Introduction
Securities class actions are a common type of class action in Australia. These actions are based on the market disclosures of listed companies and typically they involve allegations of misleading conduct or breaches of a company’s “continuous disclosure” requirements.
2022 has seen 8 securities class actions (SCAs) filed in the Australian courts to date - this is trending higher than 2021, which saw only 8 SCAs filed for the whole calendar year. The class action regime has changed dramatically in the last twelve months. While this is due in part to a change in government, the shift has been driven predominantly by the courts, leaving both insurers and insureds in a landscape which is far from settled, with one of the destabilising features being the interplay between the federal and state class action regimes.
This update provides a snapshot of the changes with a focus on SCAs.
Group costs orders continue to be made
Since July 2020, the Supreme Court of Victoria has had the power to make group costs orders (GCOs) which are “contingency fee” style orders in which the court orders that the plaintiff law firm be entitled to a percentage of the proceeds from any judgment or settlement. The GCO jurisprudence has advanced over the past two years with plaintiff law firms adopting progressively more sophisticated financing arrangements in order to present their offering as the best outcome for group members (particularly where there are competing or multiple class actions on foot). The highest GCO awarded has been 40%[1] with the only other order made to date being in the order of 27.5%.[2]
Soft class closure reinstated
Since early 2020, two state (New South Wales) court decisions curtailed the ability for courts to order “soft class closure”. Soft class closure orders had the effect of limiting participation in any settlement to registered group members while securing releases from all putative group members who had not opted out of the proceeding in favour of the defendant. This created a level of certainty for all parties regarding the value of group member claims for settlement purposes. Until early 2020, it was a standard practice for both federal and state courts managing class actions to order class closure for the purpose of mediation only.
In March 2022, the Federal Court handed down a decision[3] which effectively re-opened the door for soft class closure. This decision is an important development because it reinstates a procedural approach which enhances the prospects of settlement at mediation and provides far greater certainty for defendants in trying to resolve class actions. It does this because soft class closure orders have the effect of limiting the value of the claim to the claims of registered group members only.
The Federal Court’s approach means that the Federal and Victorian jurisdictions (where soft class closure orders can (and have always been) be made will be the jurisdictions of choice for class actions at the expense of New South Wales.
Litigation funding arrangements as managed investment schemes
Since August 2020, the law was amended to require litigation funders in class actions to hold an Australian Financial Services Licence because funding arrangements were characterised as a “management investment scheme” (MIS) under the Corporations Act 2001 (Cth). The effect of being characterised as a MIS is that the funding arrangement is subject to a number of onerous and expensive requirements in order to operate a funded class action.
That development was the subject of some criticism with many legal experts and even a Parliamentary Inquiry observing that the existing managed investment scheme laws were not fit for purpose in a class actions context and were unnecessarily onerous.
In June 2022, the Full Court of the Federal Court[4] confirmed that litigation funding schemes are not MIS for the purposes of the Corporations Act. In early September 2022, the government introduced draft regulations to formally exclude litigation funding schemes from the existing MIS and licencing obligations.[5]
With the costly licencing and requirements now removed it may result in some of the smaller funders coming back to the market albeit those smaller funders (and indeed all funders) now grappling with the GCO regime in Victoria.
Continuous disclosure in securities class actions
Temporary changes to the law around continuous disclosure, which require listed entities to disclose price sensitive information on a continuous basis, became permanent on 14 August 2021.
The amendments introduce fault elements of knowledge, recklessness and negligence to the continuous disclosure regime. The previous test was whether the information in question was such that a reasonable person would expect it to have a material effect on share price.
The new test provides that a person or entity will only be liable where they failed to update the market and either knew the information was price-sensitive, or were reckless or negligent with respect to whether it was price sensitive.
While the changes are significant on paper, the reality is that the “new” test which includes negligence is similar in substance to the “reasonable person” test under the existing legislation. Accordingly, the softening of the laws is not the panacea for ASX listed entities that they were made out to be by the incumbent conservative government.
Given the recency of the legislation there have been no cases which have proceeded beyond their initial filing and introductory matters. This has made the landscape more challenging in the short term as the new negligence test is likely to be litigated, possibly leading to uncertainty for the market and additional costs for those involved.
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Wotton + Kearney
[1] Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201
[2] Allens v G8 Education Ltd [2022] VSC 32
[3] Parkin v Boral Limited (Class Closure) [2022] FCAFC 47.
[4] LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103
[5] Treasury Consultation “Exemptions for litigation funding schemes” https://treasury.gov.au/consultation/c2022-308630
