Australia's class action law is in need of a rethink as the number and size of class actions funded by third parties grows.
The purpose of Royal Commissions is to shine a forensic searchlight into the shadows. Plaintiff law firms and litigation funders watch closely for what might be illuminated. The current Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, presided over by the Hon Kenneth Hayne AC QC, is no exception.
So it is not surprising that after the Royal Commission heard evidence in April suggesting that there may have been improper or illegal behaviour at AMP Limited, several class actions were announced. Aggressive price competition between the litigation funders is a notable feature of the rival AMP claims, which are said to be the largest securities class actions so far.
More broadly for directors, the AMP announcements raise two important issues in Australian class action law. These are currently under consideration by the Australian Law Reform Commission (ALRC). The first is the operation of the continuous disclosure laws and their interaction with the general statutory prohibitions on misleading or deceptive conduct in relation to corporate announcements. The second is the mechanism for dealing with competing claims.
The ALRC’s Discussion Paper 85, released on 31 May, went beyond an examination of the procedural and regulatory aspects of class actions and third-party litigation funding to talk about the elephant in the 21st-century boardroom — shareholder remedies against the company for alleged non-disclosure of material bad news. The ALRC recommended the government review the legal and economic impact of the continuous disclosure obligations of listed entities with regard to:
- the propensity for corporate entities to be the target of funded shareholder class actions in Australia
- the value of the investments of shareholders of the corporate entity at the time when that entity is the target of the class action
- the availability and cost of directors and officers liability (D&O) insurance cover within the Australian market.
Class actions extend beyond shareholder litigation, of course. Research by Professor Vince Morabito at Monash Business School has identified about 500 class actions commenced in the Federal Court and the Supreme Courts of Victoria and New South Wales in the 25 years since the introduction of legal rules to facilitate representative proceedings. These cover a broad range of commercial and non-commercial causes of action, including shareholder and investor claims, anti-cartel claims, mass tort claims, consumer claims for contravention of consumer protection law, environmental claims, trade union actions, claims under the Migration Act 1958 (Cth), and human rights claims.
However, shareholder or investor claims arising out of disclosure failures are the most common form of class actions financed by third-party litigation funders. Litigation funding has flourished since it was first successfully used here in 1996. It involves a third party (litigation funder), with no direct interest in the proceeding, agreeing to fund litigation in return for a share of any amount recovered if the case is successful. The ALRC found that shareholder claims are the most commonly filed class actions in the Federal Court — 34 per cent (37) of all class actions filed in the past five years. Since the 2002 introduction of the continuous disclosure provisions of the Corporations Act 2001 (Cth), 66 shareholder class actions have been filed in the Federal Court.
The ALRC found “growing evidence of unintended adverse consequences caused by the existing framework of the Australian class action regime, coupled with the peculiar characteristics of the Australian statutory provisions concerning continuous disclosure obligations”. Consequences include “the impact on the value of the investments of those shareholders (including the investments of the class members themselves) of the company at the time the company is the subject of the class action”.
The ALRC noted that when a shareholder class action is settled, value passes from the company and its shareholders to a subset of investors — who had acquired shares at a time when the market was not fully informed.
Such class actions typically commence after a significant drop in the value of securities. If that drop was caused by the late revelation of material information — and there is proof of contravening conduct prior to the eventual announcement of the material information — then the claim is brought on behalf of some or all of those who traded in the stock during that period. It can be a lengthy amount of time — in the case of the AMP actions, a period of five years.
Part of the unease with these actions is caused by the fact that none has yet proceeded to judgement — they have all been settled. The ALRC says, “judicial power is being invoked regularly without the controversy, in respect of which jurisdiction is invoked, ever being resolved by final determination of contested common issues between the parties”. It identifies various reasons for this, including “the cost of running a matter to final determination, the risk of litigating unsettled legal principles (such as the market-based causation theory), and the difficulty of disproving contravening conduct in the face of the low statutory threshold”. While courts are asked to determine whether the terms of settlement are reasonable, they are not asked to adjudicate on the merits of the claim itself.
On this basis, the ALRC endorsed the recommendation made by the Productivity Commission in 2014 that public debate about the underlying law was more appropriate than changing the mechanism by which class actions were prosecuted.
D&O liability insurance
The impact of rising numbers of class actions on the availability of D&O liability insurance has also been noted by the ALRC. Since at least 2011, the D&O business has been chronically underpriced by insurers, meaning the current D&O market premium pool is “thoroughly inadequate to meet the current and projected levels of insured securities class action losses”.
It also found that the cost of D&O insurance has increased more than 200 per cent in the past 12–18 months, and at least one significant insurer has recently left the Australian D&O market. It heard evidence that “the hardening of the market environment for D&O insurance is leading some Australian companies to contemplate relocation offshore where conditions are more favourable”. This has implications for all directors.
Competing class actions
Since 1992, 513 class actions have been commenced in relation to 335 legal disputes. In 2015–16, 25 per cent of class action proceedings were related class actions. Competing class actions occur when proceedings commence on behalf of only some of the potential class litigants, allowing a different funder to sweep up others. The ALRC has suggested several reforms to address the problem, including the initiation of all class actions as open class actions.
Submissions on the ALRC’s recommendations closed at the end of July, but this inquiry won’t resolve the broader question about the impact of the continuous disclosure laws. We can expect to see more arising out of Royal Commission revelations.
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