The Supreme Court's opinion in Morrison v. NAB and its lower court progeny have raised the question about whether private multi-national securities class actions in the U.S. may be at an end, at least for the foreseeable future. Fortunately for investors, securities collective actions across the globe have been expanding over the past several years and should see an additional boost from this key development in U.S. federal jurisprudence. Yet, as defrauded shareholders look for judicial remedies outside the U.S. they will see a landscape of judicial systems rife with complexity and fraught with financial risks. For many shareholders, therefore, understanding the global securities collective action landscape will be key to pursuing claims successfully in the post-Morrison era.
Securities Class Action Services has found some form of securities class action authorized by law in at least 15 countries. The reality is, however, that most non-U.S. securities class actions are litigated in one of four countries: Canada, Australia, Taiwan, and/or the Netherlands. Understanding Australian securities class actions, therefore, is a key component for any shareholder wanting to pursue their rights against securities fraud in non-U.S. countries.
Australian Securities Class Actions: Background
Per the Securities Class Action Services database, Australia had seen approximately 45 securities class action cases pursued since 2003 with 16 reaching a settlement thus far. Just 8 of those suits produced a little under $500 million in settlement funds. While shareholder class actions progressed at an excruciatingly slow pace leading up to the early 2000's, today Australia is second only to Canada in terms of total settlement dollars, number of settlements, and number of suits for non-U.S. shareholder class actions. As discussed in more detail below, a significant contributor to Australia's status in this regard has been its extensive use of litigation funding as an alternative to the contingency fee based system found in the U.S.
Class actions can be conducted in either the Federal Court of Australia or in the Supreme Courts of most Australia states and territories. Securities class actions specifically have been available in Australia since 1992 (amendment to Part IVA of the Federal Court of Australia 1976) and 2000 (addition of Part 4A to the Supreme Court Act of 1986). However, despite the prevalence of common stock ownership in Australia, securities class action filings remained relatively anemic until 2004 when several high-profile companies collapsed causing large shareholder losses. See NERA Economic Consulting: Trends in Australia Securities Class Actions.
Today, most securities class actions in Australia are heard by the Federal Court of Australia, which has jurisdiction over Commonwealth legislation, including legislation that serves as the basis for most securities class action claims. Such actions typically arise out of the Corporations Act 2001, the Competition and Consumer Act 2010 (prior to January 2011 was the Trade Practices Act 1974), and/or the Australian Securities and Investments Commission Act 2001. More specifically, many claims allege that the defendant violated the disclosure rules imposed on listed companites and/or they allege violations of the Corporations Act 2001 prohibition on deceptive conduct in connection with securities. Additionally, allegations often include breaches of fiduciary trust.
Nature of Australian Securities Class Actions
Like the U.S., Australian actions are representative. In other words, one or more named parties in the suit will represent the interests of the class as a whole. Under Federal Court of Australia rules, a class action may be heard if it has 7 or more persons with claims against the same person or entity. The supreme courts require only that there be numerous persons with such claims. Every court requires that there be common issues of law and fact among the class members. Unlike in the U.S., however, there is no class certification process in Australia. Most pre-trial disputes are centered on whether the pleadings meet the requirements of the court's rules for class actions.
The Traditional Opt-Out Australian Class Action Model
Traditionally, like the U.S., Australia has been an opt-out jurisdiction. In other words, the settlement or judgment in a proceeding is binding on all group members who have not opted out of the proceedings by the court appointed opt-out deadline. Parties who do opt-out are free to pursue their claims against the defendant elsewhere. Unlike in the U.S., the opt-out deadline can occur quite early in the litigation process. Interestingly, unlike in the U.S. there is no requirement that all group/class members have the same claims against all the defendants, even though they may have common issues of law and fact. Therefore, after the initial trial involving the representative plaintiff's issues is resolved, the court may entertain a process to adjudicate the remaining issues for individual group members. However, in practice, all shareholder class action claims to date have been resolved before judgment has been delivered in the trial of common issues.
It is important to note that attorney contingency fees (a percentage of the settlement fund or damages in the suit) are generally not allowed in Australia (there are some limited exceptions to this). Therefore, funding under the traditional model class action litigation is limited to either the named party in the suit or the ambitious law firm who is willing to take on the case for the possibility of winning only litigation costs and hourly fees. Thus, under this traditional model, the task of litigating a large and complex securities class action is quite cost prohibitive. Likewise, the number of securities class actions pursued under the traditional model has been much lower than those pursued using the litigation funding model discussed below.
Although the lack of funding available in the traditional model of Australian class actions places significant limitations on shareholder suits, it is important to note that participation in such actions by investors is relatively risk free. Unlike in the U.S., Australia practices the loser pays rule, which is common in non-U.S. countries, especially those whose legal systems have British origins. Under this rule, the loser pays the winner's litigation costs in almost all cases. In most cases, this rule would raise concerns that investors would be saddled with litigation costs and expenses in the event of a loss. However, in most class action cases in Australia the representative plaintiff is solely liable for the costs in the event of a loss. Thus, under the traditional Australian class action model, at large class members do not, as a matter of common practice, bear the risk of paying the defendant's legal fees and costs in the event of a loss.
The Hybrid Opt-In Litigation Funding Model: Background
Naturally, the lack of funding inherent in the traditional Australian model constrains the proliferation of securities class actions. According to NERA Economic Consulting (here), prior to 2004 all six securities class actions in Australia were financed by a named applicant and/or its law firm. In 2004, the first securities class action was financed by a third party litigation funder. After that time the number of total class actions spiked as did the number of actions involving litigation funding. NERA found that from 2004 to 2009 22 new securities class actions were filed (a 367% increase from pre-2004 totals) and 17 of those actions were financed by a litigation funder.
While litigation funding existed in Australia for securities class actions since 2004, its legal status had been a matter of vigorous debate for years. In the 2006 Campbells Cash and Carry case, Australia's highest court provided some clarity on the matter by holding that litigation funding was not an abuse of process or contrary to public policy. Following this landmark ruling, funders attempted to pursue a closed class or opt-in type class action. Such a system restricts the class to only those who join at the outset of the litigation, which allows the funders to avoid so called "free rider" claimants from making claims on the settlement fund even though they did not pay a fee to the funder for litigating the case. The pure opt-in model was not to last, however. It was rejected by the Federal Court in Dorojay Pty Ltd v. Aristocrat Leisure Ltd (2005) as a violation of Part IVA. Nevertheless, in P Dawson v. Multiplex Funds Management Ltd (2007) a hybrid litigation funding system was approved by the Federal Court whereby the funder could restrict the eligible class to participants who sign a litigation funding agreement with the funder provided that members have the opportunity to opt-out of the proceedings.
Despite a series of judicial successes, litigation funding hit a snag when the Full Federal Court decided Brookfield Multiplex Ltd v. International Litigation Funding Partners Pty Ltd. (2009). In that case the Court held that certain litigation funding agreements constituted "managed investment schemes" (MIS) as defined by the Corporations Act 2001. The practical result of this holding would have been that litigation funders would be required to register class actions with the Australian Securities & Investments Commission (ASIC). This obligation carries with it a number of burdens for litigation funders and plaintiff lawyers under the Corporations Act 2001 as operators of an MIS. These include creating a Constitution and Compliance Plan, being a Responsible Entity and holding an appropriate AFSL among other things. However, on November 4, 2009, ASIC, pursuant to its powers under the Corporations Act 2001, granted transitional relief from the MIS requirements to lawyers and litigation funders until June 30, 2010. In a more recent class order ASIC extended that relief to March 1, 2011. Considering that this March 1, 2011 date has passed, there is some question about the future of litigation funding in Australia. However, it is likely that ASIC will continue to provide relief by individual application pending extension of the more general class order. This approach is similar to the way ASIC has allowed pre-November 4, 2009 class actions to proceed.
The Hybrid Opt-In Litigation Funding Model in Practice
Given the complexity and expense of securities class actions, most of these cases in Australia today utilize the hybrid opt-in litigation funding model. This means that most actions are closed class actions (similary to opt-in). The litigation funder will pay lawyer's fees and litigation costs and will also take on the risk of paying the defendant's litigation costs in the event of a loss. In return, investors must sign both a litigation funding agreement and a retainer agreement with representative counsel. This occurs before commencement of the suit in court because the funder must engage in a rigorous analysts of whether to pursue the action based on the level of shareholder participation in the suit. By virtue of these documents recovery of a portion of the settlement fund is limited to only those parties that sign such agreements. The information required in these documents is very similar to what is required to file a shareholder claim in the U.S. (i.e. provision of transactional data relevant to the appropriate class period).
Shareholders who sign with a litigation funder enjoy protection for liability associated with the "loser pays" rule. They also reap the benefit of greater access to justice through the increased number of class actions that occur due to readily available financing. However, if the action is successful and a settlement is reached, shareholders should be prepared to see a 20 to 40% commission paid to the funder from the settlement fund on top of the payment of litigation expenses associated with miscellaneous costs and attorney's fees. Additionally, depending on the arrangement, other fees, such as litigation management fees, may also be withdrawn from the settlement fund.
Before the commencement of the case the shareholder will have a short cooling off period to decide whether to cancel the funding agreement at no cost. In both funded and non-funded cases, shareholders will also have a court approved opt-out deadline one the suit is filed. However, if the cooling off period has passed, many agreements will obligate the shareholder to pay the funder's fees in the event that the shareholder opts-out and is successful in a separate suit against the same issuer for the same conduct.
According to a study by the University of South Wales (here), there are six or seven litigation funding companies in Australia, which account for about 95% of all litigation funding in Australia. Two of these funders, IMF (Australia) Ltd and Hillcrest Litigation Services Limited are listed on the Australian Securities Exchange. Despite some bumps along the road, Australian litigation funding has become a well established practice. It is likely to continue with minimal regulatory oversight. Therefore, Australia will likely continue to be one of the most prolific non-U.S. jurisdictions for securities class actions.