Update on Productivity Commission’s report on access to justice arrangements
Since the release of the June update, the Productivity Commission has continued to receive submissions in response to its draft report on access to justice, released in April 2014. Public hearings took place in each of the states and territories during the month of June.
The draft report recommends, amongst other things, the removal of restrictions on damages-based billing for legal fees (i.e. contingency fees), subject to comprehensive disclosure requirements. This issue has been the subject of ongoing consultation over several months between the Law Council of Australia and its constituent bodies and the legal profession in each jurisdiction.
On 5 September 2014, the final version of the report was provided by the Productivity Commission to the Government. Within 25 sitting days of receipt, the Government is required to table the report in each House of Parliament.
Further to the New York e-bulletin entitled ‘Supreme Court provides new avenue for defendants to challenge securities class certification’, we set out below the impact of the Halliburton decision for Australian shareholder class actions.
Relevance to Australian shareholder class actions
The case is relevant to Australian shareholder class actions in which group members typically rely on an ‘indirect causation’ theory to allege that, during a period of non-disclosure of material information, shareholders suffered loss by purchasing shares in an inflated market.
Both the ‘fraud on the market’ and ‘indirect causation’ theories are based upon the ‘efficient capital markets’ hypothesis. That hypothesis proceeds on the basis that in an open and developed securities market, the price of a company’s shares is determined by the available material information regarding the company and its business. Group members commonly allege that misleading statements “defraud” purchasers of shares, even if the purchasers did not rely on those statements, because during the period of misrepresentation the company’s shares are trading at an inflated price. These theories have formed the basis of most US shareholder class actions since the seminal decision of Basic Inc. v Levinson, 485 U.S. 224 (1988).
The US Supreme Court upholds ‘fraud on the market’ presumption
On 23 June 2014, the Supreme Court handed down its decision: Halliburton Co v Erica P. John Fund, Inc (2014). In brief, by a majority of 6-3, the US Supreme Court upheld the ‘fraud on the market’ presumption set by Basic Inc v Levinson, but ruled that defendants may rebut the presumption before class certification by showing a lack of price impact. Notably, similar to Basic, the majority judgment in Halliburton should not be viewed as an endorsement of the ‘efficient capital markets’ hypothesis. Rather, these decisions recognise the legitimacy of that hypothesis and accordingly made market efficiency a matter of proof (i.e. a rebuttable presumption).
Potential impact in Australia
Promoters of shareholder class actions in Australia will no doubt view Halliburton as supportive of the indirect theory of causation because of its affirmation of the ‘fraud on the market’ presumption. To date, no Australian shareholder class action has proceeded to judgment and the question of the appropriate method of causation – and whether indirect causation is viable – remains at large.
Interestingly, the majority judgment in Halliburton acknowledged the business community’s concerns that securities class actions:
“allow plaintiffs to extort large settlements from defendants for meritless claims; punish innocent shareholders, who end up having to pay settlements and judgments; impose excessive costs on businesses; and consume a disproportionately large share of judicial resources”,
but such concerns are,
“more appropriately addressed to Congress”.
These comments are likely to be of particular interest to Australian listed companies, who in the last 12 months have seen the arrival of significant new plaintiff law firms and international third party litigation funders and the commencement or threat of a large number of shareholder class actions. How these issues may be addressed by courts in this country, and the extent to which such sentiments are shared by the Australian judiciary, will remain the subject of speculation until an Australian shareholder class action proceeds to judgment.
Conflicts of interest where funder acts as plaintiff
In 2013, Melbourne City Investments Pty Ltd (MCI) commenced shareholder class actions in the Supreme Court of Victoria against each of Treasury Wine Estates Limited (TWE) and Leighton Holdings Limited (Leighton) on behalf of all investors in each company respectively.
MCI is owned and operated by Mark Elliott. The claims were seemingly funded by Mr Elliott on a ‘no win, no fee’ basis.
Recently, TWE and Leighton successfully sought to restrain Mr Elliott from acting as solicitor on the record in the proceedings, although they were unsuccessful in obtaining an order that the proceedings be struck out as an abuse of process, due to potentially conflicting roles that Mr Elliott occupied as both investor/claimant and lawyer for the claimant. TWE has sought leave to appeal the refusal to strike out MCI’s claim against it, and a decision is reserved.
In 2012, Mark Elliott formed MCI, an investment vehicle owned, managed and controlled by him. On 1 November 2012, MCI purchased a parcel of approximately 140 shares in TWE and Leighton (as well as small parcels in a significant number of other publically listed companies) for around $700.1 Subsequently, both companies announced a profit downgrade to the market. MCI initiated proceedings in the Supreme Court of Victoria as the representative plaintiff, with Mr Elliott acting as solicitor.
Action to halt proceedings
In early 2014, TWE and Leighton applied for orders from the Supreme Court of Victoria that the class action proceedings be stayed on the grounds that:
- MCI was created solely for the purpose of bringing proceedings against TWE and Leighton (among others) for breaches of continuous disclosure obligations in which it would be the lead plaintiff and from which Mr Elliott could generate fees (which would amount to an abuse of process), and
- as Mr Elliott would be acting as solicitor for MCI, for which he would receive fees, should he be called to give evidence as a director of the lead plaintiff, a direct conflict of interest may arise.2
In July 2014, whilst Ferguson J was not prepared to find an abuse of process (insofar as MCI had a legitimate interest in receiving compensation for its loss, being the cost of the $700 share parcel), the proceedings could not proceed with Mr Elliott acting as solicitor for MCI for the reason that a fair-minded and informed member of the public would consider that Mr Elliott, as solicitor for, and director of, MCI would not be able to simultaneously give impartial and independent advice to his client and the remainder of the class, while maintaining "an interest beyond that of other solicitors acting for plaintiffs in group proceedings".3
For this reason, Ferguson J ordered that Mr Elliott be restrained from acting for MCI while it remained the lead plaintiff and that “the proceedings ought not be permitted to continue as group proceedings while MCI and Mr Elliott act in tandem as plaintiff and solicitor”.4
Court of Appeal considers whether proceedings are an abuse of process
Subsequent to Ferguson J’s ruling, law firm Tan Partners replaced Mr Elliott as the solicitor for MCI.
TWE has applied for leave to appeal Ferguson J’s refusal to strike out or dismiss the proceeding on the basis of it being an abuse of process. The application to the Court of Appeal was heard on 10 October 2014 and a decision is reserved.
The Court of Appeal’s ruling will provide insight into the Court’s perspective on the relationship between solicitors, funders and representative plaintiffs in the context of shareholder class actions.
ATO weighs in on foreign litigation funders
The Australian Taxation Office has sought tax payments from International Litigation Partners Pte Ltd (ILP) arising out of a $8.3 million damages payout it received in relation to a commercial dispute with Chameleon Mining NL (now known as Kupang Resources Limited (Kupang)).
ILP is a Singaporean company with its sole shareholder located in the British Virgin Islands. The ATO is seeking to treat ILP as an Australian resident company for tax purposes, due to the manner in which it operates in Australia. If permitted, this could have wider repercussions for litigation funding in Australia.
In around 2008, ILP and Kupang entered into a litigation funding deed to advance claims against Murchison Metals Limited, and its directors, for breaches of fiduciary and statutory duties. In 2010, following a change in control of Kupang, a dispute arose between the parties as to whether an early termination fee was payable under the deed. The dispute eventually made its way to the High Court where, in 2012, Kupang was ordered to pay $8.3 million (plus costs and interest) to ILP.5
Following the High Court’s decision, Kupang and ILP entered into a settlement deed in November 2012. Under the terms of settlement, Kupang agreed to pay ILP $5 million upfront and $5.5 million by way of instalments.
Shortly thereafter, in addition to issuing a notice of taxation to ILP, the ATO served Kupang with a notice advising that ILP was indebted to the ATO to the value of $7.2 million. Kupang has stated that the effect of these notices was that it was required to make the instalment payments to the ATO, rather than to ILP.6
Issues before the Federal Court
ILP sought to object to the notice of taxation. It was unsuccessful before the Commissioner of Taxation and has now appealed the Commissioner’s decision to the Federal Court (Sydney registry). The issues before the Court are:
- whether ILP was an Australian resident company for tax purposes, on the basis that the owner of ILP, Paul Lindholm, exercised the central management and control of the company in Australia; and
- if ILP was not a resident of Australia, whether it derived, from a litigation funding enterprise carried on in Australia, profits that were attributable to a permanent establishment maintained in Australia.
The matter is set down for directions in November 2014, at which time the Court is likely to fix a hearing date.
Queensland Floods class action commences in NSW
On 8 July 2014, Maurice Blackburn, backed by Bentham IMF Ltd, filed proceedings on behalf of victims of the Queensland floods. The floods occurred in January 2011 and are reported to have affected more than 4000 residents and businesses.
Proceedings have been filed in New South Wales rather than Queensland due to the lack of a class action regime in Queensland. It has been described by the media as Australia’s largest class action.7
Commission of Inquiry
The class action follows a Commission of Inquiry that was established shortly after the floods. The final report was issued in March 2012 and concluded that the flooding could have been reduced had the dam had its capacity reduced to 75 per cent prior to the December rains. However it also noted that “to appreciate what the magnitude of the rain would be and that it would fall in the dam area would have required a more than human capacity of prediction”. The Commission also found non-compliance with the dam’s operation manual.
The defendants to the class action are Queensland Bulk Water Supply Authority (Seqwater), who owned and operated the Somerset and Wivenhoe Dams, Sunwater Limited, who provided flood management services to Seqwater and the State of Queensland. It is alleged that in the period 16 December 2010 to 11 January 2011, employees of the defendants acted negligently by, amongst other things, failing to use rainfall forecast in making decisions about operating strategies and failing to preserve a reasonable amount of the dam’s storage capacity in order to provide optimum protection of urbanised areas from inundation.
The representative party is claiming damages for economic loss caused by the alleged negligence. In its November 2013 release to the ASX, IMF stated that its investment portfolio included claims with a total value of in excess of $2 billion. IMF has reportedly already invested millions of dollars in the class action, having engaged a team of US-based hydrologists to assist it in preparing the case against the defendants.8 In return for this investment, it has been reported that IMF will receive between 5% and 30% of any damages awarded, depending on the level of any compensation paid to the individuals.9
Settlement of Air Cargo class action
On 6 June 2014, the Federal Court of Australia approved the settlement of the Air Cargo class action between the applicants and all respondent airlines (other than Air New Zealand) in relation to alleged price fixing of international air freight services in breach of the Trade Practices Act 1974 (Cth). The action was commenced more than 7 years ago on behalf purchasers of air freight services, seeking damages for losses suffered as a result of the alleged cartel conduct by the airlines. It is the fourth cartel class action in Australia.
In January 2007, a class action was commenced in the Federal Court of Australia against Qantas, Lufthansa Cargo, Singapore Airlines, Cathay Pacific, Air New Zealand and British Airways. It was alleged that between 1 January 2000 and 11 January 2007, the airlines entered into cartel agreements to fix the price of international airfreight services, primarily fuel and security surcharges, in breach of the Trade Practices Act 1974 (Cth).10
The action was run by Maurice Blackburn and the proceedings were issued on behalf of Australian residents who, between 1 January 2007 and 11 January 2007, paid more than $20,000 for the carriage of goods to or from Australia, including in each instance a component by air.
The trial was set down for October 2014.
Related ACCC proceedings
The class action was instituted following the commencement of investigations and prosecutions by various competition regulators around the world against certain international air freight operators alleging similar conduct. In Australia, the ACCC commenced penalty proceedings against some 15 international airfreight operators for price fixing in the Australian air cargo market. All but two of those international air freight operators have now settled those penalty proceedings.
The joint penalty proceedings brought by the ACCC against Garuda and Air New Zealand in relation to the alleged air cargo cartel concluded in June 2013 and judgment is yet to be delivered.
Terms of settlement
All airlines, other than Air New Zealand, entered into the agreement to settle the proceeding for $38 million. The settlement involves no admission of liability by the relevant airlines. Under the terms of settlement, $13 million will be paid to Maurice Blackburn to cover its fees and approximately $5.93 million will be paid to cover third-party disbursements and expenses. It is understood that the representative parties will also seek leave to discontinue the proceedings against Air New Zealand.