than requiring each person to sue the entity that caused the loss separately, the proceedings can be brought by a representative on behalf of all of them. For the Federal Court, class actions are run under Part IVA of the Federal Court of Australia Act 1976 (Cth), enacted in 1992. Several State Supreme Courts — including Victoria, where the “egregious conduct” by lawyers and funders in Bolitho v Banksia Securities Ltd (No 18) [2021] VSC 666 occurred — have similar regimes.

    Securities class actions typically involve an allegation that a listed entity has failed to inform the market of something it was required to disclose under the ASX Listing Rules and s 674(2) of the Corporations Act 2001 (Cth). Applicants will also allege that the entity engaged in misleading or deceptive conduct contrary to s 1041H(1) of the Act and s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth). Investors and traders who acquire securities while the market is not properly informed are — unless they opt out — potential members of the class.

    In BHP’s case, because it operated at the relevant time under a dual listed company structure with UK company BHP Billiton Plc, the class members include those who bought shares on the ASX, the London Stock Exchange and the Johannesburg Stock Exchange.

    Class action reform

    Securities class actions — like the BHP case — have attracted significant political and public attention in recent years. This attention has extended to how they are funded by third parties in return for a share in any compensation awarded.

    The class actions framework was exhaustively examined by the Australian Law Reform Commission in 2018. Its Report 134 into class action proceedings and third-party litigation funders made 24 recommendations for technical reform to “promote fairness and efficiency in class action proceedings; protect litigants from disproportionate costs; and assure the integrity of the civil justice system”. Significantly, the ALRC also recommended a “further investigation of the interaction between the substantive law that supports shareholder class actions and the class action regime”.

    In May 2020, The Coalition government introduced temporary changes to the disclosure laws intended to ensure listed entities would only be liable to compensate investors for non-disclosure if they knew, or were reckless or negligent with respect to whether, the undisclosed information was price-sensitive. In December 2020, the Parliamentary Joint Committee on Corporations and Financial Services presented a report on litigation funding and regulation of the class action industry. It was legislated in August 2021, subject to a mandated post-implementation review in 2023. The changes post-date the events at BHP, where the “no-fault” standard then in force still applies.

    Funding regulation

    The Coalition government also sought, in August 2020, to regulate third-party litigation funding arrangements, by bringing them under the regulatory regime in Ch 5C of the Corporations Act 2001 that governs managed investment schemes (MIS). Its attempt failed when, in June this year, the Full Federal Court overturned earlier authority and decided that litigation funding arrangements are outside the statutory definition of an MIS, and therefore beyond the reach of the MIS laws.

    In LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103 at [22], Justice Michael Lee commented that excluding litigation funding from the MIS laws did not leave it operating “in some sort of Bir Tawil [an unclaimed stretch of land between Egypt and Sudan] zone where no laws apply”. Rather, when funding is used in class actions, ‘“the Court is required to adopt a close protective and supervisory role, be alive to the interests of group members and to take steps to ensure that any class action is conducted in a way which best facilitates the just resolution of the disputes according to law and as quickly, inexpensively and efficiently as possible”.

    His Honour went on to say that the Court must “protect group members and manage the class action recognising that conflicts of interest, or conflicts of duty and interest, between and among representatives, group members, funders and solicitors can arise”. He concluded that, “When this is understood and appreciated, any criticism that litigation funding arrangements are ‘unregulated’ is put into proper context”.

    The BHP case still has a significant distance to run. As one of the largest and highest-profile securities class actions in Australia, it will be fascinating to see it play out against the ongoing debate in 2023 about how securities class actions and their funding should be regulated.  

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