When the Howard government changed the rules on continuous disclosure in 2002 it had the best of intentions: it believed it was improving corporate regulation.
But clever lawyers have exploited that change to turn listed companies into sitting ducks for opportunistic class actions.
The Howard government removed the need for class action lawyers to prove anyone inside a target company was at fault when market-sensitive information was being withheld.
This watered down the burden of proof, shifted the balance in this part of the Corporations Act and cleared the way for the development of anti-business class actions in which settlements are almost inevitable.
Until May last year, when Treasurer Josh Frydenberg temporarily restored the pre-2002 regime, companies had been paying out millions of dollars to settle continuous disclosure class actions in which there was never a suggestion that anyone associated with those companies was at fault.
The payment of go-away money might seem like an immoral waste of shareholders’ funds. But why fight it out in court when the law is skewed against you? Companies could be found liable even if they had no idea that market-sensitive information had been withheld.
This is not how the law works in Britain or the US and it helps explain why international litigation funders have found Australia such an attractive place to finance anti-business class actions in return for a share of the proceeds.
The result has been a disaster for the insurance companies that bear the cost of those settlements, but a bonanza for plaintiff lawyers.
One of the biggest winners from the watered-down burden of proof has been law firm Maurice Blackburn, a class action powerhouse that also happens to be one of the leading financial backers of the Labor Party — which, coincidentally, does not want Frydenberg’s changes retained.
Details collected by the Business Council of Australia show that on average, securities class actions seek settlements of between $50m and $75m. For a case to reach the mediation stage, legal costs alone usually amount to about $10m.
But there is another problem. The Business Council believes the growth of shareholder class actions has created a risk-averse, compliance-oriented corporate culture with harmful long-term effects on economic growth, job creation and investors’ return on equity.
Frydenberg’s changes, while temporary, have restored much of the rigour and balance that had been missing from the continuous disclosure rules for almost two decades.
But the Treasurer’s changes expire on March 23 and unless they are made permanent, as recommended by a James Paterson’s joint parliamentary committee on corporations and financial services, the era of go-away money will resume.
So with money at stake, the class action industry is cranking up its rhetoric in a last-ditch effort to keep the gravy train on track. Hopefully, Frydenberg will see through their greed.
Just before Christmas, those who obtain their news from The Guardian were told that the Treasurer’s decision to do away with the watered-down burden of proof was itself “watering down” the law on continuous disclosure.
That is at odds with the view of former Law Council president Stuart Clark, who says companies and directors will still be liable if they make statements they know to be untrue or act recklessly or negligently.
“Honest mistakes will not expose companies and directors to attack by foreign-owned law firms and litigation funders intent on making unconscionable profits from that mistake,” says Clark, whose clients include the US Chamber Institute for Legal Reform.
“Where a company or director knowingly makes a false statement, is reckless or negligent, they will find themselves on the wrong side of a class action.
“Directors will be in exactly the same position as lawyers and other professionals — they can be sued if they are reckless, negligent or make a statement that they know to be untrue.
“Plaintiffs’ lawyers are not subject to strict liability for their honest mistakes — so why are they arguing that a director should be held to a higher standard?” Clark says.
This is in line with the view of John Emmerig, who is national head of litigation at international law firm Jones Day.
He says nobody doubts that continuous disclosure plays a critical role in maintaining market integrity but Frydenberg’s changes, if made permanent, won’t end shareholder class actions.
“It would be a significant practical reform whose impact is likely to focus and reduce the number of class actions that are filed to the sorts of claims that should more truly warrant litigation,” says Emmerig.
“The problem has been that the threshold for suing companies and directors and officers for breaches under the pre-COVID-19 continuous disclosure laws was set too low, and that’s helped make it a cash-cow form of litigation for plaintiff firms and litigation funders who have aggressively pursued this opportunity.
“The key problem with the settings was that an intention element on the part of those being sued was missing from the equation. As a consequence, prior to the temporary COVID-19 changes, shareholder class action litigation had been trending in a direction that’s overtly detrimental for the legal system, the market and its participants.”
Emmerig says the inclusion of an intention element for continuous disclosure breaches is “simply a prudent and measured ‘middle-ground’ response to a problem that the pre-COVID-19 operation of the class action system has demonstrated needs to be fixed”.