The rise of shareholder class actions in Australia
31 May 2005Shareholder vigilance
The Australian financial sector has undergone a facelift over the last 20 years and ‘shareholder vigilance’ is a phrase now appropriate to characterise our investment environment. Close to 55 per cent of adult Australians now own shares, either directly or though investments in managed funds and private superannuation.1 That’s the largest proportion in the world.2 The increasing privatisation of government businesses and statutory corporations, the introduction of compulsory superannuation and the de-mutualisation of major insurance players such as AMP and the NRMA have contributed to that position.
The result is a larger number of institutions and individuals concerned about the performance of their shareholdings, and seeking new or more vigilant processes to enforce their rights as corporate stakeholders. That concern translates into a heightened focus on the principles of corporate governance and securities fraud, and the means for recovering losses that arise when those principles are ignored by companies, their directors and advisors.
Enter the shareholder class action, a private enforcement mechanism designed to empower individual shareholders to aggregate their common claims and prosecute them as a group, thereby purportedly achieving the goals of increased access to justice and more efficient use of judicial resources.
Investors, advisers and major corporations (as well as their lawyers) will increasingly need to familiarise themselves with fundamental principles of class action litigation as Australia’s financial environment moves into a new era of regulatory vigilance and attention to corporate governance issues.
The Australian experience
The last five years has seen a number of shareholder class actions commenced in Australia. A description of some of the more prominent actions demonstrates the magnitude and frequency of this type of litigation:
- GIO: in 1999, GIO, its directors and an independent advisor were sued by Mr King on behalf of 68,000 shareholders who did not accept a takeover offer by AMP as a result of misleading statements in the Part B document required by the Corporations Act. GIO shareholders settled their proceedings for $112 million, Australia’s largest shareholder class action settlement to date and the first solid indication from the judiciary that shareholder class actions could be successfully prosecuted (albeit at the interlocutory stage).
- Media World: in January 2005, a shareholder class action was reportedly filed against Adam Clarke and certain of his companies for misleading and deceptive representations associated with Media World Communications. That company allegedly predicted it would achieve 14 per cent penetration of Australian television households within five years of commencing a video-on-demand service. After collecting approximately $35 million from investors between 2000 and 2004, Media World announced that the technology did not function as well as other commercially available technology and a class action was soon commenced.
- Sons of Gwalia: a multi-million dollar shareholder class action is proceeding against Sons of Gwalia centred on allegations that the company engaged in misleading and deceptive conduct by failing to fully disclose its gold hedging commitments. That litigation is reportedly being funded by IMF, who have recently been prevented by the Federal Court from using Gwalia’s share register to contact shareholders in order to increase the size of the class.
Further developments
A very interesting debate is emerging as to the entitlement of a shareholder to sue for damages against a company in circumstances where the shareholder has not renounced his or her holdings. In Crosbie; Re Media World Communications Ltd, Re, Finkelstein J held that a person who has subscribed for shares in a company may not, while he or she retains those shares (that is, without renouncing the contract by which the shares were acquired), recover damages against the company on the ground that purchase was induced by fraud or misrepresentation.3
The decision is somewhat counter-intuitive, and it has been noted by some commentators that it may have the unusual result of defeating shareholder class actions in situations where a company has subsequently entered into administration or liquidation (because, at that time, shareholders are effectively barred from changing the status of their investment).
Conclusion
A number of legal obstacles to the prosecution of shareholder class action claims have either recently been removed or are subject to ongoing challenges.
Already we have seen an increase in the incidence of such actions in Australia, and, accordingly, the long-suspected increase in the frequency of such cases is likely to become more than just a prophecy.
1 ASX media release, Share Ownership Study – 2004 Findings, 24 February 2005, viewed at www.asx.com.au/about/pdf/sharestudy2004mediarelease.pdf on 10 March 2005.
2 2004 Share Ownership Study – Background Information, 24 February 2004, ASX, viewed at www.asx.com.au/about/pdf/sharestudy2004presentationbackgroundinfo.pdf on 10 March 2005.
3 [2005] FCA 51
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