AICD supports regulatory regime for class action funders

Friday, 08 November 2019

The Australian Institute of Company Directors (AICD) supports calls to regulate the litigation funding market, noting that a week on from the TPT Patrol v Myer decision there are concerns that an increased number of securities class cases could be brought against Australian companies.

The AICD is also calling on the Government to hold a separate inquiry into Australia’s continuous disclosure regime, as was recommended by the ALRC inquiry into class actions in January this year.

AICD CEO and Managing Director, Angus Armour, said the AICD has long held concerns about Australia’s high rate of securities class actions, partly due to our unique continuous disclosure regime.

The Myer case demonstrated that plaintiffs can bring a securities class action against companies even when they are unable to show they relied on the relevant misstatement - known as indirect or ‘market-based causation’.

Prior to the Myer decision, the frequency of securities class actions was already increasing, prompting a significant deterioration in the directors and officers insurance market. Currently, around 45 per cent of all securities class actions ever initiated in Australia are in the pipeline, illustrating the spike over recent years.

“With litigation funding increasingly being seen as a highly lucrative investment for funders, the AICD is concerned that class actions are less about access to justice but rather about financial returns – which, as a result, will harm Australian companies and everyday shareholders,” Mr Armour said.

The Australian class actions environment is the second most attractive to plaintiffs after the US. Australia’s facilitative regime provides an incentive for plaintiff firms to consider initiating class actions - with a view to settlement - whenever a market disclosure is followed by a significant change in the share price.

Consequences for companies include economic damage to long-term shareholders; diversion of company resources from investment opportunities to legal costs; high transaction costs on plaintiff class members; and distracting boards away from driving growth and investment.

Media Contact: Maegen Sykes 0439 167 567

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