Second wave of litigation looms

CORPORATE Australia is being confronted with a new wave of securities litigation.

King & Wood Mallesons lawyers Peta Stevenson and Moira Saville are the authors of a new report on class actions. Picture: Hollie Adams

CORPORATE Australia is being confronted with a new wave of securities litigation, which is now the single biggest factor contributing to the growth of class actions.

Securities claims accounted for more than half of the 27 class actions filed in the past 18 months in the Federal Court and the Supreme Courts of Victoria and NSW. This is well above the long-term average of just 14 class actions a year and has been described as evidence of a “second wave” of class actions after the conclusion of most cases triggered by the global financial crisis.

It has been identified in a report to be launched today that says last year’s above-average level of claims has been followed by a strong “pipeline” of proposed class actions.

The report, by King & Wood Mallesons, says securities class actions proposed or investigated last financial year targeted companies that included QBE Insurance, Padbury Mining, Macmahon, Forge, Newcrest, Billabong, Mirabela Nickel and Iluka Resources.

“The strength of this pipeline of matters shows a re-emergence of securities class actions as well as a rise in consumer claims,” says King & Wood Mallesons in its annual review of class actions.

Fourteen securities class actions were filed last year — seven on behalf of shareholders and seven on behalf of investors in financial products.

The report says Australian companies have now paid out a total of $1113.1 million to settle securities class actions in the 22 years in which this form of litigation has been available.

But despite the above-average level of new matters, the review says just one settlement was approved by the courts last year, down from 13 in 2012. One more settlement was approved in the six months to June.

The first weeks of the current financial year have included the announcement of the nation’s biggest class action settlement — the $494m payout for victims of the Black Saturday bushfires — and the filing of the long-expected class action over the 2011 Queensland floods.

The settlement in the bushfires case is larger than the total payouts from all securities related class actions in 2012 — $480m.

The review says the growing maturity of the market for class action litigation has given rise to increased competition between plaintiff law firms and greater litigation risk for business.

There was now an emerging risk that business could face two separate class actions over the same circumstances.

“The second trend emerging is that, for some companies, lightning does strike twice,” the review says.

“It is no longer the case that class actions are a rare event and you will only face one if you are unlucky. A heightened state of risk is now a permanent state for all Australian corporations.”

Moira Saville, one of the review’s co-authors, said that on one view, certain aspects of the Australian legal system were helping to facilitate class actions.

Companies were faced with strict liability for their continuous disclosure obligations and for misleading and deceptive conduct.

“You don’t need to intend to mislead anybody but if you do, there can be damage and a cause of action,” Ms Saville said.

Companies were also unable to use the “business judgment” defence if they made a reasonable decision about continuous disclosure that turned out to be incorrect.

“Those things do make it easier to run these kinds of securities actions and there are people who are calling for reform — particularly of that business judgment area,” she said.

While the business judgment defence was available to directors, Ms Saville said reform of this area of law was subject to debate and some thought it should be available to companies.

Co-author Peta Stevenson said some had identified problems with the proportionate liability regime as another factor contributing to the growth of class actions, particularly in the past two years.

“The general intention behind the regime was that there would not be a multiplicity of litigation, but that has not proved to be the case,” Ms Stevenson said.

The review warns that recent conflicting court rulings on the operation of proportionate liability could amount to a potential boon for class action plaintiffs.

The rulings had left the law uncertain and this meant there was a significant risk for companies that provided financial services.

It also warns that the ability of directors and company officers to claim advances from their insurers for litigation defence costs is “under a cloud”.

When a third party’s claim for damages against a director is likely to exceed the insurance available to cover the claim and the director’s legal costs, legislation in NSW and some other jurisdictions freezes some or all of the insurance funds in favour of the claimant.

The review warns that this could mean insurers would be reluctant to advance funds to directors to cover their defence costs.

“Any directors joined to a class action or other significant commercial litigation with access to a policy providing for defence costs needs to be aware of this risk,” the review says.

While the litigation risk facing business is growing, the review says there has been increased judicial scrutiny of settlements, with courts questioning and rejecting some settlement proposals while other claims have failed in court.

In the GPT class action, run by Slater & Gordon, the review says the original claimed legal costs were reduced by $770,000 to $8.5m after costs incurred before the execution of a costs agreement were disallowed.

In the Storm Financial class action against Macquarie Bank, the original settlement was successfully challenged by the Australian Securities and Investments Commission because it would have given some of the claimants, represented by law firm Levitt Robinson, a bigger payout because they had helped fund the case.

The review says this was the first time ASIC had intervened to challenge a class action settlement. It was also the first time a settlement had been overturned on appeal.

The review has also highlighted the possibility that one of the cases that failed could cost a litigation funding company millions of dollars unless the decision were overturned on appeal.

“Omni Bridgeway, the Dutch litigation funder, stands to lose millions of dollars if the decision is upheld,” the review says.

The claim, which concerned the release of a virus from an abalone aquaculture farm, was run by Maurice Blackburn and could become the first funded class action to fail at trial, the review says.