The Litigious Investor

If you are a shareholder in Amcor, BHP Billiton, CSR, James Hardie or Telstra you will already be familiar with shareholder class actions. Until recently, most actions involved “big issues” at big companies. More recently the actions have become more numerous and more inclusive.

Professor Ian Ramsay, a corporate law expert at the University of Melbourne, says Australia now has more class actions than any other country except the US. American listed companies now face a one in 10 chance of becoming involved in a class action every five years.

The class action that changed the course of legal history for Australian investors was the shareholder action against GIO, where plaintiffs achieved a $100 million settlement.

Two weeks ago the class action industry scored another victory when Australia had its first class action based on cartels: law firm Maurice Blackburn Cashman successfully sued three vitamin companies for fixing prices.

Superannuation fund managers are active litigants in the class action arena; the Australian Council of Superannuation Investors has guided fund managers to join class actions as part of their fiduciary duty to investors.

But should a private investor join in a class action every time the opportunity arises? What are the real costs of class actions '¦ after all, you’ll be suing a company in which you have part-ownership?

Today Ian Ramsay, a corporate law expert and one of the leading voices in the debate surrounding shareholder class actions talks to Eureka Report.

The interview

James Kirby: We’ve seen an increase in class action activity across the stock exchange. Is it good or bad for investors?

Ian Ramsay: I think class action activity has the potential to actually be very good for investors in certain circumstances. In particular, it can achieve compensation for investors where some harm has been done to investors. For example, companies have issued misleading information and investors have bought or sold shares based on that misleading information.

Could you give an example of where that has occurred?

Perhaps the most famous class action bought by shareholders was the one involving AMP and its takeover of GIO, based on misleading information issued by the company concerning that takeover. Now that was a settlement but in fact the settlement was approximately $100 million, so that was a major outcome '¦ a very successful outcome for the shareholders involved in that particular matter.

Now there’s a sense that these actions are progressively getting smaller and sometimes even sillier. Do you agree with that?

Well it would be true to say that class actions aren’t always good. There is, of course, a potential for class actions to be very expensive for investors and there’s no guarantee that class actions will be successful; that, in other words, the law firm bringing the legal action on behalf of shareholders may lose the legal action and in that respect of course, shareholders could suffer significantly in terms of having to contribute to the costs of that legal action.

But we are seeing more class actions in Australia. Class action '¦ it’s perhaps not well known, but class actions have been permitted under Australian law through our federal courts now since about the mid-1970s. But in terms of shareholder class actions '” although the numbers aren’t large at the moment we are seeing a significant increase.

The nature of class actions has also widened in that only last week we saw the vitamins case come to court and being settled. That was a cartel action. Is that an important development?

Yes, I think it is an important development in a number of respects. First of all, very significant in terms of the amount of compensation awarded but also, of course, class actions have the potential to cover many areas of the law. We’ve seen some very prominent class actions in the area of trade practices law '” breaches, in other words, by companies and their directors and officers of certain aspects of our trade practices law. We are now seeing law class actions in the area of breaches of our corporate law and in particular allegations that companies have breached their disclosure obligations; for example, their obligations under stock exchange rules to continually disclose material information on an ongoing basis.

Now faced with a class action '” that is, if an investor was to receive an invitation to join a class action '” what should they do? How can they judge this situation?

Well, I would suggest this is never an easy decision for an investor because at the same time that an investor might be hearing many, if you like, very positive stories about class actions and money obtained for investors who have suffered harm, there is this very significant downside that if investors do lose a class action then there can be legal costs awarded against the plaintiffs; in other words, the investors concerned.

I would add here that there is an important issue concerning the role of litigation funding firms in Australia. These are professional firms that provide funding to run a number of these actions. Now the reason why this can be an important consideration for investors as part of their decision making is that quite often these funding firms will '” even if the case is lost '” will guarantee to pick up the costs of that, so that can be a consideration for investors.

And so is it possible that an investor could actually find themselves paying out money when they enter a class action?

Well, of course, with the benefit of hindsight it would be possible to identify unsuccessful class actions where investors shouldn’t have joined: ones that are too speculative, and the prospects of winning appeared remote. But that’s a very difficult decision to make in advance of the litigation. Certainly it’s very important for investors to read very carefully the information that they receive from the law firm that will have approached them to see if they’re interested in pursuing the litigation.

Now are you concerned in any way that in Australia with this increase in action activity, that we’re moving towards the US where there have been quite a few problems in recent times, including some accusations actually of racketeering?

Well there has been, of course, some significant debate in Australia recently as to whether we might end up with the so-called US class action situation where each year just shareholder class actions: there’s about 200 each year filed in the US courts, and as many more class actions if you extend that to situations such as product liability in the United States.

What I would suggest is that I don’t believe that in the foreseeable future we in Australia will end up with a similar situation where we have seen, not only in the US, actions that lack merit but in fact '¦ clearly, we’ve seen what can only be seen as allegations of corrupt behaviour by plaintiff law firms where they actually bribe potential plaintiffs to be the first to file, if you like. There are a number of rules under Australian law that I suggest would mean that we won’t end up in Australia with that sort of situation.