6 February, 2018
Law reform on the horizon?
In 2017 the Victorian Law Reform Commission undertook a review of Litigation Funding and Group Proceedings. Its report is due on 30 March 2018. Following this initiative, in December 2017 the Australian Law Reform Commission was likewise asked to report on Class Action Proceedings and Third Party Litigation Funders by 21 December 2018.
These developments hold out the prospect of fundamental reforms to the class action landscape. Some of the key issues raised by the Victorian Law Reform Commission's discussion paper are:
- introducing class certification at the commencement of class actions;
- giving a third party contradictor or the defendant a role in protecting the interests of class members at the settlement approval stage;
- strengthening the assessment of the reasonableness of the legal fees sought to be recovered out of the settlement or judgment;
- setting further criteria for the regulation of returns to litigation funders; and
- lifting the current ban on lawyers charging contingency fees (charging a percentage of the amount recovered in the proceeding).
Many of these proposed changes are significant as they have the potential to affect the parameters for settlement negotiations in class actions, the number of class actions commenced and the market for litigation funding.
The introduction of contingency fees remains fiercely debated within and outside the legal profession given the risk of conflicts of interest arising from such fee arrangements and the potential for excessive recoveries.
Class certification would also be a fundamental change in Australian class actions law and practice, and could restrict and streamline the class actions regime in important ways.
Please click on the image to enlarge.
Please click on the image to enlarge.
Source: Vince Morabito, An Empirical Study of Australia's Class Action Regimes (Fifth Report) – The First Twenty-Five Years of Class Actions in Australia (July 2017)
Assessing shareholder loss in the era of market based causation
In HIH Insurance (In Liq) & Ors; Cuong Ly v HIH Insurance Limited (In Liq) [2017] NSWSC 380, a key issue was whether a shareholder who had purchased shares in HIH at an inflated price and subsequently sold those shares before the company went into liquidation should be excluded from bringing a damages claim. In the United States it has been accepted that a plaintiff who has purchased and sold while the market price was inflated is ineligible for damages. Justice Brereton rejected the United States approach, on the basis that it was still possible for a plaintiff to prove loss where shares were purchased at an inflated price and sold in the inflated market at a lower price. However, this should be taken into account in the calculation of damages by reducing the damages to which the plaintiff is entitled by a percentage of the selling price which reflects the inflationary factor applicable at the time of the sale.
Brereton J also resolved a practical issue facing shareholders who held both shares acquired "pre-period" and shares acquired during the inflated market period, and subsequently sold shares, given that they were fungible shares traded on-market without unique identifiers. His Honour adopted the last in, first out approach in preference to the first in, first out and proportionate approaches. The last in, first out approach (which treats shares sold as coming from the latest purchases) was considered the best methodology to bring focus to the shares acquired and sold (if they were in fact sold) during the period the misleading conduct was operative.
For further information, see our Class Actions Update dated 12 April 2017.
When "class closure orders" are available to facilitate settlement discussions
It may be difficult for respondents in open class action proceedings to ascertain the quantum of the claim against them because the total number of group members is unlikely to be known. The absence of this information can create uncertainty during settlement discussions.
One way to deal with this is through "class closure orders" which require class members of an open class action to register their claims in advance of any proposed settlement discussions. Any class members who do not register are precluded from sharing the proceeds of any settlement, if settlement is achieved.
The Full Federal Court considered the circumstances in which class closure orders would be appropriate in Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited [2017] FCAFC 98.
The Full Court considered that the facilitation of settlement was a good reason for class closure orders, as they allow both sides to have a better understanding of the total quantum of class members' claims and assist in achieving finality.
The Court held that class closure orders were appropriate in this case, in circumstances where the trial was imminent, the parties had agreed to mediate, the proceedings were at a stage where the parties were in a position to realistically assess prospects, the lawyers for the applicant were experienced in class action litigation and able to assess whether class closure was in the interest of class members, and both parties considered that a class closure order should be made in order to facilitate settlement.
The Court observed there must be good reasons for the Court to exercise its discretion to make a class closure order as the requirements for class members to take active steps to register undercuts the opt out rationale underpinning the class action regime. The Court also said caution is required when making a class closure order which, if settlement is not reached, operates to lock class members out of their entitlement to make a claim and share in a judgment.
For a recent example of the circumstances in which a Court determined that it would not make class closure orders, see the Victorian Supreme Court decision in the Manus Island class action: Kamasaee v Commonwealth of Australia & Ors (No 8) [2017] VSC 167.
Allco Class Action – late registrants and common fund orders
The Federal Court of Australia approved the settlement of the Allco Class Action in March 2017: Blairgowrie Trading Ltd v Allco Finance Group (Receivers & Managers Appointed) (In Liq) (No 3) [2017] FCA 330. The Allco Class Action was an open class proceeding in which group members were all persons who acquired an interest in shares in Allco Finance Group Limited during a six month period and who suffered loss from alleged misleading or deceptive conduct and continuous disclosure breaches.
In the settlement approval, the Federal Court dealt with the approach to be taken to a surge of late registrations seeking to participate in the settlement.
The settlement was structured in two tiers: $30 million to be divided among group members who had registered before the mediation, and up to a further $10 million for any further group members who registered as part of the settlement approval process on a "first come first served" basis until exhausted. A surge of further registrations meant the tier 2 amount was notionally exhausted within a few weeks, leaving any further late registrants potentially excluded from participating in the settlement.
The Court considered a number of options to deal with those who would have missed out on the "first come first served" approach. Ultimately the Court decided to allow the latecomers to share in tier 2 on a pro-rata basis, with the result that group members in tier 2 would receive less than those in tier 1. The Court considered that fairness did not require all group members to be given the same outcome.
In addition, the Court was prepared to make a "common fund order" as part of approving the settlement. Similar to the outcome in the previous Money Max v QBE and Earglow v Newcrest decisions (covered in our Disputes Year in Review 2016), the Court approved the common fund orders on the basis of the funder offering to reduce its commission for a common fund order to less than the rate in agreements with group members who had "signed up". In particular, instead of the funder seeking its contractual rate of 32.5% – 35% of the gross settlement sum (ie calculated before legal costs were removed), the funder offered to accept a flat 30% of the net proceeds (ie after legal costs were taken out). The ultimate result was a funding commission of approximately 22% ($8.85M) of the gross settlement sum ($40M).
Justice Beach considered that the rate ultimately sought for a common fund order was reasonable, being within the broad parameters of the funding commission rates available in the Australian market, and comparing favourably with rates in foreign jurisdictions. His Honour also considered how the ultimate entitlement to the funder of $8.85M fared in the context of the settlement amount as a whole, and the risks assumed in the litigation.
Of significance, the Court noted that if the gross or net settlement sum had been substantially higher (eg higher than a $50M net settlement sum), it would have set a lower rate so that the amount paid to the funder would have remained proportionate to the investment and risk undertaken by the funder. In other words, the Court would have applied a sliding scale.
For further information, please contact:
John Pavlakis, Partner, Ashurst
john.pavlakis@ashurst.com
