Shareholder class actions in Australia: key information for global institutional investors

IMF Bentham’s Matthew Kennedy and Noah Wortman discuss the rapidly evolving class action regime in Australia and how IMF Bentham’s global program assists institutional investors to recover value for shareholders.

Matt and Noah explain and provide their views on:

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For a PDF of the transcript, click here.

Welcome and thanks for tuning in for the latest installment of our podcast series, In Conversation with IMF Bentham. My name is Justin McLernon and I'm an investment manager at the Perth office of dispute resolution financier, IMF Bentham Limited. My role is to source and evaluate potential case investments and manage those which are approved for funding through to resolution. I'll be your host for today's podcast, which is entitled: Shareholder Class Actions in Australia: Key Information for Global Institutional Investors.

I'd like to introduce my two guests today. Matthew Kennedy, firstly. Matthew is an investment manager who leads the Melbourne office of IMF Bentham. He's responsible for conducting due diligence on prospective cases and managing funded matters. Matt has managed many large class actions and insolvency related claims, including the case against one of Australia's leading financial institutions, the Commonwealth Bank of Australia, in a claim related to alleged non-compliance with anti-money laundering and counter terrorism legislation. It's one of the most high-profile and significant class actions in Australian history.

Noah Wortman is business development manager, global investor recoveries for IMF Bentham, with a global remit covering North America, UK and Europe, Australia and Asia. Noah has extensive experience advocating for investors, promoting corporate governance and implementing strategies to achieve collective redress. He assists IMF Bentham's international network of institutional investors, including financial institutions, superannuation, sovereign wealth and pension funds, to recover their investment losses, for example, through shareholder or bondholder class actions.

Hi, Justin. Thank you.

Hi, Justin. Thanks for having us.

Hi. Pleasure. So, onto today's podcast, I'll be talking with Matt and Noah about their roles at IMF with a particular focus on securities class actions and our country's rapidly evolving class action regime. The objective is to provide listeners with an outline of IMF's approach and procedures for funding securities class actions and how its global program assists institutions to recover value for shareholders.

So, Matt, if I could turn to you first. I mentioned in the intro that you're currently managing a number of IMF funded shareholder class actions which are before the courts. Perhaps, you could briefly step us through your process starting from when you first identify a case that you think is likely to receive the support of IMF's investment committee and what are the kinds of things which would make that case attractive, or not, as the case may be, through to the point at which a decision is made to kick off the class action and how that decision is reached.

Yes, Justin. It starts with assessing the cases against IMF Bentham's funding criteria. So, that essentially means looking at the merits and the strength of the claim, and trying to establish the potential size of the loss. In shareholder class actions it's obviously looking at the trading history of the company, the event that is of particular interest and how it's affected that company, but then it goes onto looking at, or obtaining, budgets from the law firm as to how much it will cost to bring and complete the proceedings and then working through all the risks that might arise in the matter and any issues about recoverability of the loss. That's an outline of the issues that we look at to establish whether it meets the funding criteria.

And that's a constant in every case, is it Matt? Is that something you look at for each case?

Absolutely. In some cases we may need to look at particular technical issues. The loss and damage might have some technical aspects, so we may obtain, on occasion, forensic economist's advice upfront, or we might obtain counsel's advice upfront if there's a technical legal issue that arises in a particular action, but the ones that I mentioned are done in all cases that we look at.

So, the funding criteria is there to ensure that we only fund strong cases where claimants are going to obtain a significant recovery of their loss. If the case meets our funding criteria, I then put the case up to IMF's investment committee for funding approval. That requires me to present a due diligence report and advocate for the funding of the matter. If the investment committee approves funding of the matter, I then have responsibility for informing potential claimants of the class action and of IMF's funding arrangements and then the strategic planning for the conduct of the class action in preparation for filing. Then once the proceeding commences, my role includes helping instruct the lawyers on a day to day basis in respect to the management of the proceedings, assess any ongoing risk or otherwise manage issues in the proceeding as they arise, update class members with information about the proceeding, answer queries and approve the lawyers’ fees and other project costs.

So, that oversight, risk assessment and project management role continues all the way until distribution of returns to class members. So, it's a multi faceted role. At a practical level it means talking to the legal team on a regular basis, sometimes a daily basis, and being across all the substantive documents in the case. But, essentially, the role is to help ensure that the best possible outcome is achieved.

And, Australia's class action regime has, I think, been in a state of flux over the last few years and there have been a number of important court decisions from which differences in approaches to the management of class actions have emerged. We've also seen a Law Reform Commission report into class actions and, from a competition perspective, there's definitely been a noticeable increase in the number of participants in the funding market in Australia and, I think, internationally. So, there are evidently a number of forces that are acting on our class action system. Matt, can I ask you, what do you believe to be some of the more significant developments or changes in how Australian courts are dealing with class actions and what has led to these changes?

Yes, like you say, Justin, in my view, it's definitely due largely to increased competition. That is the significant change we've seen in the space and the significant cases. The class action regime's reached a new level of maturity, whereby more lawyers, or more law firms, and more funders are participating in the space. That greater participation has led to an increase in the number of class actions and the participants have also started testing the boundaries of the class action procedure. Accordingly, the courts have had to respond to the increased number of class actions and the burden placed on them due to the increased competition.

So, the recent significant changes were effectively kicked off following acceptance in Australia, by the Full Court, in 2016, of what is referred to as common fund orders, in the Money Max case. Before common fund orders, securities class actions were often run on a closed basis. That is, the class action was run on behalf of claimants who had signed funding agreements with a funder as opposed to being run on an open class basis, which would capture all claimants who suffered loss. The closed class structure provided funders, traditionally, with the commercial certainty necessary to fund these large actions because the funding agreement provided the means by which the funder was paid. Under a common fund order, as I said, sort of introduced to Australia in 2016, the court essentially orders that a fee be paid from the resolution of the case to the funder without the need for a litigation funding agreement that contractually entitles the funder to a fee. So, this enables funders to undertake the commercial risk of funding class actions without the need to sign up large numbers of class members.

So, going back to the effect common fund orders have had in the class action regime, it meant that class actions were more appealing to more funders because it removed the burden of signing up class members and it meant more actions were run on an open class basis rather than a closed class basis. A consequence was more class actions being filed and multiple open class action proceedings being filed against the one respondent in respect of the one event. So, that then led to a line of judgments, initially arising in the Bellamy’s and GetSwift actions, which will be known to Australian listeners, that addressed the management of competing class action proceedings. And, the court has since developed the framework, sometimes referred to as the GetSwift multi factorial analysis, to decide in light of the particular circumstances whether to allow competing proceedings to consolidate into one proceeding, or close the class of one proceeding and leave another class proceeding open to represent all remaining class members, or to stay all but one proceeding.

So, they're the main means by which competing proceedings are being managed, but other arrangements are still possible.

Perhaps, this is a good opportunity to bring you into the fray.

Sure.

As IMF's head of global investor recoveries, what does your role entail, Noah, with respect, in particular, to securities class actions?

Well, in respect to securities class actions it really is engaging with global institutional investors. It entails, not only participating in the conference circuit if you will, and attending and accepting speaking roles at conferences around the world on corporate governance and landscape and goings-on and…

And, that's all educational is it? That aspect?

I'm sorry?

You're educating the institutions as to, you know, what's the current state of play in the class action space?

Yes, exactly. So, it's an educational role to inform the audience as to what the state of play is within the industry as a whole, within given jurisdictions, recognizing that the mechanics of class actions, group actions and securities litigation, in general, works differently from jurisdiction to jurisdiction and what the particularities are of that.

Not only that, it's an ongoing discussion of the recognition within the institutional investor community that there is a responsibility, whether it be a fiduciary responsibility, a moral or ethical responsibility, or simply just a business responsibility to consider and weigh the options in participation in securities litigation, especially as institutional investors' portfolios continue to diversify, not only across the breadth of industries that they're investing in, but also the regions in which they're investing in. So now, more and more nowadays, it's increasingly important to understand what the options are seeking legal redress in, possibly, more than one jurisdiction where somebody may have bought ordinary shares of a particular company's stock on, say the London Stock Exchange or the stock exchange in Australia versus having bought ADRs in the US as well of the same company. You may have two different roads to pursue and you may be able to pursue both roads at the same time, or one in a passive capacity or one in an active capacity and it's important to understand those differences.

I see. And so from those meetings and speaking engagements, you're evidently in a prime position, aren't you, to find out what are the things of most interest or most concern to institutions when it comes to making a decision whether or not they want to participate in a class action. Are there issues and questions that you would say are fairly typical that you tend to hear, across the board, from institutions in that regard?

Yeah, there certainly are. I mean there are certainly questions that come up no matter what the jurisdiction that might be being considered at the time. You know questions such as what is involved in participating in a class action? Aside from the actual mechanics of the jurisdiction, of whether or not it's an opt-in jurisdiction or you have to affirmatively join the action and become a litigant, you can't passively sit on the sidelines and passively collect on a settlement that somebody else has already procured and had approved by the court like you can in the US. Or it can range to perceived reputational risk. If I get involved in a case, who is going to know? Is it going to become public knowledge? Is it going to show up in the press? Is there going to be any potential type of retribution if my name is in the public eye in participating in a case against a company that may be a peer company or somebody we've obviously invested in?

But, that second piece goes to the other side of the coin where the question becomes, well how much is this really a piece of our corporate governance policy? How much responsibility do we have to not ignore the fact that these cases are out there? The fact that these cases are ever increasing on a global scale and that non-US jurisdictions are picking up the pace and more and more filings are being made year after year? In going after money that may be ostensibly on the table, or not shirking in their responsibilities to their own constituency when they've taken the time, resource and money to do the diligence to carefully select the stocks that they’re going to invest in for their portfolios, but then when there's an alleged wrongdoing, not actually seek some type of redress in order to gain back some of those lost monies.

You know other questions that may come up may be jurisdiction specific. I mean, a specific example of the Australian securities class action market, questions that come up nowadays, and Matt has spoken of this to some extent and maybe he wants to expand a little bit, is why should an institutional investor get involved in a case at the outset? Historically, there was incentive for an investor to choose among only a small group of competing groups with litigation funders and lawyers and parse out the differences and make a decision as to what group they wanted to join - review the litigation funding agreements and the retainer agreements and pick one to join and that was basically your way in.

But now, with the ever-increasing number of groups coming to the market and bringing cases and novel funding structures that are being put forward to the court and with open class proceedings, a lot of institutional investors seem to think, well I want to take a wait and see approach. Where is the incentive to join now as opposed to waiting to see what happens later on in a proceeding? Or will it get to the point where I can just fill out a claim form at the end of a case and collect my pro rata share of a settlement, like I would do, passively, in the US?

Yeah, it's a great point. Matt, I think it'd be interesting to hear your perspective on that. Let's say I represent an institution that's carrying a large loss on an investment in a particular listed company and IMF is proposing to fund a class action against that company on behalf of shareholders and I'm talking to you about this. I want to know whether or not to participate in that class action and, if I participate, do I sign a funding agreement with IMF? Or, as Noah mentioned, there are potentially a number of competing funders, or would it be better to not sign up and adopt that wait and see approach that Noah just mentioned? So, I mean, Matt why should I choose to sign a funding agreement in that situation? Why would it not just be better to wait and register, perhaps, as an unfunded group member in the open class, or not better to do that? What are the things I need to consider at that point?

Yes. Look, as regular claimants in our class actions and class actions globally, institutional investors also want to know about the services IMF provides. So, it is in part a question as to what does the jurisdiction, the jurisdictional structure, require from them? But it's also what can the institutional investor get by signing with IMF? They want to know that we have the personnel to answer their questions and to act as guardians for their claims, to look after their claim. I think institutional investors, when they speak to us and work with us, they come to appreciate the experience that the investment managers at IMF have in class actions and also the fantastic service provided by our client services team.

The client services team in IMF are instrumental in obtaining the trading data from claimants, storing that data securely, checking that data for errors or issues, and answering questions from claimants, which includes institutional investors. The investment managers have the experience and skills to inform institutional investors about the claim, about its merits, answer questions about how each particular proceeding is going, even the strategic approach and about general developments in the class action space, such as the ones I referred to before. They also appreciate that IMF has long established relationships with many of the lawyers in this space, so they know that we can work with all the lawyers that are commonly used in these class actions. This gives the institutional investors confidence in participating in the class action and confidence that the best possible result will be achieved. So, they can get value in having that relationship with us early on, even if there are, perhaps, opportunities for them to come into the action at a later time.

So, it's in large part, a question of value add, and you describe the number of ways in which that value is added through IMF's second set of eyes, supervisory role, if you like, experience of investment managers, connections and working with, you know, the best experts, legal experts, independent experts, et cetera, so that's what IMF brings to the table.

Absolutely.

Thanks gents. Noah, how can listeners find out more about this topic?

Well, aside from emailing those of us you're listening to on the podcast today, you can certainly go to our website and check out our investor recoveries page. There's certainly a brochure you can download there and you can also see the various class action cases that IMF is funding on our class actions area, learn more about them. And, for those that are still open for registration, sign up.

Terrific. Okay, thanks for your time gentlemen. That concludes today's episode. If you'd like a transcript of this podcast or want to subscribe to our future podcasts, blogs and e-bulletins about dispute resolution finance, its frighteningly easy to do so, just visit www.imf.com.au/newsroom/blog and follow the prompts. Until next time, thanks for joining us and bye for now.