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Reputation and risk – class actions

Class actions have been a possibility in Australia now for some considerable time. Part IV of the Federal Court Act was introduced in 1992 and Victoria followed suit in 2000 with the introduction of Part 4A of the Supreme Court Act. The procedure under both regimes is almost identical.

More recently, Australia has seen a rise in shareholder class actions. The range of defendants in class actions have been diverse.

The basics

To successfully launch a class action you need:

  • at least 7 persons who have claims against the same person
  • claims that arise out of the same, similar or related circumstances
  • the claims giving rise to at least one substantial common issue of law or fact.

These threshold requirements have not appeared to present any real obstacles to the commencement of class actions.

Opting out of the class or group

The appeal of the class action procedure from the applicants' point of view is the ability to mobilise a very substantial number of claimants with relative ease. Clearly this has significant procedural and tactical advantages in litigation and puts respondents under significant pressure because of the substantial damages which are often sought and the publicity and attention that class actions inevitably attract.

Australia's class action laws require the representatives of the class to give notice to all group members informing them of the commencement of the class action and of their right to opt out. The "opt out notice" is approved by the Court and the Court can also order how that notice is given to the group, for example, by way of media advertisement.

The decision whether to opt out of the class is an important one because unless a group member opts out of the class, that group member will be bound by any judgment given in the proceeding.

For corporate respondents, the opt out notice procedure itself puts the dispute firmly in the public eye, a situation which the applicants' solicitors will no doubt try to maintain throughout the life of the proceeding.

Costs

For corporate respondents, class actions are certain to mean extremely high legal bills.

Whilst the general rule that costs follow the event has not been disturbed for class actions, there are real issues for the corporate respondent about the recoverability of costs from the applicants.

With a couple of limited exceptions, only the group members who are actually applicants are liable for the respondent's costs. This means that the identity of the applicant is critical.

There is no reason, in principle, why security of costs would not be ordered against an applicant in a class action. However, at least in Victoria, the traditional approach is that the Court will not order security for costs against an impecunious plaintiff in person. It is yet to be seen whether the Federal Court will order security for costs in these circumstances. This is more likely where a "man of straw" applicant is deliberately chosen with a view to protecting other members of the group who are financially robust and for whose benefit the litigation is really brought.

Settlement of class actions

The practical difficulties associated with the identity of the group and the nature of individual claims, makes early disposition of class actions difficult.

Court approval is required before a class action can be settled. The Court will take into account issues of fairness and reasonableness in deciding whether to approve any settlement.

Shareholder class actions - the new private regulatory regime

Australia now has the largest proportion of shareholders in the world with some 55% of Australian adults owning shares, either personally or through managed investments or superannuation funds. It is widely recognised that this has resulted in shareholders taking a much keener interest in corporate affairs and a general increase in "shareholder vigilance".

Many of Australia's substantive laws (misleading and deceptive conduct, continuous disclosure) lend themselves naturally to class actions.

The proactive approach to litigation taken by lawyers and professional litigation funders has made it easier for shareholders to be involved in litigation against companies. For example, it is estimated that of the more than 30 cases currently being funded by IMF Australia, Australia's largest litigation funder, approximately half are on behalf of shareholders. Given that it is also reported that IMF's portfolio includes claims totalling approximately $1billion, the potential risk to companies in Australia from shareholder class actions cannot be underestimated.

Finally, recent decisions in the Federal Court may serve as further encouragement to shareholders to pursue actions against companies.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.