FRT Services: Debunking Five Myths about Australian Securities Class Actions

 

By Mike Lange, Securities Litigation Counsel

The Australian shareholder class action landscape is in flux.  There are potential legislative changes around protections afforded investors under the securities laws, regulation of litigation funders, permitting lawyers to charge contingency fees, and restoring common fund orders.  Companies wanting to minimise or eliminate risk of suit are trying to influence public opinion on these issues with articles advocating their positions.  Too often, they rely on hyperbole and ignore what’s actually going on.  Below we debunk their top 5 myths in the hopes of creating a more balanced and informed debate.

 

Myth 1: An extraordinary growth in shareholder suits creates massive risk for corporate Australia.

The Truth: There are 2,064 companies currently listed on ASX.  From 2014 through 2019, the average number targeted by the securities class action bar was about 10 – a half of one percent of listed companies.  These are not crisis levels.

 

Myth 2: Australia is a ‘magnet’ for litigation funders seeking massive returns.

The Truth:  Globally, there’s an oversupply of litigation funding capital.  This has modestly increased the number of funding sources in Australia (and elsewhere).  However, there is no indication more issuers are being sued.  Instead, we’re seeing multiple funders suing the same limited number of bad actors.  The increased competition has significantly depressed funder fees which over the past 5 years have dropped from 25%-30% to 10% or less.

 

Myth 3: Allowing lawyers to charge contingency fees opens the floodgates for strike suits.

The Truth: If (or when) Australian lawyers are permitted to represent clients on a fully contingent basis, the number of funders will likely fall as the source for case investment shifts over.  In the short term, the entry of lawyers will further pressure funder rates.  Longer term, funders will shift gears, establishing their own law firms or financing lawyers directly rather than investor groups.  Either way, competition should keep rates low.

 

Myth 4: These are strike suits.

The Truth: We’ve not seen critics offer examples of baseless securities suits.  Having reviewed the class actions since 2015, we can find no instance where the underlying corporate misconduct was first brought to public attention by the plaintiff bar.  The suits follow scandals, which belies the idea of counsel ginning things up.  AMP is a good example.  That scandal broke when, on April 16, 2018, Reuters (and others) reported that “Australia’s AMP misled the corporate watchdog for almost a decade: inquiry hears.”

Critics disregard safeguards in the system.  Unlike the US, suits in AU don’t get filed hours or days after revelations of corporate wrongdoing.  Bad cases make bad investments, and funders consider matters for some time before pulling the trigger.  Investigations and book building can take many months with subsequent facts and events added to their analyses including further press revelations and stock price rebounds that can dampen prospects.  Judges can also be relied upon to dismiss legally insufficient claims.

In truth, the Australian process systematically undercompensates actual harm to investors from these scandals.  Unlike the US, where settlements are negotiated against the estimated harm to all class members (as modelled by experts), in Australia the compensation is limited to those investors who register before the parties enter mediation.  Claimants who don’t register are forever barred and go uncompensated.

Both sides enter mediations informed of the damages suffered by eligible (registered) class members.  As a result, on average an Australian securities class action recovers around 25% of losses; in the US, class cases frequently settle in the single digits.  The higher recovery rate further belies the argument that these suits lack merit.

Finally, Australia has adverse party cost shifting, exacting a penalty for frivolous suits.  As noted in the 2018 Australian Litigation Reform Commission (ARLC) Report, the ‘After the Event’ (ATE) insurance market has grown significantly in recent years and such insurance is now readily available.  If frivolous cases were the norm, this insurance market would be shrinking with less coverage and higher premiums.

 

Myth 5: Securities cases are destroying the D&O insurance market.

The Truth: Critics offer anecdotes but not proof that increasing D&O insurance premiums have been caused by investor suits and not by any of the many other factors impacting coverage availability and rates.  The ALRC Report noted that “there has been chronic underpricing of D&O business by insurers since at least 2011.”  So rates were headed up regardless of recent events.  Persistent underpricing does not justify curtailing shareholder rights and punishing victims of the underlying misconduct being insured.

In sum, critics offer a siren song: curb shareholder rights to protect issuers and D&O carriers from risk.  The truth is that doing so will only erode transparency and trust in the Australian securities markets and cause far more economic harm over the long term.