Australian Securities Class Action Landscape Continues to Shift

Last quarter, the Australian securities class action landscape saw the impact of Treasurer Josh Frydenberg’s May 22 promise to subject litigation funders and their funding agreements to regulation. After uncertainty following the High Court’s rejection last year of common fund orders and optimism this year after Victoria permitted class action lawyers to charge contingency fees, the federal government’s July 23 Regulations, which took effect last quarter, portend significant setbacks for investors.

The Treasurer estimates funder compliance costs at $3.19 million per year: $1.1 for licensing and $2.1 for MIS requirements. Without further details, he concludes this additional cost is “not expected to reduce competition.” In truth, this figure understates the actual cost for investors. The resource burden and compliance risks will decrease the number of litigation funders in the Australian market, forcing consolidation and concentrating activity with larger players like Maurice Blackburn and Omni Bridgeway, while marginalizing smaller players.

With fewer funders, there will be less capital available to finance fewer matters. Funders will limit themselves to larger, less risky cases. They will focus on defendant companies with more institutional holders to minimize the number of participating clients needed to reach investment viability. Meanwhile, companies equally guilty of misconduct but with more retail investors will be neglected, harming the very consumers on whose behalf the Treasurer says he’s acting. Cases will take longer to launch due to regulatory requirements.

Over the last few years, funder fees in securities cases have fallen steadily. These regulatory changes will put an end to that. Whereas before we saw single-digit success fees in high profile matters, post-regulations, we expect funder fees to increase, reflecting decreased competition and higher compliance costs. Classes will more frequently be filed on a closed basis and participation will be more limited to larger investors, marginalizing and perhaps fully shutting out retail investors who have already been marginalized, particularly after the elimination of common fund orders.

Unless opposing pressure is brought to bear, we expect to see continued successful government-led assaults on shareholder rights in Australia. The Treasurer has expressed concern that his current changes may not go far enough, promising to re-assess things in his Post-Implementation Review. RIS, at 9. Meanwhile, the Attorney General has launched a fourth round of government inquiries seeking support for his stated conclusion that litigation funders and securities class actions are harming corporate Australia. This support was not found and was largely refuted, in three earlier government inquiries.

The Treasurer and Attorney General efforts go hand in hand. As the Treasurer noted in his Regulatory Impact Statement:

To the extent that a smaller cohort of funders is captured by the changes than is preferable, there is scope for the Parliamentary Join Committee inquiring into litigation funding and the class action industry to recommend further changes when it reports in December 2020.

In the meantime, Corporate Australia has launched efforts to dilute their disclosure obligations – which the Treasurer suspended using emergency powers related to the pandemic – and to prevent the spread of legal contingency fees beyond Victoria.

If these efforts are not opposed, investors risk losing essential rights and protections. The longer-term cost to the integrity of Australia capital markets will go well beyond any dollars they may lose in particular investments. In the words of the immortal John Donne, “send not to know for whom the bell tolls. It tolls for thee.”

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Mike Lange