Federal Court approval of funding commission recognises risks faced by funders
Last week, Justice Beach in the Federal Court of Australia approved the settlement of the securities class action against Sirtex Medical Limited (Sirtex). The action, funded by IMF Bentham Limited, had settled during the trial, subject to the court’s approval.
In approving the settlement, Beach J made a common fund order and allowed IMF Bentham’s funding commission in the amount of $10 million, namely 25% of the gross settlement sum of $40 million. The commission is to be deducted from the settlement sum and apportioned on a pro-rata basis between all group members who are to receive a distribution from the settlement distribution scheme.
In the Reasons for Judgment,1 Beach J elaborated on funding commission rates and concluded that the rate sought in this action was well within the range that he considered to be reasonable and proportionate for the risks undertaken by IMF Bentham.2 In particular, Beach J said that funding commission rates should properly provide a reward for the risks undertaken by the funder, both in the context of the particular action and the broader risks faced by funders generally.
Background to class action
Sirtex was an ASX-listed biotechnology company, which manufactured a single product, SIR-Spheres, a medical device used to treat liver cancer in many countries, in particular in the US.
The class action against Sirtex related to a forecast Sirtex made to the market in August 2016 about its anticipated dose sales growth. A corrective disclosure was subsequently made in December 2016.
In summary, the claims against Sirtex were for alleged contraventions of its continuous disclosure obligations, by failing to make earlier disclosure to the market of material information relating to its expected dose sales, and misleading or deceptive conduct.
At the end of the first week of the trial, the trial judge, Justice Murphy, ordered the parties to participate in a mediation. Murphy J also expressed some preliminary thoughts on liability to assist the parties in the pending mediation which was ultimately settled, subject to the court’s approval.
Approval of the settlement – reasonableness of the funding commission
Beach J’s decision was given at a time when close scrutiny is being paid to funding commissions in securities class actions generally, and the court’s power to make a common fund order is the subject of a challenge before the High Court of Australia.3 The judge’s comments and findings included:
- No party put forward any compelling reason to postpone his determination pending the current common fund order challenges before the High Court. Those challenges do not deal with an extant application for approval of a class action settlement4 and the court must apply the law as it is.
- The 25% funding commission on the gross settlement sum was well within a reasonable and proportionate range for the risks undertaken by the funder. The judge had regard to the class action statistics recently published by Professor Vince Morabito of the Monash Business School.5 These statistics included that the median percentage of settlement funds taken by funding fees in funded Federal Court of Australia cases settled during period from January 2013 to December 2018 was 26%. This was a good proxy for an objective standard of a percentage on the gross settlement sum that may be appropriate.
- Speculation about whether or not abnormally high returns have likely been enjoyed by funders in securities class actions in recent times was not productive. Detailed empirical and quantitative analysis was needed of the funders, their capital models and how they price risk for funding individual actions and across their entire portfolios before useful conclusions can be drawn.
- Falling commission rates in some cases may simply reflect lesser perceived risk in that individual matter and explain both the lower price and the price competition. Other cases, where there is perceived to be much higher risk (and accordingly less competition), may justify the higher price for funding.
- In this case, the judge did not require any further enquiry into the rates and had confidence in Professor Morabito’s statistics as, at least, a suitable prima facie benchmark.
- The group members in this case would receive very close to 50% of the settlement sum, after deducting legal costs and the funding commission. This compares favourably with settlements in other class actions. However, nothing contained in the Federal Court class action regime requires that in every class action, group members should receive at least 50% of the gross settlement sum.
Implications from the Sirtex case
In future class actions, good evidence in support of the risks undertaken by funders will continue to be required to persuade the courts to approve funding commissions (gross or net of legal costs). This is likely to be required, regardless of whether or not the High Court finds that the courts have power to make a common fund order.
- Kuterba v Sirtex Medical Limited (No 3)  FCA 1374 (23 August 2019).
- The risks included that Sirtex’s assets would be removed from the jurisdiction: see Kuterba v Sirtex Medical Limited (No 2)  FCA 1489.
- Lenthall v Westpac Life Insurance Services Ltd and Brewster v BMW Australia Ltd.
- The application was made under section 33V(2) of the Federal Court of Australia Act 1976 (Cth).
- "Common Fund Orders, Funding Fees and Reimbursement Payments”, January 2019.