Why class actions are important for Australian investors and consumers

Press/Media: Expert Comment

Description

Class action litigation has become a media topic in recent months. As new legislation related to litigation funding comes in, what does the current landscape mean for investors?

 

Outside the US, Australia has one of the more progressive approaches to litigation, although it is a mechanism that largely remains opaque. Despite this, class actions cases have been able to very effectively return more than $1.86 billion to Australian investors in recent years. In the first half of 2020, there were 26 class actions filed globally outside the US, and with seven lodged in Australia – against businesses like Treasury Wines, Boral and Freedom Foods Group – this makes Australia the second most active country for class action cases. This may well change as a result of multiple governmental interventions to the current class action landscape, starting with the High Court decision on common fund orders. In December of 2019, the High Court of Australia prohibited common fund orders at the start of class actions. Common fund orders require all potential members of a class action group to pay a shared commission to litigation funders from the proceeds of the claim. The High Court decision meant that a system that supported more and open-class cases was replaced with a system that would support fewer cases, and ones that are filed on a closed class basis. As an almost immediate response, on 18 June 2020 in a 22-16 vote, Victoria’s lawmakers passed a bill lifting the ban on contingency fees allowing lawyers to take a percentage of the amount recovered in a class action, as opposed to the time-costed billing model. The Victoria decision is a step in the right direction back to the way things were prior to the High Court’s December 2019 decision invalidating common fund orders. It’s not a hard reversal, but a good start. This decision allows lawyers to charge contingency fees for cases, thus eliminating the need of a litigation funder (only in the state of Victoria) and will also allow lawyers to file more cases on an open-class basis. Easing the complex requirements for bringing a class action against a company has support from the Victorian Attorney-General, Jill Hennessy. “We’re improving access to justice for ordinary Victorians by making it easier to bring class actions for silicosis, wage theft, consumer harm and other forms of corporate wrongdoing,” Hennessy told The Age. This positioning resulted in a wave of corporate opposition, including from AMP. “Ultimately, that will result in a higher cost of doing business which will result in job losses and higher costs being passed onto consumers,” AMP chief executive Francesco De Ferrari said. AMP is currently defending a class action being organised by Maurice Blackburn, as part of the fallout of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – and on July 29 it was announced another class action was being filed against AMP and its ‘buyer of last resort’ scheme. It is unsurprising that this opposition position was adopted. The reality is that investors we have spoken to – including some of Australia’s best known super funds – have said that the mechanism is not only a way of implementing their objectives and rights as ‘active investors’, but it is also an effective governance tool. Litigation against corporate issuers should not be a process whereby lawyers spruik their cases to the public for months before either reaching a critical mass through an opt-in model or choosing not to proceed with the case. This means some cases will not proceed because lawyers need funders due to the capital needs of large-scale litigation. Also not being able to recoup costs across all potential class members on a contingency basis means that legitimate cases against corporate wrongdoing or a failure to communicate activity, as per ASX regulations, may die on the vine as a result of there not being enough institutional investors agreeing to participate and signing joining documents. Institutional and retail investors deserve the right to be able to hold large companies to account through a legal mechanism that otherwise would inhibit an individual’s ability to be reimbursed for damages related to corporate wrongdoing. As we stare into the void of a potentially sustained recession, any mechanism to ensure in01: Sean Cookson vice president and managing director APAC Financial Recovery Technologies vestors are protected from misconduct by their providers or companies that they have invested their hard-earned money in is warranted. This remains a critical point. If the mechanisms to proceed with class actions are gummed up through regulation and other government-led interventions, what does that mean for the future of corporate activity? Associate professor Sean Foley at Macquarie Business School highlighted this recently, when he wrote: “The question is how much worse our market would be in the absence of private enforcement actions. ASIC has been quick to hand out ‘please explain’ letters, but has been reluctant or unable to follow up with any meaningful enforcement actions. If company directors know that private enforcement actions were not possible, what would stop them from committing even more egregious acts of deception on an unsuspecting shareholder base?” What this means for investors Investors should be concerned by government moves to curtail access to class actions. Open-class or opt-out actions provide investors access to recovery against corporate wrong-doers for their alleged fraud. These investors suffered an economic impact as a result of this alleged fraud, and more inclusive actions provide a greater access to justice. Any mechanism that makes it easier for an investor to participate in class actions in which they are legitimate claimants should be encouraged. These actions proceed to the courts because they are believed to have merit and often bridge the gap where other processes fail – such as where unions may be reluctant to litigate against large employers over failure to pay agreed wages. The Victorian law change will likely see meritorious cases filed in that state that may otherwise fail to proceed elsewhere, and will result in better protection of investors’ best interests as well as ensuring easier access to litigation. Ideally though, protection of investors and access to appropriate litigation should be led at the federal level. FS

Subject

31 Aug 2020 Financial Standard, National Section: General News • Article type : News Item • Classification : Magazines Business Audience : 10,160 • Page: 11 • Printed Size: 769.00cm² • Region: National Market: Australia • ASR: AUD 8,406 • Words: 1072 • Item ID: 1326268351

Period31 Aug 2020

Media contributions

1

Media contributions

  • TitleWhy class actions are important for Australian investors and consumers
    Degree of recognitionInternational
    Media name/outletFinancial Standard
    Media typeWeb
    CountryAustralia
    Date31/08/20
    DescriptionClass action litigation has become a media topic in recent months. As new legislation related to litigation funding comes in, what does the current landscape mean for investors?



    Outside the US, Australia has one of the more progressive approaches to litigation, although it is a mechanism that largely remains opaque. Despite this, class actions cases have been able to very effectively return more than $1.86 billion to Australian investors in recent years. In the first half of 2020, there were 26 class actions filed globally outside the US, and with seven lodged in Australia – against businesses like Treasury Wines, Boral and Freedom Foods Group – this makes Australia the second most active country for class action cases. This may well change as a result of multiple governmental interventions to the current class action landscape, starting with the High Court decision on common fund orders. In December of 2019, the High Court of Australia prohibited common fund orders at the start of class actions. Common fund orders require all potential members of a class action group to pay a shared commission to litigation funders from the proceeds of the claim. The High Court decision meant that a system that supported more and open-class cases was replaced with a system that would support fewer cases, and ones that are filed on a closed class basis. As an almost immediate response, on 18 June 2020 in a 22-16 vote, Victoria’s lawmakers passed a bill lifting the ban on contingency fees allowing lawyers to take a percentage of the amount recovered in a class action, as opposed to the time-costed billing model. The Victoria decision is a step in the right direction back to the way things were prior to the High Court’s December 2019 decision invalidating common fund orders. It’s not a hard reversal, but a good start. This decision allows lawyers to charge contingency fees for cases, thus eliminating the need of a litigation funder (only in the state of Victoria) and will also allow lawyers to file more cases on an open-class basis. Easing the complex requirements for bringing a class action against a company has support from the Victorian Attorney-General, Jill Hennessy. “We’re improving access to justice for ordinary Victorians by making it easier to bring class actions for silicosis, wage theft, consumer harm and other forms of corporate wrongdoing,” Hennessy told The Age. This positioning resulted in a wave of corporate opposition, including from AMP. “Ultimately, that will result in a higher cost of doing business which will result in job losses and higher costs being passed onto consumers,” AMP chief executive Francesco De Ferrari said. AMP is currently defending a class action being organised by Maurice Blackburn, as part of the fallout of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – and on July 29 it was announced another class action was being filed against AMP and its ‘buyer of last resort’ scheme. It is unsurprising that this opposition position was adopted. The reality is that investors we have spoken to – including some of Australia’s best known super funds – have said that the mechanism is not only a way of implementing their objectives and rights as ‘active investors’, but it is also an effective governance tool. Litigation against corporate issuers should not be a process whereby lawyers spruik their cases to the public for months before either reaching a critical mass through an opt-in model or choosing not to proceed with the case. This means some cases will not proceed because lawyers need funders due to the capital needs of large-scale litigation. Also not being able to recoup costs across all potential class members on a contingency basis means that legitimate cases against corporate wrongdoing or a failure to communicate activity, as per ASX regulations, may die on the vine as a result of there not being enough institutional investors agreeing to participate and signing joining documents. Institutional and retail investors deserve the right to be able to hold large companies to account through a legal mechanism that otherwise would inhibit an individual’s ability to be reimbursed for damages related to corporate wrongdoing. As we stare into the void of a potentially sustained recession, any mechanism to ensure in01: Sean Cookson vice president and managing director APAC Financial Recovery Technologies vestors are protected from misconduct by their providers or companies that they have invested their hard-earned money in is warranted. This remains a critical point. If the mechanisms to proceed with class actions are gummed up through regulation and other government-led interventions, what does that mean for the future of corporate activity? Associate professor Sean Foley at Macquarie Business School highlighted this recently, when he wrote: “The question is how much worse our market would be in the absence of private enforcement actions. ASIC has been quick to hand out ‘please explain’ letters, but has been reluctant or unable to follow up with any meaningful enforcement actions. If company directors know that private enforcement actions were not possible, what would stop them from committing even more egregious acts of deception on an unsuspecting shareholder base?” What this means for investors Investors should be concerned by government moves to curtail access to class actions. Open-class or opt-out actions provide investors access to recovery against corporate wrong-doers for their alleged fraud. These investors suffered an economic impact as a result of this alleged fraud, and more inclusive actions provide a greater access to justice. Any mechanism that makes it easier for an investor to participate in class actions in which they are legitimate claimants should be encouraged. These actions proceed to the courts because they are believed to have merit and often bridge the gap where other processes fail – such as where unions may be reluctant to litigate against large employers over failure to pay agreed wages. The Victorian law change will likely see meritorious cases filed in that state that may otherwise fail to proceed elsewhere, and will result in better protection of investors’ best interests as well as ensuring easier access to litigation. Ideally though, protection of investors and access to appropriate litigation should be led at the federal level. FS
    Producer/AuthorAssociate Professor Sean Foley
    PersonsSean Foley