In Australia, class actions are good for our markets – just ask the investors

Good for our markets

By Andrew Saker

No company wants to face a class action from its own shareholders. They are disruptive, time-consuming, reputation-shredding and expensive – potentially very expensive.

Fortunately, there is a proven way to avoid class actions: don’t break the law.

Unfortunately, there is another way being pursued by big business and its paid advocates: campaigning to undermine the class action system itself, specifically the litigation funding model that supports it.

The Business Council of Australia (BCA), the Australian Institute of Company Directors (AICD), the business-friendly Menzies Research Centre and the interloping Institute for Legal Reform – part of the giant US Chamber of Commerce – have all made submissions to the current parliamentary inquiry into class actions and litigation funding arguing, in one form or another, for crimps on litigation funders.

(Most simultaneously argue for a watering down of Australia’s robust continuous disclosure regime.)

Omni Bridgeway has helped more than 300,000 claimants pursue their rights under the law. We support improvements to Australia’s 30-year old class action system, including further regulation of litigation funders operating in Australia through a licensing regime. But we draw the line at proposed reforms, promoted by big business, that would have the effect of denying wronged shareholders access to justice and allowing corporate misbehaviour to go unpunished.

Critics of securities class actions – and the role of litigation funders in enabling them – claim they are doing untold damage to the economy and to listed companies, stifling innovation and discouraging our best and brightest from joining boards. However, with the exception of rising directors’ and officers’ insurance premiums – which are caused by multiple factors – they are unable to present any credible, quantifiable evidence of this damage.

Their criticism is based on emotion rather than evidence.

The AICD, for one, presents no facts for its claims that the threat of class actions action risks having a “chilling effect” on the ability of listed companies to attract investment, “may” deter merger activity from occurring and is “likely” to frustrate existing M&A activity.

If these risks were real, then all listed companies would be punished by the actions of a few law-breakers. As it is, the high compliance burdens on company boards are, in part, a response to corporate misbehaviour.

But the risks are not real. Class actions encourage good corporate behaviour and support the enforcement of our continuous disclosure regime. As such, they are a valuable contributor to market integrity and confidence, creating the kind of markets that attract international capital that companies can access to invest and grow.

If, as the critics would argue, class actions were discouraging market activity, we’d see far fewer ASX listings and a rise in the number of companies subject to securities class action.

Fact: as at March 2019, more than 280 international companies had opted to list on the ASX.

Fact: the shareholders of only 34 companies filed class actions in the period from 1 July 2014 to 30 July 2019. There are roughly 2200 companies listed on the ASX, so an average of less than one half of one per cent face class actions each year.

This data is from research by Monash University’s Professor Vince Morabito – considered by the courts as an authority on Australian class actions. Professor Morabito also found total recoveries in all shareholder class actions since 1992 were $889 million on behalf of 95,000 shareholders. That is not even a rounding error on the current ASX market capitalisation of about $1.9 trillion.

There are also no facts to support sensationalist claims of an ‘explosion’ in shareholder class actions.

Professor Morabito finds that over the past three years they have in fact declined as a proportion of total class actions. In the period from 30 June 2019 to 31 January 2020, only three new shareholder class actions were filed in Australia.

If only our critics were as worried about the rights of claimants as they are about the supposed effect of class actions on markets. Maybe they should spend some time asking investors what they think. As sophisticated investors, large superannuation funds regularly participate in class actions alongside so-called mum and dad shareholders.

The hospitality industry superannuation fund HESTA, which manages $50 billion of assets on behalf of 860,000 members, says it participates in class actions “to recover losses but also as a means of encouraging better standards of corporate governance and improved accountability by companies, directors and corporate advisors to their shareholders”.

AustralianSuper, which manages almost $170 billion on behalf of 2.2 million members representing over one in 10 working Australians, says: “From our viewpoint, where the interplay between the legal system, shareholders and companies is effective, class actions can be a meaningful means to hold companies accountable and enhance better corporate governance, resulting in long-term value for our members.”

According to HESTA the class action activity we see is a sign of “the maturing health of shareholder rights and poor corporate behaviour resulting in shareholder loss”.

As Securities Class Actions Services (SCAS), an advisor to institutional investors on class actions and competition cases, reminds us, “class actions don’t create an event, they follow an event”.

Unfortunately, we’re seeing a lot more ‘events’. From the findings of the Hayne Royal Commission to the systemic underpayment of workers by some of our biggest companies, there is ample evidence of poor, often illegal, corporate behaviour.

It is also important to remember that companies have the right – and usually the financial heft – to defend claims they believe are unwarranted. They don’t have to settle.

The fact that many do choose to settle does not, as some claim, reflect companies opting to abandon a winning case just to avoid reputational damage caused by an opportunistic class action.

The vast majority of settlement monies are paid by insurers, which, by their nature, do not pay out hundreds of millions to avoid shame falling on their policyholders. The payment of these very large settlement amounts reflects a hard-nosed assessment of whether a higher amount will have to be paid by the insurer after trial.

Sensible reform of class actions is something we can support. But there are no facts to support diminishing the rights of victims and shareholders to take action.

This article was also published by Lawyerly