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Recap of Sydney Shareholder Class Action Hypothetical


It is with great delight that we announce the success of our Class Action Hypothetical events in Sydney and Melbourne, held in conjunction with Herbert Smith Freehills. We are especially grateful for the illuminating views provided by our moderator, Associate Professor Michael Legg and our other esteemed guests and panellists including Andrew Watson (Maurice Blackburn), Clive Bowman (IMF Bentham), Jason Betts (Herbert Smith Freehills), Jessie Moodley (Perpetual), Marianna Papadakis (Fairfax) and Robert McCabe (Chubb).

The hypothetical scenario involved a panel discussion about the viability or otherwise of a class action being instituted against BioTechCo, an ASX Listed company whose shares had plummeted due to health issues with one of their products. Trading halts had been issued as a result, and investors, of which 65% were institutional, were notified of profit downgrades. Two themes emerged: firstly, the logistics of running a securities class action and secondly, managing any potential long tail from these claims.

Logistics

Unlike conventional litigation, class actions involve multiple stakeholders behind the scenes. Aligning all these stakeholder interests is of paramount importance to ensure effective settlement.

This process starts with effective due-diligence. Clive Bowman from litigation funder IMF Bentham stated the two key concerns for a litigation funder at this stage, these being quantum and recoverability. On the one hand, a funder needs to ensure that there is enough value in the claim to make it worth pursuing. On the other hand, value is useless if it can’t be recovered from an appropriately responsive insurance policy with a high enough limit of liability.

At the same time, the funder is trying to agree on their fees and funding arrangements with investors and affected persons. In this case, as 65% of the investors were institutional this exposed the fundamental but necessary tension between funders and shareholders. Jessie Moodley from Perpetual highlighted the difficult negotiations that take place and the need to scrutinise exactly what commission funders are receiving to ensure investors are compensated effectively.

A further logistical issue is the intervention of the regulator ASIC. Whilst running contested litigation, defendants are subject to regulatory investigation. Panellist Jason Betts of Herbert Smith Freehills indicated the need to resolve this exposure informally as there is a very real risk that any admissions in the ASIC investigation can be used in the later class action litigation. This includes the power under s19 of the Australian Securities and Investments Commission Act 2001 (Cth) which allows ASIC to examine any person on oath who may have information relevant to an investigation. The transcript of that examination can then be used in the subsequent class action proceedings. As Heerey J noted in Boys v Australian Securities Commission (1998) 80 FCR 403:

“The whole point of s25(1) is to enable the fruits of ASIC’s compulsory examination to be made available for use in civil litigation in connection with the subject matter of such examination”

Therefore, regulatory exposure is highly relevant to the outcome of class action proceedings.

Finally, logistical issues lie in navigating interlocutory applications such as security for costs and discovery proceedings. Panellist Andrew Watson of Maurice Blackburn acknowledged the substantial cost of discovery proceedings but noted their necessity in demonstrating information that is otherwise unknown.

Managing Tail Risk

    Jason Betts indicated four key criteria for effectively preparing the defence of a class action:

  • Resolve ASIC exposure;
  • Obtain a grant of indemnity and advance of defence costs from the insurer;
  • Work on ‘closing’ the class;
  • If the class is already closed, open it and then re-close.

A ‘closed’ class refers to a class action on behalf of specific, identified persons. It is not ‘open’ to the entire range of people that may be affected by the fact in issue. Because of this, ‘closing’ a class is a highly effective way of ring fencing exposure and protecting against the risk of later suits involving the same subject matter (tail-risk).

If a class is closed prematurely, it can inaccurately reflect the true extent of the risk faced by the defendant. Because of this it is sometimes necessary to open the class, allow potential group members to subscribe or opt-out, and then re-close the class to cap exposure.
Once again, we are very grateful to all our panellists for their attendance and enthusiasm. Class actions remain at the core of our business at ExpertsDirect and we look forward to sharing their development with you well into the future.