A return to sanity for disclosure class actions

The joint parliamentary committee chaired by this Victorian Liberal senator is sitting on raw data from the Law Council that shows lawyers and litigation funders have been the biggest winners from a string of shareholder class actions.

While ostensibly helping shareholders hold companies to account, the data shows lawyers and their financiers made a killing from a series of class actions that left their clients with a relative pittance.

This looks set to transform the debate about class actions. It suggests plaintiff lawyers and their financial backers can be just as big a threat to the welfare of their clients as the companies they like to sue.

This could be awkward for the Labor Party, which received more than $350,000 last financial year from the nation’s leading class-action law firm, Maurice Blackburn, which ran several cases that feature on the Law Council’s list.

In 2017 it ran HFPS v Tamaya Resources, which is one of the worst settlements when judged by the proportion of the payout that went to clients — just 31.6 per cent. Legal fees and the commission charged by a litigation funder took $4.6m of the $6.7m settlement, a total of 68.4 per cent. Legal fees alone took 51 per cent or $3.4m.

To be fair, the HFPS case was complicated. When approving the settlement, Federal Court judge Michael Wigney wrote: “This is potentially the final chapter in a complex and tortuous (and for some at least torturous) shareholder class action. It would perhaps be an understatement to say that the proceedings did not progress smoothly.”

But while Maurice Blackburn’s clients walked away with less than a third of the payout, this was not the bleakest payday in a class action.

That honour goes to the 2018 matter run by Squire Patton Boggs, although Piper Alderman had also been involved. The case was Caason Investments v Cao (No 2) and it left clients with just 31.2 per cent of the settlement.

The Law Council’s figures show legal fees and commission charged by a litigation funder took $13.2m of the $19.2m settlement, or 68.8 per cent.

In theory, shareholder class actions are supposed to be an efficient method of compensating those who suffer losses because of a company’s wrongdoing.

But the data shows that the paltry returns for clients were not flukes. They received similar treatment in several other cases.

One of those was another Piper Alderman case, Santa Trade Concerns v Robinson (No 2). Legal fees and the funder’s commission took $2m of the $3m settlement, or 66.7 per cent.

Before approving that payout, Justice Michael Lee said: “Needless to say, a settlement which involves a return to group members of only a third of the gross settlement sum is one that requires … very careful scrutiny. It is a prima facie indication that something has gone wrong.”

In Mitic v OZ Minerals (No 2), a case run by ACA Lawyers, legal fees and the funder’s commission took $21.5m of the $32.5m settlement, or 66 per cent. And in Inabu v CIMIC, another Maurice Blackburn case, legal fees and the funder’s commission took $19.2m of the $32.4m settlement, or 59.2 per cent.

When the Law Council handed this information to Paterson’s committee, it did not highlight the worst outcomes for clients and instead pointed to average outcomes from what it described as a broad overview of class action settlements.

The worst outcomes for clients are only apparent from tables at the back of the Law Council’s submission.

But even the average outcomes are cause for concern. They show lawyers received an average of 15 per cent of settlements and funders took an average commission of 27 per cent. That means clients were left with an average of just 58 per cent of payouts.

The implications flowing from these settlements and several others are outlined in a forthcoming report on class actions by the Rule of Law Institute of Australia. That report warns that any system of compensation that costs more to run than it delivers in benefits cannot avoid change.

It is beside the point that, on average, clients in class actions “only” lost 42 per cent of the compensation to which they were entitled. What about those who lost 68.8 per cent?

While aggrieved shareholders are bearing the direct cost of this system, the report warns that collateral damage to innocent third parties is a bigger problem.

The cost of settlements in shareholder class actions is eventually paid by corporate insurance cover. Insurance broker Marsh says the average increase in premium for the ASX 200 in 2019 was 118 per cent, “with extreme cases at a staggering 600 per cent; and there are no signs of these increases slowing … insurers are now so concerned about the potential size and scope of securities class actions that many are either cutting back their offering or no longer writing the coverage at all.”

Responsibility for this does not rest with law firms and litigation funders. Blaming them would be counterproductive. The fault lies with the law.

Most securities class actions allege companies have breached their obligation to continuously disclose market-sensitive information.

In late May, Treasurer Josh Frydenberg infuriated Maurice Blackburn when he temporarily brought the test for liability for continuous disclosure breaches closer to the approach used in Britain and the US. The goal was to ease the litigation risk to business during the pandemic.

Failing to extend Frydenberg’s changes when they expire in November would be a self-inflicted wound.