Securities Class Actions in Asia-Pacific

1

Introduction

The average securities class action can cost between AUD 50-70 million (including settlement value and legal costs).1 The Australian Directors’ and Officers’ D&O( ) insurance market premium pool is around AUD 280 million. By the end of 2017, 16 new securities class actions had been filed in the Federal Court of Australia and in 2018 at least 18 actions were filed.2

Against this backdrop, this White Paper explores the landscape for securities class actions against corporates across Asia-Pacific and the D&O insurance solutions that are available to companies and their D&Os.

Australia has one of the most developed (and plaintiff-friendly) class action regimes in the world and has seen the bulk of the class actions in the Asia-Pacific region. As such, the majority of this White Paper focuses on developments in Australia. However, securities class action litigation against entities and their D&Os is increasingly a global issue, and a number of jurisdictions across Asia are beginning to enhance their corporate governance regimes, and introduce procedures for collective actions.

As collective actions develop internationally, so too will exposures for companies and their directors. However, the likelihood of a collective action depends on a number of different factors, including appetite for litigation, the presence of litigation funders and the spread and make-up of the shareholders concerned. This White Paper therefore also examines the position in China, Taiwan, Thailand, Japan, India, South Korea, Hong Kong, Singapore, Malaysia and Indonesia.

1 Insurance Council of Australia’s response to the request for submissions to the Victorian Law Reform Commission’s consultation on “Access to Justice – Litigation Funding and Group Proceedings”. 2 Ibid. Also see Active Shareholder Class Actions in Australia table on pages 14 to 15 in this White Paper. Australia

Contents

03 04 04 05 Class Actions – Test for bringing Main stages in a Free-Riders the main features a Securities Securities Class Action Class Action

06 07 08 09 HIH Insurance Shareholder Growth in Role of ASIC Limited (in activism Securities Class Liquidation) Actions

10-11 12 13 14 Key Shareholder Active Shareholder What steps can Defence costs Class Action Class Actions a defendant take settlements in Australia when a Class in Australia Action is brought?

15 16 17 19 The need for Strategic Entrepreneurialism Impact of litigation expert evidence considerations funding on for defendants settlement dynamics

20 21 Multiple Class The Future Actions 3

Australia’s class action system is moving into its 27th year following its 25 year anniversary in 2017. During this time, the threat of being on the receiving end of mass proceedings has become a core risk factor for companies and directors based in, or listed in, Australia. The class action regime has grown and developed, aided by an entrepreneurial plaintiff bar, a burgeoning market for litigation funding and relatively low thresholds for bringing a claim under the class action procedure. Class Actions – the main features

The class action regime was introduced in the Federal Court of Australia in 1992, followed by the Supreme Courts in New South Wales, Victoria, and, since 2016, in Queensland, with developments in Western Australia anticipated. All of those states have procedures closely modelled on the Federal Court system. In South Australia, there is a different system which provides for certification, but is rarely utilised. The focus of this White Paper will be on the system in the Federal Court, where the majority of securities claims are brought.

On 24 January 2019 the Australian Law –– certain mechanisms should be The key features of the Australian Reform Commission (ALRC) released introduced to prevent competing class regime which currently remain are its final report in its “Inquiry into Class actions and exclusive jurisdiction as follows: Action Proceedings and Third-Party should be conferred on the Federal ––There must be seven or more persons Litigation Funders” (Inquiry or ALRC Court for causes of action arising with claims against the same defendant; Final Report). The Inquiry focused on under specific Commonwealth the impact that an increasing number legislation;6 and ––The claims must be in respect of, of class actions and litigation funders or arise out of, the same, similar or –– there are certain mechanisms which has had on the class action regime. related circumstances; and should be introduced to permit The ALRC has recommended several the charging of contingency fees in ––The claims must give rise to at least reforms that were the subject of public class actions, subject to a range of one substantial common issue of law consultation, including a review of limitations.7 and fact. the legal and economic impact of the central causes of action in shareholder Overall, the recommendations made claims.3 The conclusions reached by the by the ALRC might be described as ALRC include that: extensive but not revolutionary. The extent of any impact they have on the ––litigation funding should remain class action litigation landscape in within the purview of the Courts Australia will inevitably depend on the rather than regulation by the corporate appetite of the government to transform watchdog, the Australian Securities recommendations into policy. and Investments Commission (ASIC);4

–– there should be a Parliamentary review of the continuous disclosure laws in Australia, an area where there has been significant claims activity with shareholder class actions;5

3 For more information see www.clydeco.com/insight/article/alrc-class-actions-article. 4 See Chapter 6 in the ALRC Final Report, Regulation of Litigation Funders. 5 See Chapter 9 in the ALRC Final Report, Review of Substantive Law? 6 See Chapter 4 in the ALRC Final Report, Case Management. 7 See Chapter 7 in the ALRC Final Report, Solicitors Fees' and Conflicts of Interest. 5

Once proceedings are commenced, Despite the “opt-out“ model, Australian any settlement must be approved by Courts have permitted narrower class the Court. This requires the Court to actions to be brought with the class be satisfied that the settlement is fair being restricted to those that have and reasonable and in the interests of entered into an agreement with a class members. particular litigation funder and/or law firm retainer. This has led to competing The regime operates as an “opt-out” class actions with respondents having system, meaning that all potential to defend multiple claims arising out of plaintiffs will fall within the definition of substantially the same facts, sometimes the class upon filing unless they choose in different jurisdictions (for example, to opt out. The class can be defined by State Courts and the Federal Court). reference to a set of criteria (such as Where such competing claims are “all shareholders who bought shares in not promptly consolidated, the legal ABC between X and Y dates”) and group costs escalate. members will often play a limited or non- existent role in the proceedings, with the The jurisprudence from Australian named representatives being the only Courts is developing in this area. On named plaintiffs in the proceedings. 20 November 2018 the Full Federal At trial all common questions together Court upheld a first instance decision with all non-common questions raised ordering a permanent stay in two of by the lead applicant’s personal claim three competing class actions such will be determined. The judgment will that only one of those class actions can bind all group members who have not proceed.8 Additionally, the ALRC has opted out. recommended that the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) and the Federal Court of Australia Class Actions Practice Note (Class Actions Practice Note) be amended to grant the Court specific powers such that all representative proceedings are initiated as an open class, with further case management procedures to deal with competing class actions. If the recommended changes are implemented by the Australian Parliament, this should address the current challenges faced by competing class actions and multiplicity of proceedings.

8 Perera v Getswift Limited [2018] FCAFC 202 (appeal); Perera v GetSwift Ltd [2018] FCA 732 (first instance decision) (GetSwift). At the time of writing this paper, an application has been filed in one of the stayed proceedings seeking special leave to appeal to the High Court of Australia. That application had not been determined, as far as Chubb is aware, as at the date of publication of this paper. Test for Bringing a Main Stages in a Securities Class Action Securities Class Action

A securities class action is a claim brought 1 2 Drop in share price ASX Price Query by a group of shareholders most commonly against a company and/or its directors and officers claiming damages for financial losses 4 3 suffered as a consequence of either the Funding agreement Class action due company’s failure to disclose material facts diligence by law firm/ or a misrepresentation of material facts to the litigation funder financial market. 5 6 Class action launch Securities class Typically, whilst shareholder claims involve large overall and advertisement action claim filed by losses, the individual loss suffered by each shareholder can for group members representative plaintiff be small. Class actions therefore offer a route by which the 8 7 claim can be brought on behalf of many individuals against Defence filed Defendant consideration the same defendants by a lead applicant, usually identified of application that and managed by a plaintiff law firm. threshold requirements Securities class actions will generally allege that the respondent have not been met company, listed on the Australian Securities Exchange (ASX), 9 10 engaged in misleading or deceptive conduct by its statements Discovery Evidence filed to the market and/or failed to disclose relevant information to the market (s1041H of the Corporations Act 2001 (Cth)) (Corporations Act) and breached its continuous disclosure obligations in relation to material information under the ASX 11 Listing Rules (s 674 of the Corporations Act). ASX Listing Rule 3.1 Mediation provides that “once an entity is or becomes aware of information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell the ASX that information.” Importantly, it is not necessary to prove any intent to defraud or Settlement Hearing mislead investors, or negligence for either cause of action. (Court Approval Hearing)

Distribution of Settlement Judgment (if agreed/awarded)

Market disclosure and integrity is a matter of great interest to the corporate regulator, ASIC. It routinely investigates continuous disclosure breaches and, where contraventions are suspected or have occurred (resulting in an uninformed securities market), ASIC may conduct an investigation which can also lead to regulatory action. Whilst not always a precursor to a securities claim, where there has already been such an investigation this may give potential claimants access to a route-map by “piggybacking” their claims on the work of the regulator. 7

––––– ––––– Free-Riders However, the impact of these decisions on the Australia’s “opt-out” model has traditionally had the potential likelihood of multiple to encourage “free-riding”. actions is a key issue for This is where unfunded group members The ALRC has recommended that the wait until a successful outcome has Federal Court Act be amended so that defendants, explored been achieved before coming forward there is an express statutory power for further below in “Multiple to collect a proportion of the proceeds the making of common fund orders, without needing to reimburse the funder. either on application by the plaintiff or on Class Actions”. In order to prevent free-riding, funders the Court's own motion.14 and plaintiff law firms have sought to This follows decisions which demonstrate ––––– ––––– restrict class actions to a “closed class”, the willingness of Australian Courts typically brought on behalf of a subset of as between funders and members of to modify and interfere with litigation group members who contractually enter the group. However, the impact of these funding arrangements, including into a funding agreement or law firm decisions on the likelihood of multiple adjusting the rate of commission retainer. Litigation funders have recently actions is a key issue for defendants, due to the funder. It is important to sought to overcome the “free rider” explored further below in “Multiple note that whilst Money Max offers problem and improve their financial Class Actions”. In addition, with the comfort to funders that proceedings are recoveries by applying to Australian developing jurisprudence on common commercially worthwhile, in the absence Courts for common fund orders in class fund orders it may now be possible for of a requisite pool of signed up group actions. Common fund orders require all a funded class action to be commenced members at the outset of a matter, there class members who seek to benefit from sooner as the focus on the initial “book remains uncertainty as the Court (not the proceeds of settlement or judgment build” and signing up participants to the the funder) will set the commission rate to contribute equally to the cost of legal class before commencement may no at the end of proceedings. Similarly, the representation and litigation funding longer be as fundamental. uncertainty for funders will continue costs, regardless of whether or not they to exist if the ALRC recommendations These decisions in and of themselves had entered into a funding agreement. on regulation of litigation funders may encourage more open class actions Despite the Courts’ initial reluctance to become law. If implemented, through to be brought in Australia, and indeed make such orders, a litigation funder amendments to the Federal Court Act this the ALRC has recommended legislative finally achieved success in the Full would empower the Court to approve the amendments to ensure all class actions are Federal Court decision of Money Max terms of third party funding agreements, initiated as open class actions. Anticipated Int Pty Ltd (Trustee) v QBE Insurance such that funders would be required to reforms and/or judicial intervention mean Group Ltd9 (Money Max) in late 2016, irrevocably submit to the jurisdiction of that open class actions are therefore with the same funder also securing the Court. This would result in private expected to dominate the class action a common fund order in Blairgowrie agreements reached by the funder with regime moving forwards. However, these Trading Ltd v Allco Finance Group Ltd (rec group members only being enforceable decisions and proposed reforms will not and mgr apptd) (in liq) (No 3).10 Similarly, with Court approval, and the Court being of themselves turn cases with limited in Earglow Pty Ltd v Newcrest Mining empowered to reject, vary, or amend the prospects of success into an attractive Limited11 and Camping Warehouse Pty Ltd terms of those agreements.15 funding proposition. There is of course a v Downer EDI Ltd12 the Court approved risk that if similar orders are made in other From a defendant’s perspective, these an “equalisation order” which operated claims over time, this may cause funders decisions and potential reforms do not, as a redistribution recovery mechanism to fund cases that previously would have of course, affect the respondent’s liability to all funded members.13 been considered marginal and would not or quantum; rather they go to how have secured funding. settlement monies are to be distributed

9 [2016] FCAFC 148 10 [2017] FCA 330; (2017) 343 ALR 476 11 [2016] FCA 1433 12 [2016] VSC 784 13 An equalisation order is an alternative to a common fund order. It takes the amount that members of the class who did not sign funding agreements would have paid to the funder if they had signed the agreements, and distributes it pro-rata to all group members. It ensures that members who funded the litigation are not worse-off by deciding to help fund the litigation. 14 ALRC Recommendation 3. 15 See Chapter 6 of the ALRC's Final Report, and in particular, recommendation 14. HIH Insurance Limited (in Liquidation) – a green light on INDIRECT causation

One of the key issues to determine in This has been an unsettled area of law in reliance on public misstatements and a securities class action is whether it Australia where, until very recently, the plaintiffs will still have the onus of is necessary for each group member US style fraud on the market theory has proving that the price of the shares was to prove actual reliance on the not been embraced. However, there are affected by the misstatements. contravening conduct which it is alleged some recent decisions of single judges Although not binding in other Australian has led to their loss (direct causation) which show the Courts (at least at first jurisdictions, the decision may provide or whether they must simply show instance) are leaning towards market an important contribution towards that they purchased their shares from based reliance or indirect causation jurisprudence on the scope of the the company at an inflated price and theory. In one such case, Re HIH Insurance causation onus placed on plaintiffs the inflated price was caused by the Limited (in liq) and Others,17 a small in Australian securities class actions. company’s contravening conduct number of shareholders successfully However, it is important to emphasise (indirect or market based causation). claimed that: that it is a single judge decision of a state The “fraud on the market” theory a. The failure to disclose important Court and that the case should be given of causation is well established information caused them to acquire appropriate context: it arose following in the US. Under this theory, all the shares at an overvalue and that Australia’s largest corporate collapse material information (including any they were entitled to recover the where the liquidator had refused to admit misrepresentation) that is publicly difference between what they had proofs of debts by the shareholders. If the disclosed is reflected in the share price. paid for the shares and their so-called reasoning in Re HIH were to be accepted As a result, if an investor acquires shares true value when acquired; and by the Federal Court and appellate State at a certain price, he or she is presumed Courts, it would provide strong domestic b. They were entitled to pursue a case to rely on all of the information that is support for market-based causation. It based on the theory of indirect reflected in that price, including the would also permit plaintiffs in securities causation and that they did not need misrepresentation. The theory was actions to prove causation by the mere to prove individual reliance. affirmed in relation to misrepresentative purchase of a security on a well-developed acts (as opposed to omissions) alleged in However, the Court also observed that exchange, where the value was artificially Rule 10 b-5 claims by the Supreme Court investors cannot succeed if they knew deflated or inflated by misleading and in Halliburton v Erica John Fund.16 the truth about, or were indifferent to, deceptive conduct, unless that plaintiff the contravening conduct but proceeded knew the truth about, or was indifferent There is presently no judicial authority to buy the shares anyway. Whilst this to, the misleading and deceptive conduct. from a superior Court in Australia case was not constituted as a class as to whether causation needs to be Questions of onus in causation will action, some analogies can be drawn for demonstrated on a direct (individual continue to be passionately contested, group actions involving similar facts. reliance) or indirect causation basis. including in securities class actions, In Re HIH, the plaintiffs did not argue until such time as this area is more fully that they had read or directly relied on considered by the appellate Courts in the financial information containing the Australia. allegedly misleading statements; rather, Further, in such claims, if the lead they had bought the shares at a time that applicant successfully establishes that the price for the shares was inflated due the company engaged in misleading or to the misleading financial information. deceptive conduct and/or breached its The Court held that the failure to disclose continuous disclosure obligations, the accurate information led to the market lead applicant will still need to establish thinking that the company was trading that such conduct caused loss and more profitably than in fact was the case. damage. Expert evidence on both sides This led to the shares being traded at an will be needed to show the impact of inflated price. any share price inflation (see further Unlike the fraud on the market theory, under “The need for expert evidence”). there is no rebuttable presumption of

16 563 US 804 (2011) 17 (2016) 335 ALR 32. There has been a subsequent related interlocutory decision in this proceeding including in relation to loss methodologies, being In the Matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) and Others [2017] NSWSC 380 9

Shareholder activism

A key issue for every company is Australia’s corporate legislative framework the powers distributed and held by is regarded as having a number of “activist shareholders, and shareholders’ ability to friendly” features. It has a growing number influence a company and its management. of proxy advisors who give advice to A tension between the shareholders shareholders on how to exercise their and company has the potential to arise voting rights. There are a number of in all organisations, from large listed routes which shareholders can use to companies to private companies with force change such as the power to make closely related shareholders. Whilst the resolutions, bring oppressive actions under balance of power between directors and the provisions of the Corporations Act shareholders will vary from jurisdiction (a route which is increasingly displacing to jurisdiction, the power to make derivative actions which can be costly and binding decisions for the company and to difficult to pursue), and collective action to choose the direction the company grows change the constitution. in is generally vested in the directors. Whilst, broadly speaking, shareholder Internationally, there is an increasing activism is focussed upon effecting trend towards activism by shareholders to corporate change rather than preparing increase their influence on the company’s for a dispute with the company and conduct, and the decisions taken by its directors, increased shareholder directors and management. activism undoubtedly involves harder As reported by Activist Insight and scrutiny of a company’s performance FTI Consulting in 2017,18 shareholder and evidences a willingness to take activism is on the rise across Asia-Pacific, corporates to task for perceived failings. most notably in Australia, but also in Going forward, we expect directors China, Hong Kong and Japan. Whilst and companies to have to grapple activism in Australia is not new, its increasingly with shareholder activism. shape and scale are changing; whereas activism was largely the preserve of high net worth individuals seeking to obtain board control, Australian and international activist funds (the latter spurred on in part by the saturation of the US market)19 and asset managers are driving the activity in ever-increasing numbers. The “internationalisation” of activism in Australia is tipped to lead to a rise in public campaigns (in contrast to the preponderance of solutions reached behind closed doors), and the targeting of larger corporates than has previously been the case.

18 Global Activism On The Rise: A 2017 Update, FTI Consulting, 28.7.2017, http://fticommunications.com/2017/07/global-activism-rise-2017-update/ : For example, the removal of CEO or other Board members rose from 27.8% in 2016 to 52.7% in the first half of 2017. 19 Shareholder Activism in Australia: Navigating the evolving landscape, JP Morgan, 2017, https://www.jpmorgan.com/jpmpdf/1320730885940.pdf Growth in Securities Class Actions

The first securities class action was filed outside of the class action regime that This growth can be explained by a in Australia in 1999. Since then, there have reached full judgment. The threat number of factors, including the focus has been a rapid growth in securities of facing a class action in Australia is a by plaintiff law firms and funders on this class actions in Australia with at least huge exposure for companies and their area, heightened scrutiny of corporate 78 shareholder class actions filed in D&Os. Australia is now a country where governance, and support by ASIC, for the Federal Court since 2002 (when corporates face the highest risk of being the role private litigation can play in misleading or deceptive conduct subject to a class action in the world the enforcement of those standards. provisions were introduced into the (second only to the US). It is increasingly Institutional investors and trustees of Corporations Act).20 Shareholder class common for claims to arise out of a superannuation funds have increasingly actions are the most commonly filed single event such as a corporate collapse begun to view joining group securities class actions in the Federal Court; (for example, Dick Smith, Tamaya, Allco suits as a means of enforcing their 34% of all class actions filed in the last and Forge), as well as those that arise private legal rights (for example the 5 years have been shareholder claims.21 from alleged accounting irregularities participation by UBS in the Centro class Although one securities class action has with allegations that accounts and action). Although rarely acting as the run the full course at trial (but settlement profit forecasts have been over-stated representative plaintiff, their involvement was reached before judgment was (for example, TWE and QBE). heightens the overall exposures for the delivered) and judgment is currently defendants. Going forward, securities reserved in the Myer shareholder class class action litigation is expected to action which was conducted in late continue to develop for a number of 2018,22 there have been numerous reasons including: claims by shareholders constituted ––Indirect/market based causation (see further above under “HIH Insurance Limited (In Liquidation) – a green light on indirect causation”) - if the Courts adopt a test of indirect/market based causation, the plaintiffs do not have to show individual reliance; Class Actions established by shareholders23 ––Litigation funding given the relative ease of securing litigation funding for this type of claim and recent Court decisions granting common fund orders which favour funders; and

1992-2004 2004-2017 ––Regulatory focus by ASIC on market disclosures and integrity. ASIC routinely investigates continuous disclosure breaches and where contraventions are 5% 23% suspected or have occurred (resulting in an uninformed securities market), there is the potential to piggyback upon the work of the regulator. 23

20 ALRC Discussion Paper – Inquiry into Class Action Proceedings and Third Party Litigation Funders; June 2018 (ALRC Discussion Paper) at [1.12] citing V. Morabito, private correspondence (13 March 2018) 21 Ibid 22 TPT Patrol Pty Ltd atf the Amies Superannuation Fund v Myer Holdings Limited (VID1494 of 2016). 23 An Empirical Study of Australia’s Class Action Regimes Fifth Report. The First Twenty-Five Years of Class Actions in Australia by Professor Vince Morabito, July 2017 11

Role of ASIC

ASIC has played a prominent part in the development of securities class actions in Australia. Regulatory action following a share price drop can on occasion be the starting point for actions (see above “Main stages in a securities class action” and note below). As part of its regulatory toolkit when investigating breaches of continuous disclosure obligations, ASIC has broad powers to interview directors under compulsion, and the interview claims is typically extended to entities ways in which Side C cover is offered records can be produced under a under D&O policies as "Side C" cover. to the Australian market in future, subpoena in a securities class action. for example by increasing premiums, Under relevant Australian laws, a plaintiff ASIC can also seek compulsory provision restricting cover or reducing limits of does not need to allege that misleading of documents or information which may cover, introducing higher attachment or deceptive conduct was committed by also be provided to litigants in certain points or excluding Side C entity only directors, and under the ASX Listing Rules circumstances. The investigation can cover altogether. there is no requirement that a company's therefore provide a valuable resource for failure to disclose to the market was plaintiffs seeking to build a case. deliberate or negligent. This means Defendants’ exposure Although ASIC has the power to bring there is a lower threshold for bringing The exposure for defendants is proceedings (under s 50 of the ASIC Act securities claims against a company potentially huge with settlements for 2001 (Cth)) where to do so would be in directly in Australia as compared to shareholders and investors claims well the public interest, it is unlikely to do so other jurisdictions, such as the US where exceeding AUD 1 billion. where a private claim is already on foot scienter (intent) is required. Accordingly a and it encourages potential plaintiffs to company will often have fewer defences The largest shareholder settlement to seek alternative routes such as private available to it than an insured director or date is the Centro class action, where litigation.24 Additionally, ASIC can bring officer who can rely on due diligence in proceedings were brought on behalf civil penalty proceedings and criminal order to defend a claim where they are of purchasers of an interest in Centro proceedings (the latter of which is usually pursued as being accessorily liable for securities during a relevant period, reserved for the most serious conduct) the company's breach. alleging Centro breached its continuous and will do so even where there are also disclosure obligations and engaged in This rise in the number of Australian civil proceedings in respect of the same misleading conduct by failing to disclose to class actions being brought against breach and can also seek enforcement the market its maturing debt obligations. entities alone has led to D&O insurers undertakings from the corporation in The AUD 200 million settlement was funding and settling large claims not return for an agreement not to prosecute. approved on 19 June 2012 (estimated involving any claims against the insured Although these undertakings will not claim value AUD 1 billion). More recently, directors or officers – which is an contain a formal admission of liability, in December 2017, QBE Insurance agreed unforeseen consequence of extending they can provide valuable ammunition to pay AUD 132.5 million to settle a class Side C cover to D&O policies. This has for plaintiffs. action over its 2013 share plunge. therefore created a risk of the limit of D&O cover being fully eroded by a single Although some prospective claims do not Actions against the entity only class action (or multiple actions) against make it through the book building stage and fall away before filing, the publicity One of the current concerns for the the entity alone, leaving no or limited and scrutiny for defendants (strong Australian D&O market is the significant cover available for insured directors and media activity can accompany a class and increasing number of securities class officers for the same or other claims action launch, and can often precede actions being filed against insured entities, including, for instance, regulatory a determination of whether there is a in some cases without any claims being claims or other civil claims. reasonable case) is often intense and brought against the insured directors or In order to address these concerns, capable of collapsing the share price in officers themselves. Cover for securities D&O insurers are likely to adjust the and of itself.

24 ASIC INFO 151 approach to enforcement. Key Shareholder Class Action settlements in Australia

Year Year Settlement Reported Plaintiff Litigation Matter commenced settled amount (AUD) Demand (AUD) Law Firm Funder GIO 1999 2003 112 million 500 million Maurice Blackburn Tracknet 2000 2004 4 million Maurice Blackburn IMF Bentham Aristocrat 2003 2008 145 million 240 - 396 million Maurice Blackburn Limited IMF Bentham Concept Sports 2004 2006 3 million Unknown Maurice Blackburn Limited Duncan Basheer Harris Scarfe 2002 2006 3 million 20 million Hannon International Multiplex 2006 2010 110 million 150 million Maurice Blackburn Litigation Funding Partners Telstra 2006 2007 5 million 300 million Slater & Gordon IMF Bentham Downer EDI 2007 2008 18.25 million 100 million Slater & Gordon Limited IMF Bentham Village Life 2008 2009 3 million 30 million Slater & Gordon Limited Dennis & Co IMF Bentham Sons of Gwalia 2005 2009 70 million 260 million Jackson McDonald Limited IMF Bentham AWB 2007 2010 40 million 100 million Maurice Blackburn Limited IMF Bentham 150 million 700 million Maurice Blackburn Limited Centro 2008 2012 Comprehensive 50 million Slater & Gordon Legal Funding Maurice Blackburn Media World 2005 2010 0 40 million Slater & Gordon IMF Bentham 2011 39 million 185 million Maurice Blackburn Limited Litigation Lending OZ Minerals 2009 2011 21 million 185 million Slater & Gordon Services IMF Bentham 2016 32.5 million 250 million ACA Lawyer Limited IMF Bentham Credit Corp Group 2010 2012 6.5 million Unknown William Roberts Limited International National 2010 2012 115 million 200 million Maurice Blackburn Litigation Funding Australia Bank Partners Sigma Comprehensive 2010 2012 58 million 200 million Slater & Gordon Pharmaceuticals Legal Funding Transpacific Settled IMF Bentham 2012 35 million Unknown Maurice Blackburn Industries Group before filing Limited Comprehensive Slater & Gordon Legal Funding Nufarm 2011 2012 47 million Unknown International Maurice Blackburn Litigation Funding Partners 13

Year Year Settlement Reported Plaintiff Litigation Matter commenced settled amount (AUD) Demand (AUD) Law Firm Funder Comprehensive GPT 2011 2013 75 million 100 million Slater & Gordon Legal Funding White Sands LCM Litigation 2012 2014 3 million Unknown Piper Alderman Petroleum Pty Ltd International Allco Finance 2013 2017 40 million Unknown Maurice Blackburn Litigation Funding Group Partners Macpherson & IMF Bentham Great Southern 2013 2014 23 million 240 million Kelley Lawyers Limited International Leighton Holdings 2013 2014 70 million 400 million Maurice Blackburn Litigation Funding Partners Rivercity 2014 2016 121 million 150 million Maurice Blackburn IMF Bentham Comprehensive Newcrest 2014 2014 36 million 200 million Slater & Gordon Legal Funding IMF Bentham Downer EDI 2011 2014 28 million 38 million Slater & Gordon Limited BSL Litigation Downer EDI 2014 2016 11 million Unknown Mark Elliott Partners Comprehensive Billabong 2015 2016 45 million Unknown Slater & Gordon Legal Funding IMF Bentham Brisconnections 2014 2015 Confidential Unknown Whittens Lawyers Limited IMF Bentham Gunns (directors) 2011 2016 16 million 75 million Maurice Blackburn Limited IMF Bentham Treasury Wines 2014 2017 49 million 100 million Maurice Blackburn Limited 2017 International QBE 2015 132.5 million 200 million Maurice Blackburn (in principle) Litigation Partners International Slater & Gordon 2016 2017 36.5 million 250 million Maurice Blackburn Litigation Partners International Tamaya Resources 2014 2017 6.75 million 30 million Maurice Blackburn Litigation Partners International Arasor 2012 2018 19.25 million Unknown Squire Patton Boggs Litigation Partners IMF Bentham Kagara 2016 2018 3 million Unknown Piper Alderman Limited 6.7 million Macmahon 2015 2018 (awaiting Court Unknown ACA Lawyers Harbour Fund II Holdings approval) Active Shareholder Class Actions in Australia

Year Reported Plaintiff Litigation Matter commenced Demand (AUD) Law Firm Funder

Up to 100 million plus Phi Finney McDonald Forge 2014 IMF Bentham interest and costs Lawyers

JustKapital Worley Parsons 2014/2015 300 million ACA Lawyers Litigation Pty Ltd

2015 – on Australian Funding Myer Holdings 300 million Portfolio Law appeal Partners Limited

QRxPharma 2015 Unknown Arnold Bloch Leibler JustKapital

Unknown but 103.5 million Ashley Services 2016 market capitalisation William Roberts IMF Bentham Group Limited drop reported

Phi Finney McDonald IMF Bentham Unknown but 350 million market Lawyers Vocation Limited 2016 capitalisation drop reported International Litigation Maurice Blackburn Funding Partners

Unknown but 183.5 million market Melbourne City Murray Goulburn 2016 Elliott Legal capitalisation drop reported Investments

Phi Finney McDonald UGL 2017 Unknown IMF Bentham Lawyers

BSL Litigation Portfolio Law Sirtex 2017 Unknown Partners Limited Maurice Blackburn IMF Bentham

Unknown but 259.7 million Slater & Gordon IMF Bentham Bellamy's 2017 market capitalisation drop reported Maurice Blackburn Investor Claim Partner

Commonwealth Unknown but 5.6 billion market 2017 Maurice Blackburn IMF Bentham Bank of Australia capitalisation loss reported

Spotless Group Holdings 2017 Unknown Slater & Gordon Therium

International Litigation Surfstitch 2017 100 million Gadens Funding Partners

Unknown but 1.3 billion market International Litigation Crown Resorts 2017 Maurice Blackburn capitalisation loss reported Funding Partners

Shine 2017 250 million Quinn Emanuel Regency Funding Pty Ltd

Gadens Unknown

Quintis 2017 122 million plus Litigation Capital Piper Alderman Management

Corrs Chambers 2017 Vannin Capital Westgarth Dick Smith Johnson Winter 2018 200 million Investor Claim Partner & Slattery 15

Year Reported Plaintiff Litigation Matter commenced Demand (AUD) Law Firm Funder

Phi Finney McDonald IMF Bentham Lawyers

Quinn Emmanuel Burford Capital Unknown but 2 billion market AMP 2018 Shine Augusta Ventures capitalisation drop reported Slater & Gordon Therium

International Litigation Maurice Blackburn Funding Partners

International 75 million to 100 million Squire Patton Boggs Litigation Partners

Corrs Chambers GetSwift 2018 120 million to 140 million Vannin Capital Westgarth

Phi Finney McDonald Unknown Therium Lawyers

Iluka 2018 Unknown ACA Lawyers Harbour Fund II

Unknown but 25 billion market Phi Finney McDonald BHP Billiton 2018 G&E RTMC Funding capitalisation loss reported Lawyers

Phi Finney McDonald Commonwealth Therium 2018 Unknown Lawyers Bank of Australia Slater & Gordon IMF Bentham

Brambles 2018 Unknown Maurice Blackburn Harbour Fund II

International Litigation CIMIC 2016 Unknown Maurice Blackburn Funding Partners

Woolworths Group 2018 Unknown Maurice Blackburn IMF Bentham What steps can a defendant take when a Class Action is brought?

In the submissions in response to the procedure, like that which operates in The Court can also make any of these Victorian Law Reform Commission the United States and Canada, would orders on its own motion.26 However, in (VLRC) paper,25 a debate has raged on enhance the practice and procedure of practice, as the threshold to constitute whether certification requirements the class action regime in Australia. a class is relatively low in Australia, the should be introduced. The debate has Courts are wary of intervening on class In the absence of a certification regime, not been split evenly between plaintiffs composition issues in securities claims the onus is upon the defendant to arguing against and defendants for at an early stage in the proceedings. argue that the action is an abuse of certification, although the Insurance process or should not otherwise proceed Defendants will also typically seek Council of Australia has called for a through an interlocutory application. security for their costs of the litigation at robust certification process, including a For example, defendants can argue an early stage of class action proceedings determination pre-commencement as that the action should be struck out, or (this is referred to further below). to which of several competing actions declassified or defendants can challenge should proceed. In contrast, the ALRC was the plaintiff and group representation. unpersuaded that a class certification

Defence costs

The costs of defending a securities claim Shareholders typically seek to establish legal privilege before being produced to the are substantial, typically in the region liability in these claims based, in large class applicant for inspection. of many millions of dollars. Recent part, on publicly available evidence Expert evidence (considered further empirical studies suggest that the average (for example, documents filed with the below) also absorbs a significant portion duration for shareholder claims to settle ASX) against the company’s internal of the costs incurred in bringing and and obtain Federal Court approval is 848 records (with voluminous records often defending these claims. days (2.5 years)27 from commencement generated across several years) and, of the proceeding, although some actions where a regulatory investigation has also Other concurrent wrongdoers may also take much longer than that to progress occurred into the conduct of a company, be joined: for example, auditors and through the Courts with defence costs the records obtained in the course of that legal advisors. This all has an impact increasing the longer it takes to finalise investigation. If there has been a pre-action on the complexity of the claim and the a matter. The defence costs incurred investigation, ASIC has broad powers of incurring of defence costs. are often commensurate with, or more document compulsion and examination Costs orders are only available against than, the plaintiff’s costs of pursuing of individuals in connection with the the class representative. It is common for such claims. Recent Court settlement alleged conduct which may later be litigation funders to meet these costs. In approvals have disclosed plaintiffs’ produced under subpoena in a securities addition to their own costs, settlements costs of AUD 12.6 million in the Oz claim. Substantial costs are often incurred usually provide that defendants meet Minerals class action, AUD 19.2 million in the discovery process, the majority of the plaintiff group members’ legal costs. in the AECOM/Rivercity class action, which will fall upon the defendant. This AUD 5.7 million in the Billabong class is because the defendant corporation action, AUD 10.3 million in Newcrest will usually have voluminous internal Mining, and AUD 10.5 million in documents which need to be reviewed and Allco Finance.28 considered for both relevance and client

25 Access to Justice – Litigation Funding and Group Proceedings, Consultation paper, July 2017 (the VLRC paper). http://lawreform.vic.gov.au/sites/default/files/VLRC_Litigation_Funding_and_Group_Proceedings_Consultation_Paper_for_web.pdf 26 Sections 33C and 33N of the Federal Court of Australia Act 1976 (Cth). 27 An Empirical Study of Australia’s Class Action Regimes Fifth Report. The First Twenty-Five Years of Class Actions in Australia by Professor Vince Morabito, July 2017. 28 Mitic v Oz Minerals Ltd (No 2) [2017] FCA 409; Hopkins v AECOM Australia Pty Ltd (No 8) [2016] FCA 1096; Newstart 123 Pty Ltd v Billabong International Ltd [2016] FCA 1194; Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433; Blairgowie Trading Ltd v Allco Finance Group Ltd (Receivers and managers appointed) (in liq) (No 3) [2017] FCA 330 17

The need for expert evidence

A key consideration for the defence team will be the opportunity to attack the quantum claimed in the proceedings. To show price inflation, expert evidence is typically needed to demonstrate the economic consequences of the alleged non-disclosure. The example below shows how loss methodology may work in an artificially simple scenario.

Simple Loss Methodology One of the simplest ways of assessing the loss is to look at the market reaction to the information once it is disclosed:

1. Plaintiffs will argue that if the price drops, then at face value it suggests of other confounding information (being purchased first (i.e. before the relevant that the non-disclosed information any other information unrelated to claim period) are also sold first; was material to the price or value of the specific disclosure that would be the securities; ––Last In, First Out (LIFO), premised on expected to have an effect on the stock 2. The failure to have informed the the assumption that shares purchased price) on the market price is therefore market earlier caused the market to last are sold first, and which does not an important tool to use in attempting trade securities at a higher price - this off-set the shares sold in the claim to resolve these tensions. is known as the Inflation Period; and period; and 3. The quantum of the loss can be Event studies, whilst not compulsory in ––“Netting”, which provides for any estimated by reference to the inflation Australia as compared with the US, are purchases and sales of shares by in price or value of the securities frequently used as a tool to demonstrate each group member to be netted off caused by the contravention and the these economic consequences. to account for any windfall gain that number of securities purchased in An “event study” is used by an expert a group member may have made by the Inflation Period and still held by economist or market analyst as a selling the shares at the allegedly group members at the conclusion of statistical tool to show evidence of the inflated price. the Inflation Period. change in price to specific disclosures. The appropriate method of loss In practice, it will be much more Whilst it has been widely adopted as assessment for quantum calculation complicated and there is a natural a standard methodology in the US purposes has not been decided by any tension when investors seek to rely for assessing market inflation, its use appellate Australian Court to date and on inflation as the measurement of in Australia is not yet subject to any it can take some time for defendants their loss, as it is also equally possible useful judicial guidance because the to get access to information through that some group members may have only securities action ever to run to a interlocutory processes in order to made a profit through selling shares in full trial was settled before judgment undertake the analysis required above, the same relevant period at the higher was delivered.29 with parties fiercely debating the price. In addition, shareholder claims There are also various quantum appropriate loss methodology. Loss do not tend to be ‘no transaction’ cases methodologies which are used to methodologies were considered by his as the shareholder would have made calculate potential claim value and/ Honour Justice Brereton in New South some other form of investment, if not or the potential number of impacted Wales Supreme Court Proceedings in in the company that is the subject of shares in a shareholder class action: 2017 where his Honour ruled in favour of the claim, then some other company the LIFO approach, although this action or investment opportunity. Economic ––First In, First Out (FIFO), premised was not constituted as a class action.30 evidence on share trades and the impact on the assumption that the shares

29 Dorajay Pty Ltd v Aristocrat Leisure Limited [2009] FCA 19. 30 In the Matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) and Others [2017] NSWSC 380. Strategic considerations for defendants

Whilst the prospect of facing high value, Actions”). This practice is expected to be high stakes litigation will inevitably carry eliminated if the ALRC's recommended with it interruption to normal business reforms, which are aimed at ensuring activity, reputational risk and heightened that all class action proceedings media attention, there are a number of proceed as open class actions, are factors that are unique to class actions implemented. that raise particular issues for corporates ––There is little opportunity to challenge and D&Os: the strength/weaknesses of individual ––The opt-out system makes it cases early on because the primary difficult for defendants to an action focus at the start is on the lead to ascertain their exposure early applicant and the common issues. on. Whilst the Court requires class The defendant will have to consider members to be notified of the action its prospect of success at trial and so that they have the choice to opt assess whether this can be deemed an out and not be bound by the outcome, acceptable risk. This is a highly complex class closure can happen quite late in exercise, made more difficult by the the proceedings, usually only shortly current uncertainty around a firmly before a mediation or trial, and there established approach to causation is always the possibility of the class and appropriate loss methodology. being re-opened if a matter does not Defendants will also have to consider resolve at mediation. the benefits of having a judgment on a ––Despite the opt-out model, Australian certain set of allegations, particularly Courts have permitted closed class when facing multiple proceedings. actions (restricting the class to those who have signed up to an agreement with a funder) increasing the prospect of competing actions and increased cost. (See further under “Multiple Class

Plaintiff firms representing active shareholder class actions

ACA Lawyers Phi Finney McDonald

Bannister Law Piper Alderman

Corrs Chambers Quinn Emmanuel Westgarth

Elliott Legal Shine Lawyers

Gadens Slater & Gordon

Johnson Winter Squire Patton Boggs & Slattery

Maurice Blackburn William Roberts 19

Entrepreneurialism

The role of the Australian ––enable greater access to justice for The role of litigation funding medium-sized class actions; plaintiff bar Litigation funding, the provision of ––promote competition amongst funders Plaintiff law firms in Australia have played financing by a third party not otherwise and encourage lower commission rates; a critical part in the growth of securities involved in the litigation, has been critical class actions in the jurisdiction. Firms ––provide a more straightforward method to the development of class actions in such as Maurice Blackburn, and Slater of billing for group members; and Australia. Due to the prohibition on & Gordon initially captured most of the contingency fees in Australia, litigation ––increase returns for group members market with specialist class action teams, funding first rose in prominence to assist by allowing for unfunded actions. usually working in tandem with litigation company administrators and liquidators funders. The market has expanded to The ALRC recommends that in order to pursue debts on behalf of creditors. include more players such as ACA, Squire to achieve a limited contingency fee Increasingly, litigation funders play a Patton Boggs, Shine Lawyers, Mark Elliott, model that addresses the concerns significant role in class actions where, Bannisters, Quinn Emmanuel, Gadens of stakeholders, statutes regulating absent funding, representative plaintiffs and Phi Finney McDonald (established the legal profession should permit would bear the risk of huge financial as a boutique firm by former partners of solicitors to enter into contingency outlay and adverse costs risk in return Slater & Gordon). It is the law firms that fee agreements subject to a range of for comparatively small individual will undertake due diligence on the claim, limitations including that: damages. Litigation funders supported often following a drop in share price, and 71% of all shareholder class actions filed ––an action that is funded through a by mid 2017.33 Securities class actions in will advertise for group members and contingency fee agreement cannot also build the class. ASIC may also investigate particular are regarded as fertile ground be directly funded by a litigation funder by funders as being simpler in terms the same matters for potential regulatory or another funding entity which is also action against the company and its D&Os. of assessment of damages and the charging on a contingent basis; identification of a class than other mass 31 As the VLRC paper identifies, there has ––contingency fee agreements in consumer claims, such as products and been a trend towards smaller and newer representative proceedings are permitted cartel claims. law firms entering the class actions only with leave of the Court; and space, heightening the prospect of Essentially, litigation funding involves a more speculative claims and the issues ––the Court has an express statutory party to a dispute receiving monies from surrounding a “race to file” discussed power to reject, vary, or amend a funder in exchange for the funder elsewhere in this paper.32 There has the terms of such contingency fee obtaining a return on its investment. also been ongoing consideration over agreements. Returns can take the form of an agreed whether more regulation of lawyers is amount or a share of the proceeds. In the required, and whether contingency fee event that the claim does not succeed, arrangements (also known as percentage- the costs are met by the funder or, if the based fee billing) should be permitted. relevant rules on costs allow, After The Whilst those arrangements are currently Event (ATE) insurance may be provided prohibited in Australia amidst concerns by the terms of the funding agreement of fostering an environment of greed to cover any adverse costs orders up to and conflicts of interest amongst the a specified limit. Commission paid to legal profession, the ALRC recommends the funder is typically in the range of 34 allowing a limited contingency fee model 22-45% (after costs). for class action proceedings, which it believes will:

31 VLRC paper, supra. 32 The issues are detailed in the Insurance Council of Australia’s response to the VLRC’s consultation paper, and include (i) inadequate representation by the lead plaintiff (ii) poor pleading of claims (iii) competing class actions; and (iv) closed class actions. 33 Vince Morabito Empirical Study (p 30), supra at FN 14. 34 VLRC paper, supra. The largest funders in Australia include There is growing concern that the survived the funder’s due diligence ASX listed IMF Bentham and Litigation presence of less sophisticated players process. Class actions proceeding in Capital Management Finance, and a who may be prepared to take on risks the Federal Court will be subject to a Singaporean hedge fund, International that more established funders will not, requirement to disclose any litigation Litigation Partners. Offshore funders has led to more speculative claims being funding agreement at/prior to the (such as Harbour Litigation Funding announced (with resultant media focus initial case management conference. and Burford Capital, reportedly the on the corporate and the potential for The agreement will usually be heavily world's largest funder, which recently an accompanying stock drop). redacted on the grounds of privilege. announced expansion of its operations In addition, the funding market has Whilst litigation funding is clearly a in Australia35) are also emerging become increasingly saturated, and commercial venture that the funders players. The opportunities presented this has led in part to the “race to file” would not engage in if the commercial by Australia’s class action regime have discussed elsewhere in this paper. The returns were not there, the Courts have a attracted a diverse range of funders - involvement of the funder is usually supervisory function in ensuring that the including those backed by institutional heavily publicised, and it may be extraction of a commercial return from investors, hedge funds and even high seen as a tactical advantage for the the claims process does not offend public net worth individuals. The VLRC paper plaintiffs to show that the claim has policy.37 For example, in October 2016, states that there are approximately 19 Australian and international litigation funders active in Australia, but that number is frequently changing with the ALRC most recently reporting that there are approximately 25 active funders in the Australian market.36 Offshore funders currently comprise just over a third of the funding market.

35 See www.abc.net.au/news/2019-01-28/litigation-funder-in-australia-to-profit-from-royal-commission/10755130 "The world's biggest litigation funder has set up shop in Australia to get a slice of the booming class action business, including some high profile cases stemming from the banking royal commission." 36 ALRC Final Report, para 2.66. 37 Campbells Cash and Carry Pty Limited v Fostif Pty Ltd [2006] 229 CLR 386 21

Australia’s Federal Court stayed an action The Court also plays an important as an abuse of process where the funder, supervisory role in approving any Melbourne City Investments (MCI), had settlement or discontinuance on the purchased a small parcel of shares in basis that it is in the best interests a publicly listed company and then of group members as a whole (s 33V instituted group proceedings with the Federal Court Act). This will involve a funder’s sole director and shareholder balancing of the interests of the plaintiff retained as the solicitor in the litigation. law firms and the funder.Money Max The Court found that the sole purpose (discussed further above) represents of the creation of MCI was to buy shares a step by the Court in accepting an and bring class actions as lead plaintiff to active supervisory role in litigation enable legal fees to be earned.38 However, funding arrangements, with the Court the Courts have been mindful that the concluding that the funding commission boundaries on Court interference are set would be determined by the Court at the by the legislature; in Tamaya Resources end of the proceedings. The Court will Limited (in liq) v Deloitte Touche Tohmatsu intervene to ensure the commission rate (A Firm),39 the Court refused permission is reasonable. In Blairgownie Trading Ltd v to amend the pleadings where the funder Allco Finance Group Ltd40 the Court found was acting on both sides of the record that 30% of the net settlement sum (after in two actions arising from the same deduction of legal costs) was reasonable, factual dispute but commented that “the adjusting it where necessary.41 desirability of permitting such arrangements is something which warrants investigation by the legislature”.

Emerging funders International IMF Bentham Ltd Litigation Galactic JustKapital (65% of Funding Partners Litigation Litigation Therium the market) Pte Ltd Partners LLC Partners BSL Litigation Australia Ltd

Comprehensive Comprehensive Vannin Woodsford Burford Harbour Litigation Legal Funding Legal Funding Capital Litigation Capital Funding LLC LLC Funding

38 Melbourne City Investments Pty Ltd (MCI) v Treasury Wine Estates Limited [2016] FCA 787 39 [2016] FCAFC 2 40 Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No 3) [2017] FCA 330 41 Earglow Pty Ltd v Newcrest Mining Limited and Camping Warehouse Pty Ltd v Downer EDI Ltd [2016] VSC 784 Impact of litigation funding on settlement dynamics

There is no doubt that the presence of a The presence of a funder is relevant to a In January 2017 in Australia, the Victorian litigation funder changes the dynamics defendant’s assessment of the litigation Government asked the VLRC to review of the litigation process. Some key issues costs risk. As mentioned above, security litigation funding practices in Victoria for defendants to consider include: for costs is often ordered against a following cases such as the Huon funded party. The funding agreement is litigation (not a class action) in which ––Applying for disclosure of the funding often tendered in response to a security an entire AUD 4.5 million settlement agreement: Parties to a class action for costs application and there will be was split between the lawyers and the proceeding in the Federal Court will consideration of the funder’s ability to litigation funder. In December 2017 the be subject to a requirement to disclose meet indemnity obligations in terms of ALRC was asked to consider whether, and any litigation funding agreement, adverse costs. There are some recent to what extent, class actions and third which as recognised by the ALRC will decisions which have permitted litigation party litigation funders should be subject be scrutinised by the Court in detail.42 funders to provide security by way of to Commonwealth regulation relating ––Early Tactics: Defendants may consider an ATE insurance policy (specifically a to conflicts of interest, costs charged deploying strong defences at an early deed of indemnity together with a bank and settlement distribution, as well as stage to prompt early settlement guarantee for the costs of enforcement) looking at prudential regulation and negotiations. Any result will need to not as an alternative to paying money capital adequacy. However, the ALRC has only be acceptable to the plaintiff (and into Court.45 The Australian Institute recommended against the establishment the group members), but also ensure a of Company Directors has argued for of formal regimes for regulating litigation commercial return for the funder. the prudential oversight of funders.46 funding such as a bespoke licencing However, the ALRC has recommended regime administered by ASIC or imposing ––Costs pressures: Security for costs are against prudential oversight and in capital adequacy requirements. often ordered against a funded party; favour of strengthening the security It has instead recommended the the Court will consider the funders’ for costs regime in funded actions in a implementation of consumer protection ability to meet indemnity obligations number of respects. measures through improving Court in terms of adverse costs. oversight of funding arrangements. There is no doubt that litigation ––Settlement dynamics: The funder As discussed earlier in this paper, the funding has energised and fuelled the is likely to be front and centre in oversight enhancements recommended development of securities class action settlement negotiations. Funder by the ALRC include a requirement for litigation in Australia with varying views involvement will change the Court approval for creation of a binding on whether the effect has been positive percentages of recovery, driving the litigation funding agreement, in which or negative. There has been a debate for strategy in any given case. the Court would have the power to a number of years regarding whether amend commission rates.48 The ALRC's ––Costs recovery: Australia has a loser litigation funding should be more tightly recommendations are likely to stymie pays system, and there have been cases regulated, and whether it delivers any further suggestions that a licencing in which a funder has been ordered to access to justice. At present, there is no or prudential regulation regime should pay costs, such as in Gore v Justice Corp mandatory licensing of litigation funding, be established in the foreseeable future. Pty Ltd43 and Ryan Carter and Esplanade with regulatory oversight limited to Holdings Pty Ltd v Caason.44 monitoring by ASIC, which requires funders to have adequate arrangements for managing conflicts of interest.47

42 ALRC Final Report, para 2.60. 43 [2002] FCA 354 44 [2016] VSCA 236 45 Australian Property Custodian Holdings Limited (in Liq) v Pitcher Partners [2015] VSC 513 (first instance);Australian Property Custodian Holdings Ltd (in liquidation) (receivers and managers appointed) v Pitcher Partners & Ors [2016] VSC 399; DIF III Global Investment Fund LP & Anor v BBLP & Ors [2016] VSC 401 and In the matter of Tiaro Coal Limited (in liq) [2018] NSWSC 746 46 VLRC paper, supra. 47 See ASIC Regulatory Guide 248 Litigation schemes and proof of debt schemes: Managing conflicts of interest (https://asic.gov.au/regulatory-resources/ find-a-document/regulatory-guides/rg-248-litigation-schemes-and-proof-of-debt-schemes-managing-conflicts-of-interest/) 48 ALRC Final Report, see recommendations 11-16. 23

The ALRC has also made a number of ––the Class Actions Practice Note is recommendations directed towards amended so that the first notices managing potential conflicts of interest provided to potential class members in law firms' arrangements with funders. by legal representatives are required In relation to managing these conflicts, to clearly describe the obligation of the ALRC recommends that: legal representatives and litigation funders to avoid and manage conflicts ––the Law Council of Australia should of interest, and to outline the details of develop specialist accreditation for any conflicts in that particular case.51 solicitors in class action law and practice;49

––the Australian Solicitors' Conduct Rules should be amended to prohibit solicitors and law firms from having financial and other interests in a third- party funder that is funding the same matters in which the solicitor or law firm is acting;50 and

25-YEAR ANNIVERSARY 25

49 ALRC Final Report, see recommendation 20 50 ALRC Final Report, see recommendation 21 51 ALRC Final Report, see recommendation 22 Multiple Class Actions

register in the closed group. It is likely actions being commenced, the Full that the decision in Money Max (where Federal Court took the opportunity to common fund orders were granted) provide general guidance on the range will result in more open classes, which, of factors to be considered and the from a defendant’s perspective, is possible options open to a docket judge preferable as this increases the prospect in dealing with competing open class of achieving finality on settlement. actions. Some of the key inquiries to be However, an open class claim may not undertaken include: cover all potential plaintiffs, and there ––an assessment of the various funding may be an increase in competing open and costs models to identify which classes. How the Courts deal with model is likely to best motivate the multiple class actions will therefore class applicant's solicitor and funder continue to be a key consideration. to work assiduously to achieve the Australian Courts have generally best outcome for the applicant and all been reluctant to order a stay or group members; and consolidation where there are ––identifying which legal team is likely multiple proceedings, and have to secure the best result for the class.55 allowed multiple proceedings to At the time of this paper, an application continue in parallel, on the basis that seeking special leave to appeal from this allows class members greater the Full Federal Court decision to the choice on representation and funding. High Court of Australia was pending. In McKay Super Solutions Pty Ltd It is not known if the High Court will (Trustee) v Bellamy’s Australia Ltd52 there grant special leave to hear the appeal were two class actions filed on behalf and provide authoritative statements In recent years, there has been an of overlapping groups of people. The on these issues from Australia's most increase in the filing of multiple class defendant sought a permanent stay of superior Court. actions against the same defendant(s). one of the competing proceedings. The The prospect of facing multiple group Court made an order closing the class Additionally, as commented on earlier in claims arising from the same facts is of one of the proceedings and ordering this paper the ALRC has recommended clearly undesirable from a defendant’s it to be tried jointly with the other set of reform which would eliminate the perspective; it can increase cost and proceedings on the basis that active case practice by which closed class actions complexity and create a difficulty management would lessen the risk of the have been permissible by reference to in gauging the reasonableness of defendant facing costs duplication. group members who have entered into settlements. Defendants may be faced an agreement with a particular litigation In the more recent decision of Getswift, with: multiple open classes; one closed funder and amendments to the Federal the Full Federal Court53 upheld orders class and one open class; different Court Act to give the Court an express staying two (2) of three (3) competing claims; different claim periods; differing statutory power to resolve competing class actions.54 In deciding which of the investor groups; different group class actions. Getswift class actions should proceed, in definitions; different common issues; the first instance decision his Honour and actions which are competing, Justice Lee undertook a “multifactorial parallel or sequential. assessment” of all of the factors of the Closed class actions are undesirable competing filings, including the likely for defendants as they can increase returns to group members, funding the incidence of multiple class actions. models and the proposals put forward For example, where a class action is by the legal advisers to manage legal successful, subsequent proceedings may costs and expert evidence. With an be brought by those who did not originally increased number of competing class

52 [2017] FCA 947 53 Perera v GetSwift Limited [2018] FCAFC 202. 54 Getswift, supra. 55 See www.clydeco.com/insight/article/swiftness-does-not-mean-first-past-the-post. 25

The Future

Over the next 5 years, our predictions for shareholder class actions are:

The current trend of more than 10 new original objective that class actions A superior Court in Australia will rule on shareholder class actions being filed proceed on an open rather than closed whether a class can rely on indirect or each year will continue, if not increase, basis. This, in tandem with a possible market based causation in establishing unless and until such time as there prohibition on closed classes, would reliance in a shareholder class action. is further law reform in connection result in a reduction in competing The outcome of such a decision may with the central causes of action in class action proceedings; and impact the willingness of parties to run shareholder claims. class actions to judgment, rather than ––Changes may be introduced to the settling in the future. Law reform will follow the issue way costs are charged by solicitors in of the ALRC’s Final Report. If its funded litigation, with the availability We will see increased use of data recommendations are accepted by the of contingency fee arrangements being analytics in class actions including Australian Parliament, this will have permitted in class actions subject to a by funders and law firms to identify an impact on the class action claims number of limitations. potential class action claims, to narrow environment including in relation to: the scope and volume of discovery and As the six year limitation period has to assess economic loss suffered by ––A potential overhaul of the continuous expired for claims emanating from members of the class. disclosure regime (following losses in financial services sustained Parliamentary review) which has from the 2009 global financial crisis, There will be an increase in claims driven shareholder claims. Although shareholder actions will continue to relating to financial disclosures with not going so far as watering down be pursued in connection with large respect to the effects of climate change. In continuous disclosure obligations, we scale corporate collapses, in respect 2017 shareholder claims were instituted could see the introduction of a higher of earnings guidance/forecasts and against the Commonwealth Bank raising fault standard in respect of continuous subsequent profit downgrades and allegations of inadequate financial disclosure and the laws relating to based on any adverse findings which reporting on the impact of climate misleading or deceptive conduct. may arise from the Financial Services change, but these were subsequently Additionally we may see changes to Royal Commission (with the final report dropped. Our oil/ energy sector may see the laws around private enforcement delivered to the Australian Treasurer on claims similar to recent actions brought of rights through the Courts with 1 February 2019 and released publicly on against major fossil fuel companies in certain actions being reserved only to 4 February 2019). the US, claiming they did not adequately the corporate regulator, ASIC; or appropriately disclose risks posed to We expect to see more jurisprudence, their businesses by climate change. ––Exclusive jurisdiction may be conferred even before any recommendations from on the Federal Court of Australia for the ALRC are adopted by the Parliament, D&O insurers are likely to adjust ways causes of action arising under specific as to how Australian Courts are willing to in which Side C cover is offered to the Commonwealth legislation that are intervene and case manage competing Australian market in the future, in an central to shareholder claims; class actions irrespective of whatever attempt to avoid limits of cover being private contractual arrangements have fully eroded by actions against entities ––Explicit Court powers may be been entered into with group members alone, leaving no or limited remaining introduced to regulate and intervene and particular law firms/litigation funders. cover to D&Os. in private contractual arrangements between litigation funders and group There will be increased involvement of members in class action proceedings, institutional investors and trustees of rather than establishing a licencing superannuation funds as plaintiffs in regime administered by ASIC or class actions. otherwise imposing minimum capital We may see the first Australian shareholder adequacy requirements on funders; class action based on data breaches, for ––The Court's powers will likely be example where a company’s share price enhanced to manage and dispose of drops due to an undisclosed data breach competing class actions, which will or due to a company’s inadequate cyber help ameliorate current issues with security protections. multiple actions and return to the Class action regimes – a comparison

Jurisdiction Australia56 US UK

Type of Representative proceedings. Class actions. Group litigation orders (GLO) and mechanism representative claims under Part 19 of the Civil Procedure Rules.

Opt-in/out Opt-out although closed class Opt-out. Opt-in. permitted. However, the ALRC has recommended reforms prohibiting closed classes.

Requirements 7 or more persons with claims Be so numerous (generally held to be GLO - claims issued by a number against the same defendant more than 40 class members) that of different parties giving rise to in respect of or arising out of joining all members is impractical. “common or related issues of fact the same, similar or related or law” – each party must have first Raise common questions of law circumstances. brought their own claim. or fact. Representative - more than one party Have representatives whose claims or has the “same interest” in a claim. defences are typical of the class.

Have representatives who fairly and adequately protect the interests of the class.

Common There must be at least one Questions of law or fact common GLO – lower standard of commonality issues substantial common issue to the class members must required than representative of law or fact. There is no predominate over any questions proceedings. requirement that common affecting only individual members. Representative – “same interest” is issues predominate. a common grievance and the relief sought must be beneficial to all.

Certification Not required. Burden is on the Certification is required. Requires Court approval before defendant to show that the can proceed – this is at the Court’s threshold requirements have discretion. not been met.

Main causes Breaches of continuous Section 10(b) of the Securities and Sections 90 and 90A of the Financial of action disclosure obligations under Exchange Act of 1934 (antifraud Services and Markets Act 2000 s674(2) of the Corporations provision) and Rule 10b-5 (FSMA). Act and Rule 3.1 of the ASX promulgated thereunder (liability for Section 90 relates to misstatements listing rules. any misstatement or omission of a and omissions in listing particulars material fact). Breach of rules relating to and prospectuses. misleading or deceptive Sections 11 (misstatements and/ Section 90A relates to misstatements conduct under s1041H of or omissions in a Registration and omissions in periodic and the Corporations Act and/or Statement) and 12 (liabilities arising episodic disclosures in relation to s12DA of the ASIC Act 2001 in connection with prospectuses and securities traded on certain markets. for financial services claims. communications) of the Securities Act 1933.

56 Pending the outcome of the implementation of reforms arising from the ALRC recommendations and following on from the Royal Commission Final Report. 27

Jurisdiction Australia56 US UK

Causation Unclear, but indirect/market Fraud on the market theory. Unclear - the use of the words “as rules based theory likely to be a result of” implies a causal link approved. between the loss and the relevant misstatement or omission. However, general acceptance that there is no need to demonstrate reliance.

Costs rules Costs follow the event so Each party bears its own costs. Costs follow the event so usually the usually the losing party Parties are not entitled to costs losing party will be required to pay will be required to pay the recovery unless statute or regulation the winning party’s costs. winning party’s costs. provides otherwise.

Litigation Permitted and widely used to Permitted in a number of states and Permitted and has been critical to the funding fund securities and financial its use in the financing of securities shareholders collective proceedings services class actions. suits is growing. brought against financial and commercial institutions.

Contingency Contingency fees are not Permitted and widely used as a Damages Based Agreements (DBAs) fees permitted but risk sharing method of financing securities suits. are permitted whereby the lawyer between funders and law firms does not charge the client as the is permitted on a conditional matter progresses, but receives basis. However, the ALRC has a percentage of damages (the recommended reform in this “contingency fee”) in the event of a area to permit contingency win. Take up of such arrangements fees in class actions (subject has, so far, been low. There is a cap of to conditions). 50% for commercial cases. Securities Class Actions in Asia-Pacific

Contents

25 26 27 28 Developments - Taiwan - Japan - India in Asia - Thailand - China

29 30 31 32 - South Korea - Hong Kong - Singapore - Malaysia - Indonesia

33 34 36 Vulnerability to Multiple actions Litigation Action in the US Funding in Asia 29

Developments in Asia

China

China has a civil law system. However, misrepresentation relating to securities whilst the law itself is fairly sophisticated, (for example, fraudulent listing, fictitious the infrastructure is insufficient to profit etc). Further, after the “Provisions support it and the inherent culture of the Supreme People’s Court on the in China is unsupportive of securities Trial of Cases of Civil Compensation litigation. Arising out of False Presentation in Securities Markets” (Misrepresentation Whilst there is no specific class action Provisions) entered into force in mechanism, under the Civil Procedure 2003, more than 110 cases regarding Law (CPL) of the People’s Republic securities misrepresentations have been of China, “joint” and “representative” filed before competent Courts in China, actions have been permitted since 1991. of which more than 40 have resulted in Joint litigation is where there are two or higher fee than larger claims, which judgments. more persons and the subject matter of encourages the Courts to split claims the action is the same or of the same However, it is a different matter in up and there is often socio-political category. Representative litigation is respect of securities representative pressure not to accept securities claims. joint litigation where the number of actions. In 2001, over 350 investors filed There are other barriers to the spread of litigants on either side is ‘large’ (10 an action against Yorkpoint Science securities claims in China: or more people) and representatives & Technology Co. The next day the ––Contingency fee agreements between are then elected from the litigants to Supreme Court placed a temporary ban the plaintiffs and their lawyers in represent the class in the litigation.57 on the acceptance of securities suits group actions are prohibited; Representative litigation can be brought which ultimately led to the dismissal on an opt-in basis where: of the claim. At the time, the Court ––There must be an administrative or commented that it had insufficient criminal ruling as to liability before ––it involves the same subject matter; or training and experience to handle the filing of a misrepresentation claim. ––it involves subject matters of the same such claims. There have been class actions category and the Court considers that Representative actions were then outside of the securities field, relating the action can be tried in consolidation effectively banned following the to land acquisition, environment with the consent of the concerned “The Notice of the Supreme People’s contamination, consumer protection party or parties. Court on Relevant Issues of Filing of and copyright protection. Recently, China In theory, representative actions are Civil Tort Dispute Cases Arising from has come under increased pressure allowed across all areas, such as Misrepresentation on the Securities to address its air and water pollution, competition, consumer claims arising Market” published in 2002, in which leading to over 200 cases so far being from financial services, environmental the lower Courts were directed that brought for breaches of environmental law, pension claims and product they should only accept a single or law. This rise in the number of liability. They can even be employed for joint securities claim. This means that representative lawsuits indicates a trend civil claims connected with criminal only group actions with 10 or fewer towards increased use of representative proceedings. However, an important persons may be pursued in the Chinese litigation to resolve disputes in China. exception applies in the case of Courts. This places a restriction on However, it is a developing picture and, securities-related actions. the pursuit of investor claims where for the time being, it does not look to the number is likely to far exceed this. Historically, China has been unwilling extend to securities claims. Where individual claims are brought in to support securities claims brought different Courts at different times, there in any form, whether individually is the risk of inconsistent approaches or on a collective basis.58 However, and judgments. individual and joint securities actions have made more ground in recent There are also judicial barriers to times and there has been an increasing securities actions proceeding in China. number of judgments on the issue of For example, smaller claims face a

57 Article 54 of the CPL provides for representative action where the number of persons involved is not fixed at the date of filing. 58 For example, on September 21, 2001, the Supreme People’s Court issued ‘Notice of the Supreme People’s Court on Refusing to Accept Civil Compensation Cases Involving Securities For the Time Being (No. 406 [2001])’ Taiwan Thailand

Taiwan has a civil law system and, Group actions under these mechanisms The Civil Procedure Code in Thailand therefore, group actions are governed by are rare in Taiwan. The cases that have was significantly amended in 2015. statutory laws. The Taiwanese Code of been brought have related to securities/ These amendments included the Civil Procedure (CCP) provides for four shareholder claims, environmental insertion of class action provisions into types of group actions: protection and consumer protection. the Code, which took effect in December 2015. The procedure is a broad based 1. Joinder of parties (Article 53) – two The main activity in the region in relation regime covering all types of actions, or more persons may be party to the to securities claims is as a result of the including securities class actions. same proceedings where: Securities Investors and Futures Traders Protection Act, pursuant to which To bring a class action, the plaintiff a. The rights or obligations that are the Securities and Futures Investors files a petition and a complaint which the claims of the suit are common Protection Centre (SFIPC) may bring a states the grounds and factual basis to them; claim or arbitration in its name following for the suit. The basis and methods for b. The rights or obligations that are the receipt of 20 or more complaints from calculation of individual damages is claims of the suit are based on the investors who have suffered damage also necessary in order to obtain Court same factual or legal grounds; or owing to the same cause. The SFIPC then approval. The Court must be satisfied issues a public notice notifying investors that the following conditions are met in c. The rights or obligations that of the cases and inviting them to join. order to grant the application: are the claims of the suit are of Recent examples of cases (all involving the same type and the factual ––That the claims have common insider trading) include: or legal grounds on which the grounds, factual basis and relief claims are based are also the same ––TransAsia Airways Corporation sought, which must be sufficiently type; provided, however, that the (compensation sought: NTD 5,137,000; specified; domiciles of the defendants must status: ongoing case at Taiwan Taipei ––That a significant number of members be located in the jurisdiction area of District Court); are involved to make the procedure the same Court or the suit must be ––Mega Financial Holding Company Ltd convenient; subject to a common Court. (compensation sought: NTD 111,594,000; ––That a class action would be more 2. Appointee lawsuit (Article 41) – where status: ongoing case at Taiwan Taipei equitable and efficient; and multiple persons having a common District Court); interest appoint one or more of their ––That the plaintiff (and its lawyer) is ––Taiwan Life: (compensation sought: number as the appointees to institute sufficiently qualified to represent the NTD 289,237,000; status: ongoing case a lawsuit on behalf of the rest. The class. at Taiwan Taipei District Court); Court may also publish a notice requesting others possessing the ––Phison Electronics: (compensation same common interest to apply to opt sought: NTD 8,036,000; status: ongoing in within a specified time. case at Taiwan High Court); and

3. A suit brought by a non-profit ––OBI Pharma, Inc.: (compensation sought: association (Article 44-1) – where NTD753,364,000; status: ongoing case members of the association may at Taiwan Shilin District Court). appoint the association to bring a SFIPC actions are typically run claim on their behalf. concurrently with criminal prosecutions 4. Representative lawsuit (Article into insider trading. A downside for 44-2) – where, upon approval of investors is that if the criminal action the competent authorities, an fails, then the SFIPC action also fails, incorporated non-profit association a potential costs risk for the class of or foundation may institute a lawsuit investors. Nonetheless, the procedure against a person who has infringed provides an effective mechanism for upon the rights of multiple persons to aggrieved investors and its popularity seek injunctive relief. continues. 31

Japan

Given that the procedure it still in its Whilst Japan does a have class action However, the lack of a class actions infancy, there have not yet been any procedure59 it is limited to consumer procedure is not to say that Japanese securities-related actions. To date, the actions. The only securities actions investors are left without a remedy. procedure has only been utilised in a that can utilise the procedure are Japan has, within the FIEA, a framework claim against the operator of a goldmine those claims which are based upon tort of laws for investor protection. Investors in relation to breaches of environmental liability under the Civil Code. Claims have rights of action under Articles 17- legislation. under the Financial Instruments and 22 for false statements or omissions in Exchange Act of Japan (FIEA) cannot be the prospectus or registration statement The procedure is intended to be similar brought under the procedure. or in public documents, such as an in scope to the US class action system annual report. and its certification and opt-out features Instead, investors in securities would have much in common. However, there need to make use of the collective Under Article 21-2, the plaintiff are a few critical differences which action mechanism contained in Article need only to prove that there was a may mean that Thailand does not see 38, Code of Civil Procedure 1996 (CCP) material misrepresentation in a public the same level of interest from plaintiff which permits collective actions where document, which is required to be lawyers: the actions are: disclosed under FIEA, and that the plaintiff acquired securities after it had ––‘Success fees’ or contingency based fee ––Common to two or more persons or been disclosed. The Article does not arrangements are prohibited by the based on the same factual or legal require the plaintiff to prove reliance on Courts. As lawyers are responsible for cause; or the doctrine, thereby having the effect of gathering evidence in order to justify ––Of the same kind and based on the introducing the “fraud-on-the-market” class certification, plaintiff lawyers same kind of factual or legal cause. theory from the US.60 Furthermore, may not be incentivised to pursue under Article 21-2 the defendant class actions; Investors still need to file a claim on bears the burden to prove it was not their own behalf and whilst the claims ––Costs awards ordered by the Thai negligent. In the case of misstatements are consolidated and managed together, Courts are typically low; and and omissions in offering documents, a decision in one does not bind another. there is strict liability. There is also ––Lack of binding precedent presents Another avenue is pursuant to Article a rebuttable statutory presumption a difficulty when attempting to 30 of the CCP, under which a group of regarding damages for investors who undertake an assessment of the case investors can appoint a representative held shares for one year prior to and and its likely outcome. to bring the suit on behalf of the on the day of the announcement of group where issues of law and fact are the misrepresentation: the damage is common to all of their claims. presumed to be the difference between the average market price of the shares Alternatively, the Court can of its own for one month prior to and after the volition consolidate claims that have announcement. been filed separately, but this is not guaranteed. This legislative framework, coupled with the ability for lawyers to operate on a contingency fee basis and relatively low litigation costs (with each side bearing its own costs), means that there is an incentive for investors to pursue securities claims despite the lack of a class actions procedure.

An example of an investor action in Japan relates to the Olympus accounting fraud, which was exposed in late 2011 by its British CEO. Olympus admitted to a

59 Act on Special Provisions of Civil Procedure for Collective Recovery of Property Damage of Consumers (“ASPCP”) 60 Applied to civil enforcement of SEC Rule 10b-5 India

USD 1.7 billion accounting fraud that The spread of the US plaintiff bar Securities class actions can be pursued had concealed investment losses for under s 245 of the Companies Act In addition to the vulnerability of over a decade. The news led to a massive 2013, introduced in the wake of the Asia-Pacific companies listed on US share price drop. Claims were filed in “Satyam fraud” (though only in force exchanges to securities class actions the Tokyo District Court on behalf of from June 2016). Briefly, in 2009 Satyam addressed elsewhere in this White nearly 90 investors, including foreign Computer Services’ chairman, admitted Paper, companies in the region are institutional investors and pension to manipulating the company’s earnings not immune to the attentions of an funds, seeking to recoup JPY 37.7 billion (approximately USD 1 billion on the books ever-entrepreneurial US plaintiff bar. (USD 316 million) in damages. The case was fictitious) leading to a significant Similarly to, and often in tandem with eventually settled in 2015 following share price drop and the company’s litigation funders, the US plaintiff Bar is successful mediation. Shares had also removal from the main stock exchanges. extending its territorial reach. been traded in the US and, following a The case brought corporate governance claim there, settled for USD 2.6 million. A prime example is the Olympus and investor protection in the developing litigation in Japan, where US lawyers, Nonetheless, it is unlikely that Japan will corporate sphere in India into the DRRT, brought together non-Japanese see the volume of actions seen in the spotlight. Class actions were pursued institutional investors, directing strategy US. As the collective procedure requires in the US by purchasers of Satyam’s and acting as an intermediary between individual claims to be filed, this requires American Depository Receipts, which the investors and Japanese Counsel. a significant amount of time, energy were eventually settled for USD DRRT had been involved in the smaller and coordination. In addition, the lack 125 million. However, notably, investors US case involving Olympus’ American of discovery presents an evidentiary in India were left without recourse due to depository receipts (which were not challenge and the lack of binding the lack of a class actions procedure. This captured by the Morrison61 decision – see precedent creates uncertainty. A further in part led to the legislature introducing the “Multiple Class Actions” section) but, hindrance to the spread of securities s 245, which prescribes that shareholders as a result of Morrison could not pursue collective actions in the region is that or depositors can file a suit with the the larger case on behalf of their clients third party funding is not common in Tribunal if “they are of the opinion that in the US. It highlights the vulnerability Japan and there is still an ongoing debate the management or conduct of the affairs of corporates to claims brought by global as to its lawfulness. Whilst there is no of the company are being conducted in a investors in their local jurisdiction. express law against litigation funding manner prejudicial to the interests of the and claims and causes of actions can be company or its members or depositors.” assigned, any claim assigned primarily To proceed, the class needs to have for the pursuit of litigation is expressly at least 100 members or at least 10% prohibited. In addition, non-lawyer third of the shares, whichever is less (if no parties are prohibited from acting as share capital, the class must equate to intermediaries between lawyers and at least a fifth of the total members of clients and sharing in the proceeds from the company) and the following must be any suit. To do so may lead to criminal satisfied: sanctions. ––The class action suit is preferable to many individual cases; ––Common issues of law; and ––The representative parties will protect the interest of the class.

The class can seek injunctive relief, declarations that resolutions are void where they are based on misrepresented facts, damages, or any other remedy.

In addition, securities class actions can be brought under s 37 of the Companies Act 2013 for a misleading statement or the inclusion/omission of any matter 61 Morrison v. National Australia Bank 561 US 247 (2010) 33

South Korea in a company prospectus. These class There is currently no procedure for In the Jinsung T.E.C. case which settled actions can be commenced by any claimant class actions available for in 2010 (a year after commencement), person, group/association of persons general claims in South Korea. Class the entity agreed to pay KRW 2.7 billion affected by the statement/inclusion/ actions are only available for certain (USD 2.5 million) with each party to bear omission. securities actions62 under the Securities its own costs. The Court granted the Related Class Action Act, in force plaintiff’s counsel fees amounting to Such claims are filed before the National since 2005. 20% of the settlement. The settlement Company Law Tribunal (NCLT), which amount was administered under then considers, amongst other things, The class requires certification before a distribution plan through which whether the depositor/member has it can proceed. In order to be granted KRW 1.9 million (USD 1.7 million) was acted in good faith, any evidence certification, the class must number claimed by class members with the showing the involvement of people at least 50 members holding, in the balance returned to the defendant. beyond the company’s directors and aggregate, at least 0.01% of the total officers and whether the claim could be number of the outstanding securities Despite the relatively low number of brought as an individual action instead. of the defendant company. In addition cases brought, there is judicial support they must have common legal or factual for such actions within the region; the After an application is admitted, the issues against the defendant and a class Supreme Court has granted certification, NCLT has to give notice to all the action is an “efficient and appropriate” reversing decisions of the lower Courts members of the class, by means of both means of protecting the rights of the on two of the cases brought to date. Such a vernacular and English newspaper, as class. Thereafter, a notice is published by support may add weight to a decision well as websites including the company’s the Court inviting those who wish to join to pursue a class action under the Act and the NCLT’s own. Once a class action a representative party to apply within 30 and it is expected that more may be has begun, a member can opt out at days of the notice. The procedure is opt- forthcoming in years to come, especially any time with the NCLT’s permission. out. given that the volume of securities- Subject to any conditions it imposes, related cases has been increasing in the member cannot be prevented from Contingency fees are permitted and the region. However, this is tempered bringing an individual claim against the there are no express rules against third with the following difficulties faced by company under another law. party funding. However, Article 6 of the potential plaintiffs: Trusts Act prohibits the assignment of Section 245 has only been in force since claims purely for the purpose of pursuing ––Limitations on discovery within South June 2016 so the procedure is still very litigation. As such, funding agreements Korea mean that proving a case can much in its infancy. However, there need to be structured in such a way so be difficult for a class, potentially are concerns that the framework is as not to breach these rules. preventing them from being brought; not conducive to a viable class action procedure. For example: Ten cases have been brought to date, ––The length of time it takes to certify ––Contingency fees are banned in India including two against foreign financial a class, with the average case taking and litigation funding is prohibited, institutions (Royal Bank of Canada and over 4 years to obtain certification; discouraging the emergence of a Deutsche Bank). The first and only case ––Costs risks, as costs are usually plaintiff bar; to reach judgment is the case brought by borne by the losing party (though the ––There is a lack of knowledge regarding the investors of equity linked securities availability of contingency fees may the securities market and awareness against Deutsche Bank in May 2016, reduce this risk); and of rights by investors; which reached judgment on 20 January ––Banks are excluded under the Act and 2017. Deutsche Bank was ordered ––Limitation period; the class action actions may not be filed against them; to pay damages of KRW 8.58 billion must be brought within 3 years from ––The rules hold plaintiffs to a high (approximately GBP 6 million). Two other the date of the unlawful act or within burden of proof, making it difficult for cases involving defendants Jinsung 1 year of the claimant becoming plaintiffs to prove their case; and T.E.C. and Royal Bank of Canada have aware, whichever is earlier. ––The length of the proceedings – it can settled and judgments in other ongoing take over a decade to full conclusion, cases are expected over the next year. if appealed.

62 Damages for false disclosure, unfair securities practices or claims against auditors in relation to financial records Hong Kong

Hong Kong does not have any specific The later case of Prudential Assurance Co starting incrementally with consumer class action procedures, rather the sole Ltd v Newman Industries65 relaxed this cases. The mechanism would adopt an mechanism for dealing with multi-party test, instead requiring that “there must be “opt-out” approach and potential classes proceedings is the rule on representative a common ingredient in the cause of action of would need to overcome a certification proceedings, based on the English law each member of the class” or “some element stage. However, despite several meetings representative proceedings. common to the claims of all members of the between 2012 and 2017, the matter has class”. Once this was established, any not progressed and the Administration Order 15, rule 12 of the Rules of the High following judgment would be binding is still considering the recommendations Court sets out the basis for representative and plaintiffs could then prove the of the working group. proceedings. It provides that where remainder of their action in separate numerous persons have the same If the recommendations get through, and proceedings. Further cases also held interest in any proceedings, one or more coupled with the increased scrutiny of that separate contracts and separate of them can represent all such persons the Securities and Futures Commission defences should no longer prevent in the proceedings. Representatives can and the possibility of litigation funding in an action from proceeding and that bring proceedings or act as a defendant the region, Hong Kong can likely in time damages can be awarded. in proceedings. A judgment or order expect claims being brought against given in representative proceedings will Despite these developments to make the financial institutions in the jurisdiction, be binding on all persons so represented, procedure more flexible, the procedure in line with other jurisdictions that have but shall not be enforced against any is still rarely used and the Chief Justice’s class action procedures. However, there person not a party to the proceedings Working Party on Civil Justice Reform are several limitations which mean that except with the leave of the Court. has commented that representative any future system is unlikely to mirror proceedings are inadequate as a US-style class actions. For example: Representative proceedings in framework for dealing with large-scale Hong Kong are rare and, to date, there ––The Law Reform Commission’s report multi-party situations. In relation to have been no securities actions brought does not specify whether punitive securities actions, there is either a more using the procedure despite there being damages could be awarded (currently appropriate remedy already available66 or, no limitation within the rules to such Hong Kong only permits them in for example in relation to claims involving actions using the procedure. Historically, certain prescribed circumstances67) – mis-selling, unsuitable recommendations a primary reason for this was the if compensatory only, the attraction to or negligent investment advice, the “same requirement for the potential class to plaintiff lawyers is reduced; interest” requirement presents a hurdle have the “same interest”. The English that is difficult to overcome due to liability ––It is still the case that contingency fees case of Markt & Co Ltd v Knight Steamship turning on the individual circumstances are prohibited and it is not recommended Co Ltd63 held that this requirement of the members of the class. In other that this position change; and translates to all class members having situations, such as claims pursuant to to show the same issues of fact and law: ––The losing party generally has to pay investor protection provisions in the “The implication is that they have to prove (a) the costs meaning that plaintiffs run a Securities and Futures Ordinance (Cap the same contract between all plaintiff class significant costs risk. 571), representative actions in theory members and the defendant, (b) the same may be brought but, to date, none have defence (if any) pleaded by the defendant done so. against all the plaintiff class members, and (c) the same relief claimed by the plaintiff Recognising the limitations inherent class members.”64 This was a stringent test in the system, the Law Reform that was difficult to overcome, resulting Commission produced a report in May in few actions being brought using the 2012 which looked at the current system procedure. and recommended the introduction of a comprehensive class action regime

63 [1910] 2 KB 1021 (CA) 64 The Law Reform Commission of Hong Kong, Report On Class Actions: Executive Summary, 28 May 2012, at paragraph 5 65 [1981] Ch 229 66 For example, the compensation scheme in Part XII of the Securities and Futures Ordinance (Cap 571) for cases involving misappropriation or theft of clients’ assets by officers of licensed corporations 67 The two specific categories of cases in which the CFI may award exemplary damages are: i) Cases of oppressive, arbitrary or unconstitutional action by servants of the government and ii) Cases in which the defendant’s conduct was calculated to make a personal profit which may exceed the compensation payable to the plaintiff. 35

Singapore

As in Hong Kong, multi-party actions ––There must be significant issues of fact funding contracts for court litigation in Singapore are currently confined or law common to all the plaintiffs. The still remain in general unenforceable, to representative proceedings under Court must compare the significance except in certain insolvency-related Order 15, rule 12 of the Rules of Court of the common issues between the proceedings. In addition, the Law Society (Cap. 322, R5), based on the English law plaintiffs with the significance of the of Singapore is currently reviewing the representative proceedings. Many of issues which differ between them; and ban on conditional/contingency fees the issues discussed in the Hong Kong and, if lifted, this could result in more ––All the plaintiffs must have the same section regarding the requirement for securities representative claims in the interest in the relief granted. the potential class to have the “same future in Singapore. interest” apply in the Singapore system. However, despite the Court’s willingness to make the procedure flexible and As in Hong Kong, representative actions accessible, such cases are still rare and are rare. This may, in part, be due to there have been no securities actions the culture of the region which is not using the procedure. by nature litigious. Nonetheless, such cases have been brought, the most There are no current plans to introduce noteworthy being the Raffles Town Club a class action regime in the country. case,68 in which members sued the club’s It has been reported in the press shareholders for misrepresentation and that Securities Investors Association breach of contract and the Koh Chong (Singapore) (SIAS), an investor lobby Chiah v Treasure Resort69 case, in which group, would readily represent minority ex-members of the club sued the club’s investors in group actions, despite the owner, Treasure Resort, claiming they fact that no shareholder representative had been denied membership privileges. action has been brought in Singapore to date. SIAS also said it was considering These cases demonstrated a move away establishing a litigation fund, to which from the English case of Markt70 which members and minority investors could required the application of a strict “same contribute. interest” test. In Koh Chong Chiah v Treasure Resort the Court of Appeal underlined that However, SIAS also stated that litigation the procedure is to be applied in a broad was the last resort, with its President and flexible manner so as to preserve the saying: “I sincerely hope we do not see the principle of access to justice, describing day when we launch a class action suit it as a flexible tool of convenience in the against a company. I believe in resolving administration of justice. things in the boardroom, not the courtroom, in the interest of all parties… Because when The Court established that: you have acrimony in the capital markets, ––The class of represented persons people will think twice about investing in must be capable of clear definition. our country.” This is critical because it identifies As with Hong Kong, contingency fees are the individuals who are entitled to prohibited and the general rule is that relief and who will be bound by the the losing party must pay the reasonable judgment; costs of the successful party. In Singapore, ––The proposed representative(s) must third party funding of dispute resolution adequately represent the interests proceedings is generally prohibited. of the entire class, and must capably However, recent legislation has permitted prosecute the interests of the class; third party funding of international arbitration proceedings.71 Third party

68 Tan Chin Seng and Others v Raffles Town Club Pte Ltd (No 2) [2003] SGCA 27 69 Koh Chong Chiah and others v Treasure Resort Pte Ltd and another [2013] 4 SLR 1204 70 See note 1 71 Amendments to the Civil Law Act Malaysia Indonesia

As in Singapore and Hong Kong, the 3. the relief sought is in its nature Indonesia introduced a broad class only form of group litigation in Malaysia beneficial to all whom the plaintiffs action procedure in 2002 via Supreme is representative actions, pursuant represented. Court Regulation No. 1 of 2002 which to Order 15, Rule 12 of the Rule of defines a class action as: where“ one or The decision of Tang Kwor Ham looked Court 2012, based on the English law more persons representing a class of people back at previous decisions and held representative proceedings. Similarly, lodge a lawsuit for himself or themselves, and that Order 15 Rule 12 should not be Malaysia has adopted the English simultaneously represent a class of people in applied rigidly; it should be as flexible decision of Duke of Beford v Ellis72 and great number representing similar facts or as possible. However, despite this, the Markt & Co Ltd v Knight Steamship Co Ltd73 legal bases between class representatives procedure has its limitations when used and issues regarding the “same interest” and said class members.” in Malaysia for reasons including: requirement feature in Malaysia. Supreme Court Regulation No. 1 of 2002 ––Lack of pre-trial case management in Two Malaysian cases of note that does not specify any limitations on use group litigation; consider these cases are Tang Kwor Ham of the procedure in relation to certain & Ors v. Pengurusan Danaharta Nasional ––Funding mechanisms; claims. In theory, therefore, it could be Bhd & Ors74 and Palmco Holding Bhd v utilised in securities actions. However, ––The payment and allocation of costs Sakapp Commodities (M) Sdn Bhd & Ors only the following Laws expressly permit (the Courts typically order the losing (Palmco).75 Palmco confirmed that the the filing of “representative” suits: party to pay costs); and criteria to be met were: ––Law No. 5 of 1983 - Indonesian Exclusive ––Contingency fees are prohibited. Economic Zone; 1. The plaintiffs are members of a class; ––Law No. 10 of 1997 - Nuclear Power; 2. They have a common grievance or ––Law No. 8 of 1999 - Consumer Protection interest; and (consumers having similar interests and suffering from actual damages); ––Law No. 18 of 1999 - Construction Services (representative suit by way of power of attorney); ––Law No. 41 of 1999 – Forestry (representatives claiming in relation to forest destruction that causes damages to society); and ––Law No. 32 of 2009 – Environmental Management (similarity of facts and legal basis).

Class actions have been brought outside of these restrictions. In 2007, 600 25-YEAR customers of Bank Perkreditan Rakyat ANNIVERSARY Bungbulang claimed against the bank and the Government for [RP 478 million of savings to be returned and in the 25 form of deposits of RP 3.5 billion]. The customers were successful in 2015.76 However, the law is silent in relation to actions related to financial services issues and of the 20-30 class actions (largely public interest cases) brought to date, none have related to securities.

72 [1900-3] All ER Rep 694 76 Other examples include Case No.262/ 73 Supra note 37 Pdt.G/2016 PN.JKT.PST, dated 10 May 2016 in 74 [2006] 1 CLJ 927 relation to the Government’s relocation of the 75 [1988] 2 MLJ 624 people Bukit Duri 37

Is securities litigation prevalent in the jurisdiction?

Vulnerability to Action in the US Whilst Morrison may have curbed the ability for 14.2% of all securities suits during that year, of claims against foreign corporates without the which 10 were against Chinese companies (an necessary US nexus to be brought in the US, additional 2 were brought against Hong Kong companies in the Asia-Pacific region that are based companies). These companies face a higher listed on US exchanges, remain vulnerable to US frequency of action than their representation securities suits due in part at least to the more amongst US listed companies would suggest,80 stringent financial disclosure rules and heightened indicating that the risks are not confined to the regulatory scrutiny accompanying a US listing. period of Chinese reverse merger activity in 2011. Identification of accounting irregularities may be This may in part be due to the type of industries particularly acute for companies with dual listings predominating in the region; many of the claims in the US and China, due to the different ways the against Chinese entities relate to the activities of accounts will be presented and structured. technology companies.

Many in the region will be familiar with the spate Whilst the burden of proof for bringing a successful of lawsuits filed against US listed Chinese companies action remains relatively high, an example of this in 2011, largely relating to Chinese reverse mergers, being the PetroChina decision81 in which the Court which enabled private companies to obtain a US dismissed the action for lack of a causal nexus listing through a reverse merger with a US listed (the acts of corruption complained of were not public shell company without having to go through proved to relate to the actions of the listed entity), the IPO process. The emergence of these US suits the spectre of US proceedings is a crucial risk resulted in part from the actions of short sellers factor for all companies considering listing in a who highlighted accounting irregularities in pursuit US exchange. of profits.

Reverse merger lawsuits are now a legacy issue, and as reported by Cornerstone,77 filings against non- US listed companies generally declined in the few years after 2011 as the spate of these suits subsided. At the beginning of 2017, NERA reported78 that the drop coincided with, and is partially explained by, a decline in the percentage of overall US listings represented by foreign-domiciled companies. The drop in Chinese domiciled companies was particularly pronounced, with many de-listing in the US and re-listing in China.

However the picture is beginning to change, and 2014 onwards has seen an upswing in securities class actions against US listed Chinese companies. In mid-2017, Cornerstone reported that there was one more action against a Chinese company in the first half of 2017 than in the whole of 2016. The D&O Diary79 reports that 59 securities suits were filed against non-US companies in 2017, representing

77 Securities Class Action Filings, 2017 midyear assessment, Cornerstone Research, www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2017-Midyear-Assessment 78 Recent Trends in Securities Class Action Litigation: 2016 Full-Year Review, NERA, 23.1.2017, (page 7), www.nera.com/content/dam/nera/publications/2017/PUB_2016_Securities_Year-End_Trends_Report_0117.pdf 79 Securities Suit Filings at Historically High Levels During 2017, D&O Diary, 1.1.2018 80 ibid 81 In re PetroChina Company Ltd. Securities Litigation [2015] 13-CV-06180-ER, US District Court, Southern District of New York Multiple actions

Securities class action litigation against entities and their D&Os is a global issue, with developments in one part of the world significantly impacting upon the development and spread of actions in other jurisdictions. For example, the US Supreme Court decision in Morrison v. National Australia Bank,82 which (broadly) held that the US Courts do not have jurisdiction over claims by non-US investors who purchased their shares in a non-US company outside of the US has meant that foreign investors who purchased shares in a foreign company on a foreign exchange, cannot pursue claims in the US Courts and must look elsewhere for redress. Whilst the exact boundaries of the Morrison decision continues to be a source of litigation in the US Courts, there is no doubt that investors denied access to the US Courts as a result of the decision (the plaintiffs in the Morrison case were Australian residents who had purchased shares in the Bank on the ASX), are increasingly seeking to pursue their claims in other jurisdictions. The Court in Morrison itself expressed the view that the action “had Australia written all over it”.

The decision in Morrison, which has the potential to exclude certain classes of shareholder but not others from the jurisdiction of the US Courts also brings into the spotlight the prospect of multiple competing procedures in different jurisdictions arising out of the same fact pattern, a situation which will be complicated where those jurisdictions’ laws have the potential for extra-territorial effect. For example, provisions of Australian conduct must have an effect on the law dealing with market manipulation Australian financial market. In relation or making materially false or misleading to the making of false or misleading statements that are likely to impact the information, the conduct can occur prices on the financial market, have anywhere and the investment can be in the potential for broad extra territorial a foreign incorporated company as long reach. Broadly, the rules apply to as the person affected is in Australia. conduct, meaning acts or omissions regardless of where they occur, but the

82 Supra note 42 39 Litigation Funding in Asia

Litigation funding has been pivotal to the development of class actions in jurisdictions where contingency fees are not permitted, such as Australia. However, the doctrines of maintenance and champerty (maintenance is the act of a third party encouraging or maintaining litigation, usually by providing financial assistance. Champerty is a type of maintenance where a third party funds litigation in return for a share of any judgment proceeds) have acted as a barrier to the spread of litigation funding in certain jurisdictions. Even where legal principles do not operate as a barrier and the costs rules are favourable, a litigation culture is required to fuel demand, and the litigation risk must be palatable to the funder. Litigation funding is gradually spreading across Asia, with funders such as IMF Bentham expecting growth in the region. 41

People’s Republic of China India Singapore No laws expressly prohibit litigation At present in India, lawyers funding their In Singapore, third party funding is funding in mainland China, so long clients’ legal proceedings and charging generally prohibited in litigation to as it is not by plaintiff lawyers. That contingency fees is prohibited, being the extent that it falls foul of the rule said, given the unpredictability of legal opposed to public policy. Tentative steps against champerty, but third party action and the difficulty of enforcement have been taken towards, amongst funding of international arbitration is in mainland China, at present, few other things, enabling foreign law firms allowed by legislation. Singapore has also professional funders are active in the and foreign lawyers to practice foreign introduced the Insolvency, Restructuring market for either litigation or arbitration. law; diverse international legal issues in and Dissolution Act 2018 which, when non-litigious matters and international it comes into force, will allow judicial Taiwan arbitration cases in India, albeit in a managers and liquidators to assign phased manner. At present, foreign law proceeds from certain actions to a third- In Taiwan, contingency and conditional firms are not allowed to operate in India. party, in exchange for funding of such fees are allowed, with the exception Unless the fees system is reformed, we do actions. Contingency fee arrangements of criminal, family and juvenile not anticipate a plaintiff lawyers’ market. with lawyers are not permitted. offenders’ cases. Third party funding Third party funding is prohibited. is not prohibited, but it is a relatively Malaysia underdeveloped market in this South Korea regard. ATE insurance is rare, though Contingency and conditional fees have not prohibited. Contingency fee arrangements are been ruled as illegal by the Malaysian permissible for civil cases under Korean Bar Council. In Mastika Jaya Timber v. Thailand law, but have been ruled by the Korean Shankara,83 the Court stated that the Supreme Court as impermissible for doctrine of champerty invalidates any The general position in Thailand seems criminal cases. At present, there are no such contingency agreement which to be that contingency agreements are rules to allow, regulate or prohibit third demands payment only in the event of prohibited between plaintiffs and their party litigation funding in Korea. We success at trial. This means that third lawyers. With regards to third party are not aware of any trend that would party funding is most likely prohibited, funding, the Supreme Court of Thailand indicate that a third party funding despite not being addressed directly in has ruled several times that litigation regime will be formulated in Korea. the law. funding is in conflict with public policy and ethics, meaning any agreement Hong Kong Indonesia would be rendered void. In general, the third party funding of Contingency fees and conditional Japan commercial disputes is not allowed in fees are allowed in Indonesia, on the Hong Kong. However, limited exceptions condition that they are provided with a The present position in Japan is that exist, including insolvency proceedings non-refundable deposit on instruction. contingency and conditional fee to enable liquidators to pursue various Furthermore, there are no restrictions on arrangements are not prohibited claims. Recently, steps were taken to how the claimant is financed, meaning outright. ‘No win, no fee’ arrangements allow litigation funding in relation to third party funding is technically are relatively rare in practice. Third arbitration and mediation. Hong Kong allowed. However, no specific process for party funding is uncommon in Japan is seen as presenting an opportunity third party funding has been recognised due to the uncertain position on its for funders, with Harbour Litigation as of yet. lawfulness, as it is neither authorised Funding being set up in 2015. nor prohibited.

83 22-229-2009-I Chubb

Chubb is the world’s largest publicly traded property and casualty insurer. With operations in 54 countries, Chubb provides commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance and life insurance to a diverse group of clients. As an underwriting company, we assess, assume and manage risk with insight and discipline. We service and pay our claims fairly and promptly. The company is also defined by its extensive product and service offering, broad distribution capabilities, exceptional financial strength and local operations globally.

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#CC02 - February 2019