Class actions under review
A discussion paper released by the Australian Law Reform Commission (ALRC) recommends a review into the legal and economic effects of Australia’s continuous disclosure and misleading and deceptive conduct laws and their impact on class actions.
The paper, released last month as part of the ALRC’s inquiry into class action proceedings and third-party litigation funders, notes that shareholder claims are the most commonly filed class actions in the Federal Court. Indeed, they have represented 34 per cent of all class actions filed in the last five years.
Such claims are usually based on breaches of the continuous disclosure and misleading and deceptive conduct provisions of the Corporations Act 2001.
The paper notes that there is growing evidence of ‘unintended adverse consequences’ caused by these breaches when coupled with the class action regime. These include the impact on the value of the investments of company shareholders (including the investments of the class members themselves) at the time the company is the subject of the class action and the impact on the availability of directors and officers (D&O) insurance in the Australian market.
The ALRC says it has been told that there has been chronic under-pricing of D&O business by insurers since at least 2011 and that the indications are that the current D&O market premium pool is thoroughly inadequate to meet the current and projected levels of insured securities class action losses.
“The cost of D&O insurance has increased more than 200 per cent in the last 12 to18 months,’ it says.
‘At least one significant insurer has recently left the Australian D&O market and there is some (anecdotal at this stage) evidence that the hardening of the market environment for D&O insurance is leading some Australian companies to contemplate relocation offshore where conditions are more favourable.’
The discussion paper also questions whether the introduction of contingency fee billing for solicitors acting in class actions would provide better protection for class members than the current system where both lawyers and funders receive a proportion of settlement.
It also examines whether there should be a licencing regime for third-party litigation funders and whether solicitors involved in class actions should require specialist accreditation.
Further to this, the discussion paper proposes a system for regulatory collective redress, enabling potential class members to recover damages without going through the statutory class action regime.
The paper, which follows more than 40 consultations, provides 16 proposals and asks 11 questions that focus on how third-party litigation funders can be better regulated and how the Federal Court supervision of funded class action proceedings can be improved.
Other proposals include:
- Prohibiting solicitors and law firms from having financial and other interests in a third-party litigation funder that is funding the same matters in which the solicitor or law firm is acting.
- Requiring additional disclosure requirements about conflicts of interest.
- Providing the Federal Court with the power to reject, vary or set the commission rate in third-party litigation funding agreements.
- Allowing the Court to determine which proceedings will progress if there are two or more competing class actions.
- Allowing the Court to appoint a referee to assess the reasonableness of costs charged in a class action prior to settlement approval.
Responses to the discussion paper are due by 30 June 2018. The ALRC is expected to submit a formal report of its findings and recommendations to the Attorney General by 21 December 2018.