A crisis is looming for Australia's listed companies, with conditions perfect for unleashing a storm of shareholder class actions, writes Alex Cuthbertson
A perfect storm of factors is making the threat of shareholder class actions greater than ever for Australia's listed companies. The global financial crisis and the falling stock market, combined with the increased prominence of litigation funders, have led to predictions of a spike in shareholder class actions - both actual and threatened - over the next 12 months.
Shareholders watching the value of their investments plummet in the bear market are increasingly looking for opportunities to recoup their losses where there is any suggestion that a company - or its directors - has misled the market in some way, usually by failing to disclose price-sensitive information in a timely fashion.
This heightened focus by shareholders on ways of recovering their losses, combined with the increased prominence of litigation funders in the Australian legal system, has meant that any downgrades in a company's performance, or revelation of other difficulties which result in a significant decrease in share price, are met with an announcement of a potential shareholder class action.
It's now nearly 10 years since Australia's first significant shareholder class action, the GIO action, commenced. Since then, there has been a gradual but steady increase in the number of actions, leading to an increase in commenced or threatened actions over the past year.
The trend is expected to continue in the coming year as we witness the ongoing fallout from the global financial crisis. Recently, an executive director of Australia's largest litigation funder, IMF (Australia) Limited, spoke of an "exponential" rise in enquiries from shareholders about potential claims against listed companies since the onset of the crisis.
IMF is also reported to have $1billion of claims over shareholder losses coming to fruition over coming weeks.
Most shareholder class actions are based on alleged breaches of the Corporations Act 2001, and in particular, the provisions of that act concerning the continuous disclosure regime, and misleading and deceptive conduct in relation to financial products and services.
Recent examples of shareholder class actions include current actions involving the Multiplex Group, the Centro companies and AWB Limited, and the foreshadowed claim against OZ Minerals Limited.
The amounts involved can be significant: by way of example, the claims against the Centro companies are reported to be in the vicinity of $1 billion.
While the defendant in most shareholder class actions commenced to date has been the company itself, this needn't be the case. A company's directors, as well as its external advisers, including auditors, brokers and investment bankers, are also potential defendants.
In the current economic climate, where many companies are already in financial distress, shareholders may well begin to look to these other targets in an attempt to recover losses alleged to have been caused by misleading or defective advice.
It is, therefore, essential that companies clearly understand their disclosure and reporting obligations and have sound policies and procedures in place to ensure that materially price-sensitive information about the company is identified and disclosed in accordance with the ASX Listing Rules, and that the company's statements (particularly those concerning financial forecasts and results) are correct and accurate, and based on sound and reliable information.
A shareholder class action, or threatened action, often follows or is commenced simultaneously with an investigation by the Australian Securities Exchange (ASX), the Australian Securities and Investments Commission (ASIC) or another regulator.
The ASX and ASIC have been increasingly prepared to investigate potential breaches of the continuous disclosure regime and ASIC is armed with a suite of regulatory powers enabling it to obtain from companies information and documents which may relate to potential breaches.
The most significant of these powers enable ASIC to examine a person on oath about a matter it is investigating, and to compel the production of books and records relating to an investigation.
Under the Australian Securities and Investments Commission Act 2001, ASIC may provide to third parties any books and records produced to it in connection with an investigation, and permit such third parties to use the books and records for the purposes of legal proceedings.
Further, where ASIC has conducted an examination of a person, it may provide the transcript of that examination (and any related books and records) to a person's lawyer, where the lawyer satisfies ASIC that their client is contemplating, in good faith, a proceeding to which the examination relates.
In addition to these statutory provisions, ASIC (or any other regulator) may be required to produce documents obtained in the course of an investigation in response to a subpoena served on it by a third party.
The provision by ASIC of information relating to potential breaches of the continuous disclosure regime is an invaluable tool for potential shareholder claimants and their lawyers, and listed companies should expect that plaintiff lawyers will actively seek access to any information produced to ASIC during an investigation.
An example of the lengths to which potential shareholder claimants and their lawyers may go to procure such information occurred in the Multiplex class action. In that case, the applicants served a subpoena on ASIC requiring ASIC to produce documents obtained in the course of its investigation (including transcripts of examinations) and then challenged ASIC's objection to production of some of those documents (which was made on the ground of public interest immunity).
It is essential that in dealing with regulators, companies are aware of the potential that any documents produced or transcripts of examinations may be provided to third parties - including potential shareholder class action claimants and their lawyers.
Any information which is to be provided to ASIC must be carefully reviewed and its implications properly understood. Steps should be taken, where possible, to restrict its production to any third parties. If information is privileged, the privilege needs to be identified and, where appropriate, preserved.
The response to a regulatory investigation must be strategically managed. Companies need to be aware of all possible outcomes of an investigation, including the potential threat of a shareholder class action. Failure to properly manage this threat can have long-lasting and expensive consequences.