The number of shareholder class actions in Australia continues to grow at an impressive rate.  However, a recent decision of the Supreme Court of Victoria has examined the limits of entrepreneurship by securities class action lawyers, and has reiterated concerns foreshadowed by the High Court regarding the funding of legal actions by lawyers.  

Background

In Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No. 3) [2014] VSC 340, the lead plaintiff, Melbourne City Investments Pty Ltd (MCI) was controlled by solicitor, Mark Elliott, the company’s sole director and shareholder.  In 2013, MCI commenced separate securities class action proceedings against Treasury Wine Estates Limited (Treasury), WorleyParsons Limited (WorleyParsons) and Leighton Holdings Limited (Leighton), alleging misleading and deceptive conduct, and a failure by each company to satisfy its continuous disclosure obligations, contrary to various provisions of the Corporations Act 2001 (Cth).

Decision

Treasury and Leighton subsequently brought an application seeking orders that the proceeding be stayed as an abuse of process on the basis that the proceedings were brought by MCI for a collateral purpose, namely as a vehicle for Mr Elliott to obtain legal fees.  Alternatively, the defendants sought orders that the Court stay the proceeding for so long as Mr Elliott continued to remain the solicitor or record, and if he continued to act, for so long as MCI remained the lead plaintiff.  The Court was not persuaded that the proceeding constituted an abuse of process, but found that unless Mr Elliott ceased to act, or MCI was replaced as the lead plaintiff, Mr Elliott should be restrained from acting and the proceeding should not be permitted to continue as a group proceeding.  In reaching this decision, the Court regarded public interest in access to justice through class actions, and the high threshold required to stay a proceeding. Notably, the Court found that the probable reason for MCI’s existence was ‘to launch proceedings…to enable its sole director and shareholder to earn legal fees from acting as the solicitor for MCI’.  Further, it accepted that the company’s ‘business model’ was to purchase nominal shareholdings in a variety of listed companies, with the objective of subsequently launching class actions against them.  The Court’s findings were based on the following conclusions:

  • MCI’s business model was likely to depend on the outcome of the proceedings against Treasury, Leighton and WorleyParsons
  • Mr Elliott was compromised in his role and there was a real risk that he could not give detached, independent and impartial advice to MCI
  • it was in the interests of justice for MCI to be represented by a person without the vested interests that Mr Elliott held, and
  • the proper administration of justice required Mr Elliott be prevented from acting for MCI whilst the proceeding remained as a group proceeding with MCI as the lead plaintiff.

Implications

The decision of the Supreme Court is timely, given that the Productivity Commission’s report into ‘Access to Justice Arrangements’ is set to be handed down in the coming days.  The report is certain to canvass the findings of the Commission into the litigation financing arrangements for class actions in Australia, and the ever controversial topic of contingency fees in Australian legal practice. Practitioners should be mindful that courts currently will not hesitate to intervene where group proceedings resemble entrepreneurial litigation, and present a risk to the due administration of justice.  The primary consideration for the court is whether there is an indication that self-interest will dominate over the interests of group members. On the back of Commonwealth Attorney-General, George Brandis’ comments regarding conflicts of interest and moral hazards in class action litigation, the case is an ominous warning to ‘lawyer-driven’ class actions, confirming the uncertainty that exists regarding legal boundaries between a claimant, lawyer and funder.