Shareholder Class Actions

Shareholder Class Actions The Liberty White Paper Series Part 1 Executive Summary Australia is now the second most likely jurisdiction, outside North America, in which a company will face a class action.1 In the aftermath of the HIH Royal Commission, it has been recommended2 that personal duties and liabilities under the Corporations Act be extended beyond directors and officers to corporate officers, employees and other individuals below board level. Defence costs in class action suits (for which directors and officers may be liable regardless of the outcome) can run into millions of dollars. Class actions Securities Class Actions The recent collapse of a number of major Australian compensation claims for losses corporations both within Australia (HIH associated with shareholdings have been Insurance and One.Tel) and overseas made by shareholders against GIO-AMP (Enron, WorldCom and Adelphia) has (settled in August 2003), Telstra and created an environment requiring much Concept Sports among others. greater vigilance in regard to corporate governance and the actions of directors Bankrolled by litigation funder IMF (Australia) Ltd, the case against publicly listed company Sons of Gwalia Ltd within corporations. and its directors alleges that share value was lost as a result of misleading statements and failure to keep the Today, the greatest litigation threat to corporations market fully informed in respect of gold reserves. is posed by “class actions” and other multi-claimant proceedings – actions brought by or on behalf of Aristocrat, the world’s second largest gaming machine hundreds or even thousands of parties in similar manufacturer, currently faces a shareholder class situations seeking significant relief against companies action, claiming damages of $A190 million, for allegedly and their directors and officers. Some class actions misleading shareholders by not keeping them fully even seek orders from the courts to impose major informed before announcing earnings downgrades that changes to the ground rules upon which those wiped $A2 billion from the company’s value in 2003. companies operate. The Statement of Claim cites adverse operational events (eg. significant margin pressures in its US operations, The Hollywood film Erin Brockovich depicted a massive inadequate risk assessment systems and incautious tort claim against a California power company for growth strategies in South America) that should have polluting the city’s water supply, and the media is full been disclosed to shareholders when they occurred. of product liability and other tort cases against major corporations in respect of products such as asbestos, Similarly, a class action by shareholders was brought tobacco, breast implants, heart pacemakers and weight against retailer Harris Scarfe who claimed that, in loss drugs. In Australia, compensation claims relying on the representations made by the directors, have been made against: they acquired shares in the company at a value greater than their true market value or lost the opportunity – Longford Gas for interruptions to gas/power supplies to sell shares in the company prior to the shares – Sydney Water for contaminated water supplies becoming valueless. – Wallis Lake Oysters for various food contamination incidents – Mobil Avgas for contaminated fuel supplies However there is also an increasing trend for shareholders to bring class actions against companies and their directors for compensation claims associated with their investment in the company’s shares. These actions are commonly termed “securities class actions”. Being Ordered to Pay Compensation What exactly are class actions? is only Part of the Problem. In the United States, where class actions A crucial, but often poorly understood have been entrenched in their legal system aspect of class action risk is the legal for many years, the term “class actions” costs involved. The GIO claim was describes a litigious process where a worth a staggering $97 million but the large number of claimants, who may have defence costs alone came to $15 million. claims involving common questions of The shareholder class action against fact and law against a particular defendant Aristocrat has been running for several or group of defendants, combine their years and has yet to be resolved and the actions in one proceeding. defence costs are already running into many millions of dollars. Companies need In Australia, “class actions” often take the form of “same interest” proceedings which are commenced under the to ensure their directors and officers are Supreme Court Rules of the various State or Territory or covered for defence costs or they may “representative proceedings” which are brought under end up paying, even where no liability is Part IVA of the Federal Court Act 1976 (Cth) or Part 4A proven. of the Supreme Court Act 1986 (Vic). What is driving the trend for shareholder class actions? “Same Interest” procedures provide a legal regime Today a vast number of Australians invest in shares, whereby numerous persons who have the same interest either directly or indirectly through managed investment in a proceeding, can have the action commenced or funds and superannuation. Institutional investors also continued by one or more of the group who represents have substantial shareholdings in other companies as the whole or part of the group. part of their portfolios. Traditionally, these “same interest” procedures have Two recent High Court decisions have made bringing been narrowly interpreted, requiring the claims of all class actions on behalf of shareholders and investors group members to arise out of the same transaction more attractive by confirming that: or series of transactions. In recent years, however, a more liberal interpretation of the requirements has 4 (i) shareholders rank equally as unsecured creditors in been adopted by the courts . the case of an insolvent company (Sons of Gwalia), and Class actions in the Federal Court are known as “representative proceedings”. The provisions of (ii) the concept of litigation funding (ie litigation funded the Victorian legislation for class actions procedures by those who “invest” in legal actions initiated by are virtually identical to those of the Federal Court those who otherwise cannot afford to bring such although class actions in Victoria are known as actions) is not against public policy3. “group proceedings”. In Part 4 of this series, we will explore in greater detail The term “class action” in the Australian context is the factors driving the recent increase therefore used in a more popular context rather in shareholder class actions in Australia. than a strictly legal one. Used in this popular context, class actions encompass a range of litigious processes at Federal, State and Territory levels and include various forms of representative or group proceedings and, sometimes proceedings involving multiple plaintiffs or defendants. These various forms of litigious processes provide a means by which the claims of many individuals against the same defendant (or defendants) can be brought by a single representative. For the sake of simplicity, we shall refer to all such litigious processes in this series of White Papers as “class actions”. Footnotes (1) There are a number of recent articles (2) Following the HIH Royal Commission recommendation that personal duties (4) In Carnie v Esanda Finance written by leading law firms of this Report on The Failure of HIH Insurance, and liabilities be extended under the Corporation (1994-5) 182 CLR 398, for country informing us that class actions the Corporations and Markets Advisory Corporations Act beyond directors and instance, the High Court held that “same have become a significant part of the Committee (CAMAC) published a officers to those in senior management interest” means “a community of interest Australian legal landscape. See, for paper ( 2005) which reviewed the or who otherwise take part in, or are in the determination of some substantial instance, the article written by S Stuart personal duties and liabilities under the concerned in, the management issue of law or fact”. This more liberal Clark and Christina Harris of Clayton Utz, Corporations Act of corporate officers, of companies. approach has allowed “same interest” “Class Actions in Australia employees and other individuals proceedings to become almost as broad – A Comparative Review” below board level. The outcome of the (3) Campbells Cash & Carry Pty Limited as proceedings which are brought in the November 2004. report was, amongst other things, a v Fostif. Federal Court. Part 2 Executive Summary Shareholders in Australia now have available to them the entire suite of corporate malfeasance claims and remedies under numerous pieces of legislation. The Prudential Principle is no longer a barrier to shareholders who wish to bring a class action seeking damages for loss of share value. The class action against the now-defunct Harris Scarfe Holdings – which went into voluntary administration in 2001 – successfully met the federal requirements: namely, the claims of 7 or more persons were shown to arise from related circumstances and to have given rise to common questions about the directors’ duty of care, the entitlement of individuals to recover losses, and the liability of individual directors. Directors and officers and the company secretaries who manage the board’s legal responsibilities need to understand the importance of this changed legal landscape, particularly as it relates to the liability

Load more