(A) CHANGES TO FUNDING OF OPEN CLASS ACTIONS
Class actions in Australia can be brought by a representative either on behalf of:
- a very broad class of people without their consent or even knowledge (each of whom can opt out), ie an ‘open class’; or
- a discrete group, a ‘closed class’, who have expressly opted into a proceeding.
In a closed class action, opting in usually involves signing a funding agreement with a litigation funder who agrees to bank roll the proceeding in return for a commission. Class members who do not opt into the class action cannot get a ‘free ride’ at the funder’s expense. The funder’s potential up-side is, however, capped in a closed class proceeding by the number of class members who have opted in.
In 2016 the Full Federal Court handed down a decision that provides a framework for litigation funders to charge a reasonable percentage funding commission to the whole class, including to unfunded class members who have not contracted with the litigation funder, in an open class action. The decision was Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited  FCAFC 148.
+ What did the court decide?
The Full Court determined that all members of the class in that class action suit were required to contribute to a common fund in favour of the litigation funder, irrespective of whether they each signed a funding agreement with that funder. The Money Max action is being funded by litigation funder International Litigation Funding Partners Pte Ltd (the Funder). The applicant brought the class action on behalf of an “open class” comprising all persons who acquired an interest in QBE shares and who claim to have suffered loss as a result of QBE’s allegedly misleading and deceptive conduct. As at the date of the hearing of the application, the applicant and approximately 1,290 class members (funded class members) had each entered into a litigation funding agreement with the Funder. The balance of class members had not (unfunded class members). The Court’s order had the effect of applying the terms of the Funder’s funding agreement to both funded class members and unfunded class members.
+ Court's analysis
QBE objected to the application, arguing that a common fund order: would lead to substantial and unjustified increases in the aggregate funding commission paid to the Funder; would leave class members with significantly lower proportions of any settlement or judgment moneys “in hand” and that this would be to the detriment of both funded and unfunded members; would create an unnecessary financial hurdle to the resolution of the substantive proceedings; and is not an order the Court had the power to make. In coming to its decision, the Court cited the potential advantages of a common fund order as being: the common fund order removes the contractual obligation for funded class members to pay a funding commission at the rate of 32.5% or 35% of the settlement of judgment amount. The common fund order contains the protection inherent in judicial oversight and approval of a potentially lower funding commission rate as the Court considers reasonable; the common fund order seeks to prevent the funder from becoming entitled to an excessive or disproportionate amount; the Court’s new approach contains a floor condition that no class action member can be worse off than he or she would be if the common fund order was not made; prior to class members being required to opt in or out of the class action, the Court’s new approach will ensure that class members will be informed of the funding commission rate. If class members are concerned with the obligation to pay the funding commission, they will be entitled to opt out of the proceeding and commence their own case; the Court’s new approach enhances access to justice by encouraging open class proceedings as a practical alternative to closed class proceedings which are particularly prevalent in funded shareholder class actions; and encouraging open class proceedings is more consistent with the opt-out procedure and may reduce the prospect of multiple, overlapping or competing actions
+ G+T Observations
This decision represents a significant change in class action procedure as: all class members will from now on be required to pay to the funder of a class action the same funding commission from the common fund of any settlement or judgment awarded in the class members’ favour; and the funding commission rate will no longer be imposed by the funder – it will now be determined by the Court at an appropriate time, which is likely to be the time of settlement approval or the distribution of damages (although the Federal Court was not proscriptive as to when this needed to occur). Historically, litigation funders have been prepared to fund shareholder class actions where the class is closed or limited to those persons who enter into a litigation funding agreement. That is because, if funded proceedings were commenced on an open basis, then unfunded class members have been able to enjoy a “free ride” at the funder’s expense. The Full Court’s decision will shift litigation funders’ attitudes in favour of commencing open class, rather than closed class, proceedings. This will likely have an effect on: the speed in which class actions are commenced because: there is no longer a need for funders to engage in the often lengthy process of signing class members up to a funding agreement prior to the commencement of a claim; and if the distinction between open and closed class actions falls away, funders will have greater competition amongst themselves to be the first to commence a class action in relation to a potential claim; defendants’ assessments of the risks associated with a class action being brought against them on the basis that: it will be much more difficult for defendants to quantify their potential exposure to an open class actions; and the quantum of damages sought in larger, open class proceedings may well be greater than the quantum of damages sought in closed class proceedings.
The focus in 2016 within the Australian court system on the ability to commence and the management of class actions suggests both a continued trend toward increased class action activity and judicial openness to that activity. The key developments included:
+ Queensland introduces class actions regime
In November 2016, Queensland passed a bill introducing a class actions regime for Queensland State Courts largely modelled on schemes in the Federal Court, Victoria and New South Wales. The commencement date is yet to be announced.
+ Western Australia moves toward a new class actions regime
In late 2015, the Law Reform Commission of Western Australia tabled the Final Report on Representative Proceedings in parliament recommending the introduction of class actions legislation based on the Federal regime. While in early 2016 it seemed likely that legislation would be developed as the Western Australian Government supported this in principle, we are still waiting to see whether WA will follow Queensland’s lead.
+ Federal Court of Australia increases management of class actions
Indicative of the Federal Court’s growing experience in dealing with class actions and the sophistication of the judicial approach to class actions in Australia, the Court issued a class actions specific practice note, as part of the National Court Framework (NCF) reforms, which introduced: obligations regarding the disclosure of costs and litigation funding agreements to class members, the Court and the other parties; requirements for costs and litigation finding agreements to include provisions for managing conflicts of interest between any of the applicant, class members, applicant’s lawyers and any litigation funder; an obligation on the applicants’ lawyers to provide class members (who are clients or potential clients) with a breakdown of the costs that they have incurred, including any “uplift” costs; the practice of the Court appointing a second “Case Management Judge” to appropriate proceedings, whose role is to conduct case management hearings between the parties and to drive the expeditious and efficient management of the proceedings, particularly with respect to interlocutory matters; and guidance on communications with class members.
(C) SOPHISTICATION OF CLASS MEMBERS
Sophisticated, well-funded institutional investors (including superannuation funds) are increasingly actively seeking out class actions to commence against corporations. In doing so, they are engaging experts, advisors and advanced technology systems (such as software which automatically monitors share price fluctuations and the proximity of these fluctuations to market announcements) to determine the viability and quantum of potential claims.
This activism can be attributed to:
- members demanding greater corporate responsibility from their funds – this is being seen particularly through members asking more questions of their funds and of the funds’ investments;
- members putting pressure on funds to be actively involved in class actions which have been brought in relation to corporate misconduct and poor governance; and
- members reacting to large bonuses being made to executives of companies in circumstances where the company had experienced poor financial performance or a corporate scandal.
Representatives of superannuation funds have indicated that new litigation funding models, spurred on by the recent QBE decision, have made participation in class actions more financially attractive.
The recent emergence of two firms offering class action advisory services to institutional investors in Australia signifies the perceived growth in this area. Australian-based Investor Claim Partner (ICP) and US-led Institutional Shareholder Services (ISS) market themselves as advisors to institutional investors who are considering bringing claims against ASX-listed companies as a result of board or management wrongdoing. ISS and ICP both provide services designed to assist companies to manage class actions (by arranging funding on favourable terms, organising the book build process and managing legal spend) and maximize recoveries.
With advisory firms acting as conduits between institutional investors (particularly superannuation funds) and plaintiff class action firms and funders, we anticipate seeing:
- class actions being increasingly applied to economic losses as opposed to product liability actions;
- shareholder interest extending beyond continuous disclosure or misconduct to issues that relate to the behaviour of companies, including remuneration and environment disclosures; and
- advisory firms undertaking the book building process more efficiently than plaintiff law firms or litigation funders, and therefore classes being formed more quickly.
With the increasing number and sophistication of litigation funders and plaintiff solicitor firms in Australia, it is often the case that a public event that adversely affects numerous people will spawn a number of representative proceedings purporting to represent those affected. Defendants and courts alike must grapple with the competing actions and competing legal teams, often with different strategies and approaches to effectively the same case.
There is no easy, universally applicable answer to the question as to what the court will or should do in these cases. The courts have given some indications as to how they might deal with multiple class actions but, particularly following the Money Max decision and the development of Australia’s class action jurisdictions, this is an area in which we can expect the courts to continue to innovate and develop the law.
This issue was recently considered by the NSW Supreme Court in Smith v Australian Executor Trustees Limited; Creighton v Australian Executor Trustees Limited  NSWSC 17. The Court ordered that, rather than being consolidated, the two class actions should proceed to trial and be heard together on account of their different funding arrangements and case strategies.
+ Class action case management options
- to run one proceeding as a test case in advance of the others;
- to run a joint trial;
- the consolidation of the competing proceedings into a single proceeding;
- on the Court’s or (more usually) the defendant’s motion, order that one proceeding not continue as a representative proceeding; and
- where the circumstances allow and on the defendant’s motion, permanently stay one (or more) of the multiple actions as an abuse of process.
+ Class action case management evaluation
The courts have generally held that the concept of ‘first in best dressed’ is not determinative of how to manage class actions or whether one case will take precedence over others, but a question may arise as to whether a second or subsequent action commenced in a court in Australia, if an action between the same group members with respect to the same subject matter is already pending, can be said to be vexatious or oppressive.
In Australian Executor Trustees the Court included a non-exhaustive list of factors that courts consider in deciding how to manage competing class actions, as follows:
- the experience of the practitioners seeking to bring the representative actions;
- the likely costs to be incurred by the firm acting for the group members;
- the terms of the funding for the representative action;
- the nature and scope of the causes of action advanced in each action and the theories advanced as being supportive of the claims advanced;
- the presence of any conflicts of interest;
- the number, size and extent of involvement of the proposed representative plaintiffs;
- the relative priority of commencing the representative actions; and
- the status of each class action, including preparation.
+ Decision in Australian Executor Trustees
The two competing actions in Australian Executor Trustees concerned claims arising out of debentures issued by Provident Capital Limited. The case provides insight into how courts may manage competing class actions, particularly in circumstances where there is a substantial overlap between the proceedings. The parties presented the Court with competing preferred options to manage the case: The Respondent’s position was that one or other of the proceedings should not be permitted to continue as a representative proceeding and should be stayed until further order of the court. Alternatively, the two proceedings should be consolidated or directions be made for the appointment of a litigation committee that would manage the two proceedings on behalf of the class members of both proceedings. Mr Creighton (who, indemnified by Slater & Gordon acting on a “no win, no fee” basis, commenced first representing an open class) said that the Smith’s case should be stayed until a determination of the Creighton Proceeding. Mr and Mrs Smith (representing a closed class who had signed up with a litigation funder) said that both proceedings should be permitted to continue as representative proceedings, but they should be heard together and an order should be made that evidence in one be evidence in the other. His Honour Justice Ball considered the factors set out above and ultimately found that, owing to the different funding arrangements and case strategies as well as the distrust between the plaintiffs’ lawyers, it would not be appropriate to attempt to consolidate the proceedings. His Honour was also not inclined to stay the Smith proceeding in favour of the Creighton proceeding (although Creighton appeared to broadly represent the members of the Smiths’ class) as that would necessarily involve the court imposing a choice on the Smith class members which was against their will. The alternative adopted by Justice Ball was that members of the Smith class could continue as members of the Smith proceeding or the Creighton proceeding (but not both) – despite the overlap between the proceedings, they were found to offer true alternatives to class members. The cases will proceed to a joint trial, meaning the Defendant will be required to deal with two sets of lawyers adopting potentially different approaches on the various factual and legal questions that arise throughout the conduct of the proceeding. The Court’s approach is indicative of the flexibility courts have when managing competing class actions but also demonstrates the lack of certainty defendants have when facing multiple class action.
(E) CHALLENGES TO LITIGATION FUNDERS
Following two recent cases in Australia and the UK, it is clear that Courts are increasingly concerned to hold litigation funders to account in the course of large and protected proceedings, including by ordering litigation funders (and even their directors) to bear the costs of unsuccessful claims.
Emphasising the Court’s broad discretion to order costs against non-parties and that appropriate costs orders will differ depending on the circumstances of each case, the Victorian Court of Appeal recently upheld an order requiring a litigation funder, its sole director and shareholder to pay the costs of an unsuccessful claim.
The significance of such decisions for defendants in class actions, and increasingly, multiple class actions potentially across jurisdictions, is that they have an expanding set of litigation tools to strategically respond to the challenges of increasingly litigation-funder led class actions.
+ The Australian position: Carter & anor v Caason Investments Pty Ltd & ors  VSCA 236
In October 2016, the Victorian Court of Appeal upheld a decision to award costs (on the ordinary basis) against a litigation funder and its sole director and shareholder.
The subject proceedings concerned an agreement between Bakers Investment Group (Australia) Pty Ltd (Bakers) and Caason Investments Pty Ltd (Caason) regarding the funding of an exploration and development opportunity in relation to a coal mine in northeast Tasmania. Each side made claims against the other with respect to a number of alleged breaches of that agreement. During the course of that proceeding, Bakers obtained litigation funding from Global Litigation Funding Pty Ltd (Global) to enable it to continue the litigation.
Bakers’ claims ultimately failed. During the course of the proceedings, Caason sought non-party costs orders against various persons and entities associated with Bakers. The trial judge made orders that Global (as well as Esplanade – the sole shareholder in Global - and Mr Carter - a shareholder in Esplanade) pay costs of and incidental to the proceeding, on the ordinary basis. The Court ordered that they be jointly and severally liable for the payment of those costs.
On an application for leave to appeal, the Court considered whether the judge erred by ‘piercing the corporate veil’.
The Court of Appeal identified a number of factors to be taken into account in deciding whether to exercise the court’s discretion to make a non-party costs order, including:
- the financial position of party against whom a costs order would be made;
- whether there have been orders made for security for costs;
- whether the non-party has a ‘real interest’ in the litigation, and if so, the extent;
- the amount of funding contributed by the non-party; and
- whether the non-party has agreed to provide an indemnity if an adverse costs order is made against a funded party.
The Court held that the costs awarded in a case are dependent on what is required in the circumstances of the case. A costs order against a non-party is exceptional in that costs orders are usually made against a party to the proceeding, however, the Court has a broad discretion to order costs against non-parties. The Court of Appeal also noted that making a non-party costs order against a company director was not piercing the corporate veil.
 See Bakers Investment Group (Australia) Pty Ltd v Caason Investments Pty Ltd (No 3)  VSC 644.
+ The UK Position: Excalibur Ventures LLC v Texas Keystone Inc & ors (2016) EWCA Civ 1144
Excalibur Ventures LLC (Excalibur), heavily supported by a number of funders, claimed an interest in a number of oil fields in Kurdistan. Excalibur began an action against Texas Keystone Inc. (Texas), Gulf Keystone Petroleum Limited and other Gulf Keystone companies (Gulf) (together, the Defendants), claiming specific performance of a ‘Collaboration Agreement’ under which Excalibur claimed an entitlement to an interest in the oil fields or to damages of US$1.6 billion. The action failed in its entirety, with the Court describing the action as “essentially speculative and opportunistic”.
The UK High Court at first instance directed Excalibur to pay the defendants' costs on an indemnity basis. The security for costs previously paid into Court were inadequate, having been calculated on the ordinary basis. Excalibur was ordered to provide additional security for the defendants' costs, failing which the Court gave leave to the defendants to join some of the funders of the action to the proceedings so that costs orders could be sought against the funders. The additional security was not provided and leave was subsequently given to join the remainder of the funders. The High Court ordered the litigation funders to pay costs on an indemnity basis, from the date of their first contribution of funds to the litigation.
On appeal, the Court considered whether:
- litigation funders should be subject to indemnity costs orders;
- funders who provide funding for the express purpose of security for costs should be liable for any further costs; and
- litigation funders who had entered into no direct funding arrangement with either the applicant (or its lawyers) but who had provided the funds on back-to-back terms should be liable to a costs order, including indemnity costs.
The Court noted that the funder chooses which claims to back, whereas, a defendant does not choose by whom to be sued, or in what manner. The Court was unable to find any legal basis upon which the funder can dissociate himself from the conduct of those whom he has enabled to conduct the litigation and upon whom he relies to make a return on his investment. Accordingly, the funders and the funded were jointly and severally liable for the costs of the proceedings.
Those funders who had no direct funding arrangement with either the applicant or its lawyers were ordered to pay indemnity costs on the same basis as those funders with direct arrangements.
Those funders that had agreed to advance funds for security for costs argued that, based on the Arkin cap, they should be liable for no more than they had advanced to furnish security for costs. This argument was rejected. The rationale for this being that both the provision of security for costs and the payment of the litigant’s own lawyers and experts, are costs of pursuing the litigation which, if not met, will result in the litigation being unable to proceed.
Whilst the Court found that the due diligence undertaken by the funders was inadequate, it found that it was not necessary to consider the adequacy of the due diligence in order to make an indemnity costs order against the funders.
 see Arkin v Borchard Lines Ltd  1 WLR 3055.
(F) MARKET-BASED CAUSATION
+ What is it?
In a securities class action, a plaintiff is required to establish that their loss was caused by the conduct of a defendant. Until recently in Australia, causation was typically proved by a plaintiff demonstrating that it relied on the defendant’s conduct, such as a misleading statement or breach of continuous disclosure obligations, when entering into a transaction such as the purchase of securities. A recent decision in the NSW Supreme Court, HIH Insurance Ltd (in Liq) & Ors  NSWSC 482, provides support for an alternative view with respect to the requirement to prove causation, namely market-based causation. An acceptance of this type of causation may lead to plaintiffs not being required to demonstrate that they actually relied on the defendant’s conduct when entering into a transaction, but rather that they transacted in a market where the price of securities had been artificially inflated by the defendant company’s conduct (typically an alleged misleading statement or failure to disclose material information to the market) and suffered loss when the price corrected following disclosure of the true position. Market-based causation is reminiscent of (but distinct from) the rebuttable presumption of reliance long accepted by US Courts in securities fraud class actions in that both are based on the “fraud on the market” theory which effectively assumes that: established capital markets efficiently incorporate all available information, including misleading statements but not undisclosed information, into the price of securities; and investors purchasing securities in such markets do so in reliance on the market and therefore it may be presumed in reliance on any misleading statements made to the market and without the benefit of any undisclosed information.
+ How is it applied?
To date, the NSW Supreme Court’s 2016 decision of HIH Insurance Ltd (in Liq) is the only Australian decision applying market based causation. In that case, Brereton J found in favour of the investors who had purchased securities in HIH Insurance Ltd (HIH). The Court found that HIH had included misleading or deceptive representations in its financial results which caused its shares to become inflated. His Honour stated the following with respect to the issue of direct reliance on the financial information:
I do not see how the absence of direct reliance by the plaintiffs on the overstated accounts denies that the publication of those accounts caused them loss, if they purchased shares at a price set by a market which was inflated by the contravening conduct: the contravening conduct caused the market on which the shares traded to be distorted, which in turn caused loss to investors who acquired the shares in the market at the distorted price. In the absence of any suggestion that any of the plaintiffs knew the truth about, or were indifferent to, the contravening conduct, but proceeded to buy the shares nevertheless, I conclude that “indirect causation” is available and direct reliance need not be established.
On that basis, the Court made an award of damages in favour of the investors despite the investors not being able to demonstrate that they directly relied on the financial information when purchasing the HIH securities.
We note that this case related to a prohibition on misleading and deceptive conduct in the former Trade Practices Act. However, similar prohibitions are now contained in the Competition and Consumer Act, Corporations Act and ASIC Act. On that basis, we anticipate that the reasoning adopted in HIH would also apply to claims for compensation under these Acts.
+ Will courts continue to apply market-based causation?
Although market-based causation has only been applied in the Australian context on the one occasion, and not in relation to a class action, we anticipate Courts will increasingly apply this theory – particularly to securities class actions involving allegations of misleading or deceptive conduct and breaches of continuous disclosure obligations.
The examples below suggest that members of the Federal Court are inclined to support the application of a market based theory of causation to claims based on breach of market disclosure obligations, including in relation to a misleading prospectus or other disclosure document.
- In Caason Investments Pty Ltd v CAO (2015) 236 FCR 322, the Full Federal Court upheld an application for leave to amend a pleading by deleting a paragraph restricting group membership to persons who acquired the relevant shares ‘in reliance upon’ representations made by the respondents. This ruling reflected a market causation theory applied to s 729 of the Corporations Act (which establishes a right to recover for loss caused by a misleading market disclosure document). Gilmour and Foster JJ held it could not be said that these amendments were incapable of succeeding. Justice Edelman (in dissent) also expressed the view that it may be possible to argue reliance is not a required element of a claim for damages.
- In Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 322 ALR 723, the plaintiffs submitted that shareholders who had purchased shares at an inflated price should be able to recover the amount of the price inflation where the inflation was caused by the listed company’s wrongful failure to disclose information to the market. Although the Court stated that it wasn’t necessary to decide this particular question, Perram J stated that he would have accepted these arguments and found in the plaintiffs’ favour.
These examples strongly suggest that if the Federal Court were asked to rule on market based causation (for example, in relation to a claim for misleading or deceptive conduct under either the Competition and Consumer Act, Corporations Act or the ASIC Act), the Court would find that it is available as an option for establishing causation. Justice Edelman’s recent elevation to the High Court means this view may also find favour with at least one member of that Court.
+ How will market based causation affect class actions
In our view, judicial acceptance of market-based causation will be a factor in driving a gradual increase in the value of settlements and the prevalence of securities class actions, particularly actions based on breach of market disclosure obligations, since the principle will make it easier for plaintiffs to establish the necessary connection between the wrongful conduct and their loss. In addition, it will be easier for class action law firms to identify potential claims, as any significant fluctuation in the price of listed securities, coupled with a delayed or misleading market disclosure, could conceivably form the basis of a claim.
However, it is important to recognise that, even with the courts’ recognition of market-based causation, class action plaintiffs will still face a number of hurdles in establishing a securities claim. In particular:
- Market based causation will not be relevant to all causes of action. It is likely to apply to market manipulation (and would have in any event without the support of decisions like HIH) and misleading or deceptive conduct, but its application to actions such as unconscionable conduct is less obvious;
- Even where it does apply, the plaintiffs must still show that the defendant has engaged in conduct which gives rise to a recognised cause of action (such as a misleading or deceptive conduct claim); and
- Plaintiffs must also still show that the wrongful conduct caused their loss, for example, by establishing that the wrongful conduct led to prices in the market being inflated, and that the plaintiffs suffered a loss as a result of transacting in the inflated market. In addition, the court would need to be convinced that the plaintiffs were not indifferent to the wrongful conduct in the sense that, had the plaintiffs been aware of the true position, they would not have traded.
We would further caution against concluding that Australia is on the precipice of a proliferation of high-value, US-style securities class actions or that class actions will now be pursued to judgment. Indeed, notwithstanding an established class action culture and lengthy judicial acceptance of the rebuttable presumption of reliance, it is still rare for securities class actions in the US to proceed to trial and judgment.
(G) SETTLEMENT APPROVAL
Class action settlements require Court approval. A recent Federal Court of Australia decision demonstrates an increasing trend for Courts to question or reject settlement proposals, something which has previously been uncommon.
Despite class members reaching an in principle settlement with the defendants, when asked to approve the settlement proposals of four overlapping but not identical class actions, Justice Murphy in Kelly v Willmont Forests Ltd (in liq) (No 4)  FCA 323, refused to do so.
In reaching this decision, Justice Murphy provided a number of reasons for the refusal, including:
+ Requirement that admissions be given by the class members
- The settlement proposal included a requirement that the claimants give binding admissions on behalf of the class members as to the validity and enforceability of the loan agreements between the Lenders and class members.
- His Honour found that such admissions would be significantly detrimental for some class members because it would prevent them from defending future loan enforcement proceedings by the Lenders on any basis, even if those proceedings did not relate to issues in the class actions.
- Further, his Honour found that:
- class members would be giving these admissions at a time when they did not know whether they would have individual claims against the Lenders;
- class members were not clearly informed that if they did not opt out of the class action they would be prevented from defending future proceedings; and
- the proposed settlement did not allow class members an opportunity to opt out at the point of settlement.
+ Inadequate case preparation
- His Honour found that gaps in litigation funding meant that the claimants’ lawyers did not prepare the case in a satisfactory manner.
- This was found to be significant, because if the class members knew of the inadequate preparation, they might have chosen to opt out of the proceedings.
+ Conflicts of interest
- His Honour found three instances of a potential conflict of interest arising from the settlement proposal:
- a conflict between the interests of registered class members on the one hand, and the interests of non-participating class members on the other;
- a conflict between the claimants’ solicitors duty to the registered class members who are the firm’s clients, and its duty to non-participating class members; and
- a conflict between the claimants’ solicitors interest in receiving legal costs and the class members’ interests in minimising the legal costs they paid.
- His Honour held that the settlement should not be approved until these conflicts had been recognised and properly dealt with.
- His Honour found three instances of a potential conflict of interest arising from the settlement proposal:
+ Legal fees
- His Honour questioned the reasonableness of the legal fees incurred by the claimants’ solicitors.
- Further, his Honour explained that legal costs should be considered by the court as part of the settlement approval process. This was because an assessment of the reasonableness of legal fees may affect the real "return" to class members if their lawyers were required to discount any costs that were shown to have been excessive.
+ G+T Observations
Our assessment is that this judgment may provide a platform for judges in 2017 to question the reasonableness and validity of settlement proposals for other class actions. In particular, court will likely focus on issues such as:
- settlement proposals that go beyond the scope of an opt-out notice, and whether or not the settlement proposal should be rejected on that basis;
- the reasonableness of legal fees incurred by claimants’ solicitors.
(H) RREACHING FINALITY
Although the High Court’s decision in Timbercorp Finance Pty Ltd (in liquidation) v Collins  HCA 44 has provided certainty with respect to whether or not group members’ secondary rights were extinguished by the primary class action, the result is that defendants now face significant uncertainty as to when that class action will achieve finality.
The High Court’s decision concerned recovery proceedings following a failed class action that had been commenced by group members against Timbercorp Finance.
The critical issue for the High Court was whether group members were able to raise individual claims or defences during the recovery proceedings in circumstances where those individual claims or defences had not been raised during the class action.
The High Court found that group members were able to raise defences that were not captured by common questions of law or fact in the primary class action. In so doing, the High Court put to rest conflicting precedent regarding the operation of the principles of Anshun estoppel in class action proceedings.
Anshun estoppel operates to prevent a party from bringing claims which were capable of being pursued in earlier proceedings. The High Court held that there could be no estoppel unless it appeared ‘that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it.’
In this instance, the High Court found that it was not unreasonable that the group members did not raise their individual defences during the primary class action. In assessing the reasonableness of the group members’ individual claims, the Court raised:
- the interaction between the individual defences and the common questions in the primary class action;
- the level of control the plaintiff had over the group proceedings, as compared with a group member;
- the ability of a group member to have his or her individual claim decided during the primary class action; and
- the financial burden of raising those defences in the primary class action.
At a practical level, the High Court’s decision may result in defendants who successfully defend class action proceedings being unable to achieve finality of judgment until all potential secondary claims commenced by individuals have been ventilated.
So as to obtain as much protection from this potential outcome, defendants should:
- ensure that pleadings and the common questions of law and fact are drafted as carefully as possible. This will reduce the risk of individual claimants commencing secondary claims that are outside the scope of the issues in the primary class action; and
- seek to ensure that opt out notices that inform group members that, by not opting out, they may face the risk of not being in a position to defend future loan recovery proceedings that might be brought against them.
The increase in securities class actions, potentially as a result of the recent acceptance of market based causation, means that companies now face a higher risk of class actions being brought in connection with fluctuations in their share price. It is important for companies to be able to quantify this risk through an accurate assessment of the amount of damages that might be awarded in any potential claims.
Securities class actions typically involve a claim that investors have suffered loss as a result of purchasing securities at a price that was artificially inflated by misleading or undisclosed information. The ways in which courts have historically measured the amount of loss for inflated and mistaken purchase claims has varied significantly, making it difficult to accurately estimate the potential amount of damages that could be awarded. The different measures of damages have included:
- The difference between the amount paid and the “real” or “true value” at the time of purchase;
- The difference between the purchase price and the amount “left in hand”;
- The difference between the purchase price and the sale value (where the asset has been sold prior to judgment);
- The total purchase amount; and
- The difference between the amount “left in hand” and the amount that the plaintiff would have earned if the plaintiff had used the purchase amount for an alternative investment.
However, the recent decision of Brereton J in HIH Insurance Ltd (in Liq)  NSWSC 482 suggests that courts are now moving towards an assessment of damages based on the difference between the amount paid for the securities and the “market value”, being the price that would otherwise have prevailed if the contravening conduct had not occurred but all other factors remained constant. The “market value” differs from the “true” or “real value” in that it represents the value that the plaintiffs could actually have bought the securities for in the prevailing market, rather than an objective assessment of their worth.
In HIH, Brereton J held that the “market value” approach was the correct measure of damages where the plaintiffs’ case was that they would have purchased the securities in any event, although it may not be appropriate if the plaintiffs can established a “no transaction” case (that is, that if they had known the true position they would not have purchased the securities at all).
The “market value” approach mirrors the approach to assessing damages which has been adopted by US courts in connection with securities class actions brought under s 10(b) of the Exchange Act (deceptive or misleading scheme in the sale of listed securities). The US experience suggests that, in the event that Australian courts continue to endorse the “market value” as the appropriate way to determine loss, it will be necessary for plaintiffs and courts to be able to distinguish between price inflation connected to the defendant’s wrongful conduct (for example, a misleading market statement) and price inflation or deflation associated with extraneous factors such as other market disclosures, industry events or prevailing economic and market conditions. In circumstances where there have been multiple misleading statements or omissions, it may also be necessary to distinguish between the price impact of statements or omissions affecting a plaintiff and those which did not (because, for example, the plaintiff sold the security before the statement or omission was corrected).
While distinguishing between the different causes of price inflation may be simple in theory, the US experience has shown that establishing loss will often require class action plaintiffs to make use of highly technical expert economic analysis and modelling, adding to both the time and cost of bringing and defending securities claims. Importantly for defendant companies, the US experience suggests that courts are unlikely to simply accept at face value a claim for damages which is based on the total drop in price of the relevant securities, particularly where the drop coincides with a market or industry downturn, or the release of other unrelated bad news.