As part of preparing the report, the ALRC conducted over 60 consultations with stakeholders and received over 75 submissions, including submissions from MinterEllison on key aspects of the inquiry.

Of significant importance is Recommendation 24, calling for a new inquiry into or review of the legal and economic impact of the continuous disclosure and misleading or deceptive conduct provisions of the Corporations Act 2001 (Cth).  

MinterEllison welcomes the ALRC’s recommendations, including the suggested inquiry into or review of Australia's continuous disclosure and misleading and deceptive conduct laws.

Shareholder class actions are the most commonly filed class actions in the Federal Court, representing 34 per cent of all class actions filed in the last five years.  These claims are usually based on a breach of the market disclosure-related provisions of the ASX Listing Rules and the Corporations Act, and they typically seek significant awards of damages.

Settlement amounts paid by companies and their insurers over the course of the last few years have averaged between $40 million to $50 million.

Critics have assumed without basis that the suggested review or inquiry is about “watering down” continuous disclosure laws.

MinterEllison disagrees that the recommendation was motivated by a desire to relax or undermine the operation of those important laws. The ALRC accepted the considerable number of submissions that it was time for such a review, having regard to the passage of time since the enactment of Australia’s market disclosure laws, the ongoing and significant development of class action jurisprudence, the recent upsurge in shareholder class actions in Australia, and the impact of these actions on companies and shareholders.

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The ALRC also made clear that any review should involve broad consultation, and be balanced and unbiased.   

The report observes that “[a]ny such review should undertake wide consultation, collect and draw from an evidence-base, and should be conducted by agencies with sophisticated understandings of the regulatory provisions, class action law and procedure, and the securities market”. The question, put simply, is ‘whether the current laws achieve their goals in an optimal manner’?

Many contributors to the ALRC inquiry, including MinterEllison, have questioned whether the current laws most optimally achieve the important objectives of fully informing the market, and ensuring appropriate consequences for companies that fail to operate in a transparent manner.

Concerns about the operation of those laws include the following:

1. Any review should consider the impact on current shareholder value of a company being sued by (often predominantly) former shareholders.

Even if the defendant company has insurance for class actions, the company will usually bear some proportion of the legal expenses and may need to directly contribute to a settlement sum.

The announcement of a shareholder class action may also harm a corporate defendant’s share price and affect its ongoing value due to increased insurance premiums and management distraction. Often a shareholder class action is commenced on the back of some bad news about the company’s financial prospects and a share price fall.

Management might be trying to remediate the issues that are the subject of the bad news and to run the business effectively, but they will also have to juggle defending a large scale piece of litigation for several years. Investors who stay with the company during the period of the litigation bear the burden of this.

2. Another concern is whether it is fair to penalise companies for disclosure mistakes if they were not negligent.

Other significant jurisdictions require there to be an element of fault, such as negligence or a failure to undertake due diligence. In Australia companies run the risk of being held to have breached the law when they and their boards have made strenuous and good faith efforts to keep the market accurately informed, but despite all those efforts, simply make the wrong judgment call.

3. Some submissions to the ALRC inquiry have suggested shareholder class actions may create an unenviable operating environment for corporate Australia, with the risk that these corporates might seek to over-compensate by making disclosures at every turn.

Over-disclosure driven by knee-jerk reactions or the nervousness of boards to class action risk can also have damaging effects on the market, which will then have to decipher whether the information is actually material or not. Put another way, over-disclosure may itself be misleading, or harm shareholder value, and create further risks for the company and its shareholders.

4. The report also questions whether the best method to achieve the goals of a shareholder class action (that is, to compensate shareholders harmed by breaches of the rules, and deterrence against future breaches) is best served by private litigation or is more appropriately a matter for regulators such as ASIC.

It is by no means certain that Australia’s system strikes the right balance in placing much of the enforcement in private litigants' hands.

Litigation funders say that they fund fewer than 5 per cent of potential class actions brought to them as opportunities. If the criteria for whether to fund an action depends on, at least in part, potential returns to funders through a damages claim, it may be that policy objectives of transparency and compliance with the law become of secondary importance.

MinterEllison supports a review which takes into consideration the differing approaches adopted by other jurisdictions.

It may be that we are actually are striking the right balance in Australia, but a comparison against jurisdictions may be instructive in assessing this and may provide a better understanding as to further improvements that might be made.

Beverly Newbold is a partner and national class action practice head at MinterEllison, while David Taylor is a partner and class action specialist at MinterEllison.