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An edited version of this article was published by The Australian on 8 July 2021. You can find it here.

So much for the so-called ‘explosion’ in shareholder class actions backed by unscrupulous litigation funders.

This claim, used liberally by sections of corporate Australia and their US big business allies to justify self-serving attacks on the litigation funding industry, was always based on dubious accounting.

But now we have incontestable evidence that the ‘explosion’ is nothing more than a myth.

Three pieces of recently released analysis have all come to the same conclusion: although there was a small increase in class actions filed in the past year, the proportion of shareholder class actions (typically against ASX-listed companies) and funded class actions is actually in substantial decline.

(Predictably, the analysis also confirms a sharp increase in class actions filed in Victoria – from seven to 22 in the space of a year – following the passage of contingency fee legislation that many parties, including Omni Bridgeway, warned would make the State the most class action-friendly jurisdiction in Australia.)

The Federal Government is currently considering its response to the recommendations of the parliamentary inquiry into litigation funding and the class action industry. Legislation is before parliament to permanently change Australia’s robust continuous disclosure regime, including the misleading and deceptive conduct provisions. The Government is also examining how to guarantee a minimum return of class action proceeds to class members.

It is imperative that this research by Australia’s leading class action academic Vince Morabito and top tier law firms Allens and King & Wood Mallesons (KWM) informs those deliberations.

Professor Morabito has long disputed claims of an ‘explosion’ in class actions, particularly shareholder class actions, based on his forensic analysis of Australia’s three-decade-old class action regime. His latest research, first published by Lawyerly in May, only reinforces his argument.

His research reveals that a total of 69 class actions were filed in the year to 3 March 2021, up from 54 in the previous 12 months and little changed from 64 in 2018-19.

Importantly, the increase has not been driven, as critics would claim, by opportunistic actions against companies for inadvertent breaches of their continuous disclosure obligations. In its report, Class Action Risk 2021, Allens found that consumer claims dominated the class actions landscape for the second consecutive year, representing 39 per cent of class actions filed.

“This continuing trend was largely driven by the long tail of consumer filings against banks, superannuation trustees and insurers following the Financial Services Royal Commission,” Allens says. “2020 also saw several product liability claims, as well as some COVID-related consumer claims alleging a failure to prevent infection or address infection risks.” 

Professor Morabito adds that the overall increase could also be explained by a desire to file class actions before the Government’s tougher class action regime – requiring litigation funders to hold an Australian Financial Services Licence and for class actions to be registered as a managed investment scheme – came into effect in August 2020.

Most importantly, what Professor Morabito, Allens and KWM all found was a decrease in proportion of shareholder class actions and actions supported by litigation funders.

Professor Morabito, Allens and KWM each calculated their data over slightly different time periods but are all broadly in line.  

The Allens report says that, while there has been an increase in the number of class actions filed in 2020, far fewer actions are backed by a litigation funder. “Only one third of 2020 filings are known to have received third-party funding, down from 59 per cent in 2019, 75 per cent in 2018 and an average of 60 per cent in the four years prior,” Allens says. It also found that shareholder class actions had fallen from an average of 31 per cent of actions filed in 2012-2018 to 21 per cent in 2020. 

KWM’s data also shows a decrease in the proportion of class actions funded by a litigation funder – down from 74 per cent in 2017-18 to approximately 30 per cent (to date) in 2020-21. KWM also found there had been a decrease in the number of shareholder claims filed (from approximately 23 in 2017-18 to approximately seven (to date) in 2020-21).

Professor Morabito found funded class actions had decreased from 37 (or 72.5 per cent of all class actions) in 2017-18 to 32 (46.3 per cent) in 2020-21. The number of shareholder class actions fell from 21 (41.1 per cent of all class actions) in 2017-18 to 14 (20.2 per cent) in 2020-21 – up only marginally on the 11 filed in the preceding 12 months.

“The fact that over the last two years the overall ‘significance’ of shareholder class actions has halved … is of some importance in determining the appropriateness or desirability of any legislative reform that will diminish the ability of shareholders to seek legal redress with respect to losses they have suffered,” Professor Morabito says.

Presented with these figures, any rational observer would recognise that claims of an ‘explosion’ in class actions simply cannot be justified. But reason has so far been a casualty of this debate.

Even though just 142 class actions have been filed against just 71 Australian corporations in the 29-year history of our modern class action regime – that’s fewer than three out of 2000-plus listed entities in the gun each year – critics of litigation funding will not rest until shareholders have no recourse through the courts for corporate negligence.

What these figures show is that with the changes to the class action regime introduced by the Government last year, which were supported by Omni Bridgeway, there is a reasonable balance between the rights of the wronged to seek justice and the rights of all other parties to be shielded from frivolous or meritless litigation.

What they also show is that claims shareholder class actions are the primary driver of rising directors’ and officers’ (D&O) liability insurance costs do not stand up to scrutiny. In the face of sharply falling numbers of shareholder class actions, directors should be asking their insurers why their D&O premiums continue to rise.

In its latest D&O Insurance Market Insights report, Aon Australia says it expects further price pressure this year, though the pace of increases will slow amid signs the market is realigning and moving towards a sustainable position. Although insurers have experienced uncertainty around the potential economic fallout from the COVID-19 pandemic, Aon is cautiously optimistic about the outlook for the rest of 2021.

Good public policymaking should wait for the impacts of the mid-2020 changes to play out before further regulatory measures are contemplated.

Most importantly, significant changes to substantive law, such as the continuous disclosure obligations, must not be rushed through without proper scrutiny. Several witnesses to the Senate Economics References Committee currently inquiring into the proposed changes, including senior academics Michael Duffy and Peta Spender, said a detailed review process, as recommended by the Australian Law Reform Commission, is required. Both Dr Duffy and Professor Spender referred to problems in the draft bill, which Professor Spender referred to as “messy law”.

Any further reform relating to class actions, particularly those regarding returns to class action members and the continuous disclosure regime, must be based on facts not myths.