Jurisdiction - Australia
Reports and Analysis
Australia – Securities Class Actions: A Growth Market.

17 June, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

What You Need To Know

 

  • The volume of securities class actions in Australia is increasing. A number of recent developments suggest that the securities class actions “market” in Australia is growing. New plaintiff law firms, specialising in class actions, have been established and the number of litigation funders operating in Australia has increased. 
  • Listed entities’ continuous disclosure practices are coming under increased scrutiny by those with an interest in promoting securities class actions.

What You Need To Do

 

  • As the 30 June 2014 financial year ends, listed entities need to be particularly conscious of the obligation to keep the market appropriately informed of earnings that are materially different from market expectations or of a material balance sheet event (eg material impairment of asset values). 
  • Listed entities should be cautious when providing guidance at AGMs on current and future period earnings to shareholders. Forecasts will form the basis of the market’s expectation and any subsequent updates (including for adverse changes) will be closely monitored and examined. 

A Time For Reflection 


As the financial year ending 30 June 2014 draws to a close, many ASX-listed entities will be going through their year-end corporate reporting processes, assessing results, preparing for external audit and beginning to finalise their statutory reports. These processes could identify matters giving rise to disclosure obligations. 


Where management and directors become aware that an entity’s earnings (or the breakdown of those earnings) for the year will differ materially from market expectations, the entity may have an obligation to disclose that fact to ASX. Similarly, an awareness that a material impairment of asset values may be required could also trigger a disclosure obligation. If a disclosure obligation does arise, the market will need to be informed in advance of the release of the entity’s preliminary (or final) results being issued to ASX before the end of August. 


Care also needs to be exercised at the entity’s annual general meeting (AGM), when it is held later in the year. The AGM provides an opportunity to reflect on the entity’s prior financial year. Shareholders may also expect the entity to provide some guidance on the entity’s performance for the new year and into the future. Forecast financial information must be based on reasonable grounds. It is also likely to become the market’s expectation. A failure to promptly update the market where the forecast is no longer accurate could constitute misleading and deceptive conduct and represent a breach of the entity’s continuous disclosure obligations. 


The environment in which earnings surprises and earnings forecasts are considered is changing. Recent increases in the number of announced securities class action claims suggests the frequency of these actions in Australia is increasing. The number of plaintiff law firms with securities class action practices and the number of litigation funders in Australia also suggests that the “market” for securities class actions in Australia is growing.

 

Securities Class Actions In Australia 


Since the first major securities class action in Australia (the GIO Australia Holdings class action in 1999), the securities class action “market” has grown and evolved. It remains the case that no securities class action filed against a listed entity in Australia has proceeded to judgment; to date, those claims that have concluded have been settled, usually with the listed entity agreeing to make a settlement payment. 


Securities class actions generally involve allegations that the defendant entity failed to comply with its continuous disclosure obligations and/or was involved in misleading and deceptive conduct by failing to properly inform the market about market sensitive information in a timely manner. 


The essential features of class action proceedings in Australia are that they relate to seven or more plaintiffs with claims arising out of the same or similar circumstances with a substantial common issue of fact or law. Compared with major overseas jurisdictions, this is a low threshold and makes Australia a jurisdiction that is class action friendly. 


One issue that has yet to be determined by courts in Australian securities class actions is the extent to which plaintiff shareholders need to establish that their loss was suffered by reliance placed on the alleged misleading statement or the failure to properly inform the market under our continuous disclosure rules. In contrast, the US Supreme Court in a case known as Basic v Levinson established the “fraud-on-the-market” presumption. This is a rebuttable presumption that public information about an entity is reflected in the price of its securities because of the efficient market hypothesis. Plaintiff investors do not need to establish actual reliance on a purported misstatement when deciding to buy or sell securities.


The US Supreme Court is currently deliberating on whether to overturn or modify the “fraud-on-the-market” presumption in Halliburton v The Erica P. John Fund, with the decision expected soon. That decision will be keenly watched by those with an interest in securities class actions and may have an impact on the willingness of plaintiffs to litigate and defendants to defend securities class action claims if the decision is seen as being persuasive for Australian courts.


Growth Of The Securities Class Action Business Model 


There have been a number of recent developments in the Australian securities class action “market”. Of particular note: 


Increasing Number Of Plaintiff Law Firms 


In the past, major securities class actions in Australia have been conducted by one of several established plaintiff law firms. 


Recently, new firms have entered the commercial litigation market with prominent offerings in securities class actions. For example, ACA Lawyers, some of whose principals and lawyers have previously worked at other plaintiff law firms, was recently established.
It has publicly stated that it is exploring four potential securities class actions:

 

  • OZ Minerals (II) (announced by ACA Lawyers in February 2014) – registrations are currently being sought from former shareholders in Zinifex who acquired OZ Minerals shares as part of the 2008 merger of Oxiana and Zinifex. This action will involve allegations of a failure to disclose Oxiana’s debt profile in 2008. If it proceeds, it would be another class action involving OZ Minerals relating to events around the Oxiana and Zinifex merger (Maurice Blackburn and Slater & Gordon both filed class actions (now settled) on behalf of former shareholders in Oxiana); 
  • Iluka Resources (announced by ACA Lawyers in March 2014) – in respect of sales guidance announcements made in February 2012 and subsequent downgrades of the guidance in May 2012 and again in July 2012; 
  • Macmahon Holdings (announced by ACA Lawyers in April 2014) – in respect of a profit downgrade announced by Macmahon on 19 September 2012 for the FY2013 (following on from earnings guidance it announced on 20 August 2012); and 
  • Padbury Mining (announced by ACA Lawyers in June 2014) – in respect of allegedly misleading statements to ASX concerning the funding of a major project.

Increasing Number Of Litigation Funders 


Litigation funders provide funding to meet the costs of securities class actions. They do so on the basis that those shareholders who have elected to participate in the class agree to provide a portion of any damages recovered to the litigation funder.

 

The number of entities providing litigation funding for Australian securities class actions also appears to be increasing:

 

  • In Australia, the ASX-listed Bentham IMF Limited has played a prominent role in funding securities class actions. It has primarily been associated with securities class actions where law firm Maurice Blackburn has represented the plaintiffs. 
  • Comprehensive Legal Funding LLC, a firm associated with Peter Gordon (a former partner of Slater & Gordon), has been involved with a number of Australian securities class actions and is usually associated with actions involving Slater & Gordon. 
  • A third entity in the Australian market has been International Litigation Partners Pte Ltd, a Singapore-based litigation funder. It has also been associated with securities class actions where Maurice Blackburn has been acting. 
  • Harbour Litigation Funding, a UK litigation funder, established in 2007, has been named as the litigation funder for three of the securities class actions announced by ACA Lawyers. While 2014 would appear to be its first year of active operation in Australia, the entry of a well-resourced and experienced litigation funder from overseas highlights the attraction of securities class actions in Australia to those who pursue it as a business model.

Private Litigants – A New Development 


In 2013, Melbourne City Investments, a company associated with Mark Elliott (formerly a partner of a large commercial law firm and in-house counsel), initiated and filed claims against a number of ASX listed entities alleging, among other things, continuous disclosure obligations breaches.


Melbourne City Investments has now filed claims in the Victorian Supreme Court against the following entities, alleging loss as a result of continuous disclosure breaches:

 

  • WorleyParsons (filed on 18 December 2013) – in respect of a profit downgrade it announced on 20 November 2013 for the FY2014 (following on from earnings guidance it announced less than six weeks earlier); 
  • Treasury Wine Estates (filed on 4 November 2013) – in respect of its announcement on 15 July 2013 regarding write-downs impacting on the earnings forecast for the FY2014 (following on from earnings guidance announcements made in August 2012, October 2012 and February 2013); and
  • Leighton Holdings (filed on 4 October 2013) – in respect of its announcement on 11 April 2011 regarding write-downs relating to two major construction projects (following on from profit forecasts for the FY2011 it announced on 14 February 2011).
 

(Melbourne City Investments’ action against Leighton Holdings is separate from an earlier action launched by plaintiffs with Maurice Blackburn acting. On 16 May 2014, Leighton Holdings announced that it had signed a conditional settlement, agreeing to pay approximately AUD 69.5m as compensation in respect of the Maurice Blackburn action, following allegations that Leighton Holdings had contravened its continuous disclosure obligations in respect of profit forecasts (and delays in updating those forecasts) in respect of its FY2011 results.)


The writs are filed on behalf of Melbourne City Investments and a class of other shareholders. It appears that the intention of Melbourne City Investments is to fund the action itself, rather than relying on a litigation funder. 


This could indicate a new trend – where the plaintiff and the litigation funder are one and the same entity. However, this development is being challenged. Treasury Wine Estates has argued that Mr Elliott acquired his shares in that company for the purposes of bringing the class action and that he should not be permitted to act as solicitor on the record in those circumstances. The court is presently considering this matter. 


Other Recent Developments 


Issues of conflict of interest will continue to arise whenever lawyers seek to fund class actions. Maurice Blackburn recently withdrew an application for court approval for the use of a litigation funder associated with the firm, in light of expressions of concern by the Commonwealth Attorney-General about this practice. 


One response may be to permit plaintiff lawyers to charge US style contingency fees. The Productivity Commission’s recent draft report on Access to Justice Arrangements recommends that restrictions on contingency fees be removed. The draft report also recommends greater regulatory control of litigation funders. The final report to the Government is due in September 2014. 


Finally, application has recently been made in the Allco shareholder class action for court approval of a proposal for a US style common fund, which would require all group members to contribute a proportion of their damages in a successful class action to thelitigation funder, even when they had not signed up with that funder.


Matters For Management And Directors To Consider 


As the 30 June year end approaches, and in advance of the 30 June reporting season, directors and officers of ASX-listed entities will be reflecting on disclosure issues as they close off their books, review the likely earnings for the period against the market’s expectations and proceed to finalise their full year statutory reports. 


Ensuring the prompt disclosure of market sensitive information identified as part of the year end process is critical. Senior management should be particularly sensitive to indications that the entity’s results or any year-end adjustments may be materially different from the market’s expectations. 


Having a sense of how the entity’s performance for the period has tracked against the market’s expectations is very important. (ASX Guidance Note 8 sets out ASX’s view on determining the market’s expectations for a particular period.) Of course, these matters also need to be assessed throughout the year. 


In addition, if an impairment of asset values has been triggered and management identifies that a material impairment may be required to the carrying value of the entity’s assets, the entity should carefully consider its disclosure obligations. If the impairment is material, it may be too late to wait until the release of the preliminary final results to inform the market.


Caution is also called for when providing the market with guidance about the entity’s current and future earnings. Shareholders may expect an entity to provide it with an update on the entity’s first half earnings at the entity’s AGM. A degree of conservatism is appropriate when providing shareholders with guidance at an AGM as to the entity’s performance in the current and future periods. Guidance statements should be, where relevant, appropriately supported by reasonable assumptions and sensible qualifications when disclosed to shareholders and the market. 


It is no coincidence that securities class actions are often considered by investors (and plaintiff lawyers and litigation funders) where a listed entity has disclosed information that is unexpected by the market and there is a significant fall in the entity’s share price. Ensuring that the market is kept appropriately informed and, to the extent practicable, is not startled by adverse news will reduce the risk of a securities class action.

 

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For further information, please contact:

 

Ashley Wharton, Partner, Ashurst
ashley.wharton@ashurst.com

 

Adrian Chai, Partner, Ashurst 
adrian.chai@ashurst.com

 

Kylie Lane, Partner, Ashurst 
kylie.lane@ashurst.com

 

Corey Lewis, Ashurst
corey.lewis@ashurst.com 

 

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