Tightening the screws for litigation funders
The scope for speculative class actions has been drastically reduced after temporary changes to continuous disclosure laws were made permanent. By James Mathias.
In 1769, the great English liberal Edmund Bourke observed: “It is general popular error to suppose the loudest complainers for the public to be the most anxious for its welfare.”
Little has changed. The voices who tried to drown out Josh Frydenberg’s sensible and frankly, uncontroversial changes to continuous disclosure laws this week were those of Labor lawyers and their litigation funding mates. Good sense prevailed on the cross benches and the measures were passed.
They are the same shouty voices that have enjoyed a legal bonanza by using Australia’s loose continuous disclosure laws to launch speculative class actions since 2013, when Labor’s Chris Bowen as the relevant Minister exempted the litigation funding industry from any meaningful oversight.
The changes tighten the rules such that companies and their officers are liable for civil penalty only if they acted with ‘knowledge, recklessness or negligence’ in not providing adequate updates to the market on price sensitive material.
The changes were first introduced as a temporary COVID-19 relief measure in May 2020. Before their introduction listed companies could be taken to court for technicalities over disclosures that are purely procedural and not even have any effect on the company’s stock price. Litigation funders buzzed like bees around honey.
Crossbench Senator Sterling Griff, after voting with the Government to make the changes permanent, said that class actions could proceed on the basis of a purely technical, “even trivial, breach of the disclosure obligations. A litigant does not need to demonstrate any wrongdoing by the company or its officers. There doesn’t need to be any incompetence or negligence. Class actions can proceed even where the litigant has not suffered any real financial harm”.
In recent times listed Australian companies have borne the brunt of an explosion of class actions launched based on the previous continuous disclosure regime as previous regulatory mistakes combined to create the perfect environment for third party litigation funders and their lawyer mates. The Menzies Research Centre’s report, Litigation Nation, charted the explosion of class actions since 2014, growing from just 21 to 59 in 2019. In the year to March 3 this year there have been 69 actions launched.
Our report found that litigation funders were making 17 times the return that can be achieved by investing in ASX 200 shares, and nearly 12 times the benchmark returns earned by US Hedge Funds. The success rates on the actions they back are between 87 and 94 per cent.
The people they represent on the other hand are losing out big time as courts approve settlements which consistently see them walk away with 50 per cent or less in the damages awarded to them.
But perhaps the worst side effect of this perfect litigation storm pervading the business community since 2014 is the wasted capital diverted to either defending or preparing for these actions.
Director and Officers Insurance is a barometer for the business risk environment. Any rises and falls help to explain any trends within the economy. In recent times even prior to the COVID-19 pandemic, D&O has been rising by hundreds of per cent due to the increasing number of class actions being brought and backed by litigation funders. The resources being diverted towards insurance and defending these actions are resources being pulled away from investing in more Australian jobs and capital.
According to Marsh Insurance the average increase in premium for the ASX200 in 2019 was 118 per cent with extreme cases at a staggering 600 per cent. Marsh details that corporate entitles are now paying between $5 and $10 million for cover that previously cost between $500,000 and $800,000.
These significant changes ensure that money best spent on investment in Australian jobs and industry comes ahead of lining the pockets of third party litigation funders and their lawyer mates.
