The Situation: Australia has become a hot spot for class actions fueled in large part by litigation funders, who have operated for many years in a largely unregulated market and have derived spectacular returns from their investment―in some cases, more than 500%. With the passage in June 2020 of Australia's first regime (in Victoria) permitting lawyers to charge U.S.-style contingency fees, the increase in class action activity is not just expected to continue but potentially lift substantially further if left unchecked. As class action activity has increased, complaints by class members about the level of their returns from settlements or judgments have become more prominent. After the deduction of the litigation funder's share and plaintiff law firm's fees, it is increasingly common for class members in successful actions to obtain returns well below 50% and, in some cases, much lower.
The Result: Responding to concerns from the business community and class members, a Joint Parliamentary Committee on Corporations and Financial Services ("JPC") investigated 'whether the present level of regulation applying to Australia's growing class action industry is impacting fair and equitable outcomes for plaintiffs and to make recommendations on reforms'. On 21 December 2020, the JPC published its report identifying a range of major deficiencies with the current class action regime and with the operation and regulation of the litigation funding industry. The JPC has made 31 recommendations for reform which, if implemented, are likely to improve the position for businesses and directors/officers in relation to class action risks. Reforms are also proposed to improve the relative returns for class members.
Looking Forward: If the recommendations in the JPC report are implemented, they will constitute the most substantive reform to the Australian class action regime in its nearly 30-year history. The Federal Government has not yet announced the timing of its response on whether it will implement some or all of the recommendations, but we expect that response is likely to emerge in Q1 or Q2 of 2021.
Regulation of Litigation Funding
The JPC endorsed the Federal Government's recent introduction of regulations which require litigation funders to hold an Australia Financial Services Licence ("AFSL") and register litigation funding schemes as managed investment schemes ("MIS").
However, the JPC has proposed a number of further steps to improve the oversight of litigation funders, including that:
all class action litigation funding agreements be required to expressly include:
- a complete indemnity in favour of the representative plaintiff against an adverse costs order (recommendations 8 and 9); and
- an Australian governing law and jurisdiction clause (recommendation 12);
- there be a statutory presumption that a litigation funder provide security for costs (recommendation 10);
- litigation funding agreements be only enforceable with court approval, with the court retaining a discretion to reject, vary or amend the terms of the agreement when the interests of justice require (recommendation 11);
- the Federal Court have a power to appoint an independent referee as a litigation funding fees assessor who is a professional with market capital or finance expertise (recommendations 13 and 14); and
- the Federal Court have an express power to make a costs order against a litigation funder, including an order that the funder pay the costs of any independent referee (recommendations 15 and 16).
The JPC also recommended that the Federal Government consult on the best way to provide a guarantee of a statutory minimum return of the gross proceeds of a class action to class members, including to consider whether it is more appropriate to legislate a minimum gross return of 70% or adopt a graduated approach, taking into account the risk, complexity, length and likely proceeds of the case (recommendation 20). Such a "floor" on the minimum return to class members is likely to provide a more robust and effective way of addressing the high cost of litigation funding than leaving this issue to be resolved by market forces or ad hoc judicial intervention. This recommendation closely reflects the public position of at least one key Parliamentary cross-bench member whose political support will be required to pass any reforming legislation.
Federal Control of Contingency Fees
In June 2020, the state of Victoria enacted legislation which allows—for the first time in Australia—lawyers to charge a form of contingency fee in class actions commenced in the Supreme Court of Victoria by providing the Court with the power to make "group costs orders". The Victorian class action rules are such that both National and Victorian-based class actions can be commenced under the Victorian regime, so the implications of this reform have wide reach.
The Federal Government and business groups criticised this reform. The JPC has joined in that criticism describing contingency fees as 'being for the benefit of lawyers' profits'. In response, and bearing in mind that there are constitutional limits on the extent to which the Federal Government can address the impact of the Victorian reform, the JPC has opted for recommending two measures that would restrict the impact of contingency fees in the key area of shareholder class action claims. This is possible because the Federal Government has primary legislative authority in relation to the regulation of corporations and financial services. The specific measures include:
- a recommendation that the Federal Government amend the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) so that exclusive jurisdiction is conferred on the Federal Court for all class actions under those statutes including shareholder claims (recommendation 30). One consequence of this would be that shareholder class actions could not be brought in Victoria under its contingency fee regime for class actions (or in any other state which implements contingency fees); and
- a recommendation that the Federal Government review the feasibility of applying the AFSL and MIS regime to lawyers operating on a contingency fee arrangement (recommendation 21) which would extend to class actions brought under state regimes.
Shareholder Class Actions
In May 2020, as part of its response to the COVID-19 outbreak, the Federal Government amended the continuous disclosure provisions in the Corporations Act(Corporations (Coronavirus Economic Response) Determination (No. 2) 2020).The amendment provides that ASX-listed entities' decisions on continuous disclosure can only attract liability if they knew or were reckless or negligent with respect to whether information would, if it were generally available, have a material effect on the price or value of their securities. This imposes heightened requirements for proving a contravention, compared to the current test which requires disclosure of relevant information where a reasonable person would expect that the information would have a material effect on the price or value of securities. The amendment was intended as a short-term safe harbor to last until 23 March 2021 (having been introduced for an initial six-month period but then extended for a further period to this date).
The JPC has recommended that the temporary amendment to the continuous disclosure regime be made permanent and that fault be required for proof of breach (recommendation 29), which would align Australia with comparable jurisdictions, such as the United States and the United Kingdom, and potentially stem the flow of opportunistic shareholder class actions.
Three Key Takeaways
- Overall, the recommendations of the JPC will be welcomed by the business community and directors/officers. The proposed recommendations, if implemented, provide more comprehensive regulation of litigation funding, including removing the opportunity for windfall profits that have made Australia such a magnet jurisdiction for funders. This greater alignment between risk and return is likely to make Australian class actions less attractive investments. The JPC has also put forward reforms aimed at tempering the adoption of contingency fees which could have become a new engine for class action growth.
- The recommendation to modify permanently the Australian continuous disclosure laws to require that a claimant must prove that an ASX-listed company had knowledge of, or was reckless or negligent with respect to, a continuous disclosure breach will, if implemented, materially increase both the difficulty for claimants to bring shareholder class actions and also help to deter speculative filings. However, in the absence of an amendment to the misleading or deceptive conduct provisions, which do not require that a claimant establish fault, it is unclear whether this permanent change would on its own have the desired effect of lessening the burden of shareholder class actions on defendants.
- Although the JPC called for national consistency between class action regimes, this is likely to prove contentious in some states. Class actions have now become a partisan issue, with the Federal Opposition writing a dissenting report rejecting many of the recommendations made by the JPC. In light of this, achieving national harmonisation may prove difficult, which may give rise to 'forum shopping' with claimants issuing class actions in more plaintiff-friendly jurisdictions.