Australia: Growing Class-Action Trend Can Hurt Shareholders (The Australian Financial Review)

Last Updated: 6 February 2019
Article by Mark Crean and Michael Lishman

Jones Day partners Mark Crean and Michael Lishman explain how the rise of irresponsible shareholder class actions in Australia is unfairly lining the pockets of a few at the expense of the overall equity market's health.   

At the moment there is debate in Australia about the increase in shareholder class actions. The debate about these actions and directors' duties and shareholder rights generally is of little interest to the public when cast in complex terms focusing on issues which the average Australian sees as only relevant to the top end of town. It is time to recast the debate in terms that are relevant to people. 

A significant part of Australia's $2.7 trillion of superannuation is invested in listed Australian companies. Every Australian worker and retiree has a personal interest in how our listed companies perform. Even small differences in returns can make a big difference to the sort of retirement people have. For example, if someone has $100,000 in super and they get 8 percent per annum with a 15-percent tax rate, the nominal value of that money in 30 years is about $760,000. If they get 7 percent the nominal value is $590,000. Small differences in returns in superannuation matter. 

Shareholder class actions based on an alleged breach of the ASX disclosure rules cannot be justified by reference to improving the performance of companies and the returns to shareholders or indeed of improving disclosure. These actions simply line the pockets of some shareholders, the litigation funder, and law firm. 

Australia's disclosure rules for listed companies are unique. They require (with some exceptions) the "immediate" disclosure of information that affects a company's share price. The problem in practice is that life is not that simple. Business is complicated, and the impact of facts is often only fully understood with the benefit of hindsight. Companies sometimes get this wrong, release information late, and then the share price drops. 

Litigation funders and plaintiff law firms bring action on behalf of people who bought shares in the period between when the company should have announced and when it did announce. They are suing the company for alleged loss on the assumption that had the announcement been made before the plaintiffs bought shares, they could have bought at a lower price or might not have bought at all. The losses are claimed from the company and directors, which both in turn may claim against insurance. 

Australia has become a very attractive market for litigation funders because of the ease of making such claims. Even in the litigious US, such actions are not as easily made. This year Australia had 20 such class actions.  

These actions don't get to trial. The insurers and the company usually payout. 

Such actions are a bad thing for many reasons.

First, they add to the disincentives to people being directors and distract directors from growing the company. Because of superannuation, all Australians have an interest in the very best people serving as directors on listed company boards and in those boards spending their time working on making better products, growing sales, expanding into new markets, and efficiently deploying the company's capital. 

Second, if the purpose of these class actions is to compensate some shareholders, they are inefficient. Too much of the compensation goes to litigation funders and their lawyers and not the shareholders who suffered the loss. 

Third, the cost of remedying the alleged wrong is borne by the company, in effect by the other shareholders. Money paid out by the company lowers the value of the company and therefore all shares. Money paid out by the insurers is recovered by increased premiums. Again the cost is borne by shareholders. Why should one group of shareholders compensate another group when the value of all shares has gone down and shareholders have done nothing wrong? 

Directors tell us that directors and officers insurance premiums are going up. In a recent case, the insurer successfully argued that each class member had a separate claim, meaning the $2 million deductible or "excess" payable by the company before the insurer had to pay, was in fact more than $200 million (being $2 million multiplied by more than 100 "claims"), rendering the policy worthless. These actions are a material financial risk to listed companies. Something must be done.

So what should be done?

Ideally such class actions should be legislated away. However, there will be extreme examples of breaches of continuous disclosure which litigation funders and law firms will point to as justifying such actions being available. So a complete legislative ban on such actions probably won't get political support. 

A number of solutions have been canvassed recently, including modifying the disclosure regime or requiring more proof of causation. Another solution which we suggest might be politically achievable is to legislate that a breach of continuous disclosure laws does not give rise to any shareholder right to claim, but to give the Australian Securities and Investments Commission (ASIC) the ability to seek not only penalties but also the sole ability to seek compensation for affected shareholders. ASIC can already bring civil and in some cases criminal proceedings against a company and directors for breach of disclosure rules. In extreme cases, ASIC could be given the role of seeking compensation on behalf of affected shareholders. This would reduce the amount of such actions and eliminate the returns to litigation funders. 
 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions