Dealing with the threat of the class action 'new normal'

Companies and boards are under threat of class action litigation more than they ever have been before, a report by law firm King & Wood Mallesons shows. Directors must understand where they are vulnerable to minimise the risks posed.

The last decade has seen a steep rise in the number of class actions in Australia, reaching a peak in the 2015 financial year when 40 new class actions were filed, according to a recent report by law firm King & Wood Mallesons (KWM). While numbers were down slightly in 2016 with 35 class actions filed, it was still roughly double the number filed in 2013 and 2014. This level of activity in class action litigation could be the ‘new normal’, the KWM report states. Total settlements for 2016 arising from the class actions were at least $411.38m but could be hundreds of millions higher once four significant confidential settlements are included.

The KWM report highlights how the growth in the industry has attracted new firms and new funders. The 35 actions pursued in 2016 involved 19 different plaintiff firms. Smaller firms are increasingly drawn to the legal fees on offer in class action suits. Recently mid-tier firm Gadens got in on the game calling for registrations of interest in a class action against surfwear retailer Surfstitch, citing concerns about the adequacy of its disclosure at the time of its IPO. Several new players have also entered the litigation funding market, according to the report, including Vannin Capital and Galactic Litigation Partners.

With more interested parties watching for boards and companies to slip up than ever have before, it is important that directors reduce the risks they’re exposed to by understanding the dynamics of the class action market, according to KWM partners Moira Saville and Alexander Morris.

“Directors need to understand what plaintiff law firms and funders need to run a class action. What is the sticky paper that attracts the flies, so to speak,” Morris said. “They obviously look for money and an easy damages claim. If you understand the business model that drives class actions, and then map that to your business, you will start to understand what within your business has the potential to act as an attractant to class action litigation.”

The rise in expensive securities class action settlements serve as a reminder to directors of listed companies of the importance of complying with continuous disclosure obligations. There were three major securities class actions that were settled in 2016. Class actions against Newcrest and Downer EDI for continuous disclosure breaches and misleading and deceptive conduct were settled for $36m and $11.1m respectively. A third class action against the directors of Gunns settled with the details kept private but the KWM report puts the amount at approximately $16m. In 2015 there had only been one securities class action settlement — also confidential but worth around $21m — involving insolvent toll road operator BrisConnections.

But these are not the only type of class action directors need to be aware of. Funders and plaintiff law firms are now scouring the market for a much more diverse and esoteric range of claims.

“There are many other types of class actions now besides just the disclosure class actions,” Saville said. “Many now are to do with the conduct of the business, or something that happens within the business, whether its mis-selling or product liability, an environmental or employee liability issue, or a franchisee dispute. So it’s not just about what the board does anymore, it’s also about what’s happening lower down in the business.”

And what to do if a class action is filed against the company? It’s important that the board gets to the nub of the claim, according to Morris.

“You need to make sure you take an externalised view as to the substance of the class action. “ Morris said. “There is a risk in these things that something has indeed gone wrong. And it’s difficult sometimes for people inside the business to have perspective about events in which they have been heavily involved. You need to make sure the claim is being looked at by people (both internally and externally) who have that detachment.”

A decision in the NSW Supreme Court earlier in the year in litigation arising from the collapse of HIH may further embolden class action plaintiffs and entrench the ‘new normal’. In the HIH matter, while there was no contention the company had directly misled the plaintiff shareholders when they made the decision to buy their shares, the court ruled that the company’s misconduct had indirectly caused the shareholders loss because the misconduct had inflated HIH’s share price.

While this ruling could still be appealed, it might have an impact on the class actions coming forward and the balance of settlement talks when they do. “Readers will well recognise that the number of investors who have sustained huge losses in the securities markets as a result of alleged misleading or deceptive conduct will translate into a very significant litigation storm,” Professor Bob Baxt AO FACID wrote in the July issue of the AICD’s Company Director magazine.

Related viewing: Lysarne Pelling, AICD Senior Policy Adviser, discusses recent lessons for directors from the courts.