One of the major bugbears for investors in listed equities is what can happen when the company gets it wrong – when the reaction on the share market can be a very severe fall. “Haircuts” of 20%-plus – even in the 40% range – can easily happen when companies surprise the share market with bad news, or reveal negligence or incompetence. Such falls can wipe out years of patient investment appreciation.
In recent years, aggrieved shareholders who have suffered loss from painful capital losses when there are grounds to believe that the company’s actions (or inactions) caused or contributed to the falls, have sought redress in shareholder class actions, which are lawsuits that allow one or more shareholders to bring an action as the representative of a larger group of persons known as the class.
As law firm Allens puts it, the claims typically made in Australian shareholder class actions relate to the circumstances in which shares (or other equity securities) are bought and/or sold. The most common claim is that, because of alleged illegal conduct by the company (and/or other defendants), claimants either:
- acquired shares (or other equity securities) when they would not have done so but for the alleged conduct; or
- acquired shares (or other equity securities) at a higher price than they would have otherwise paid but for the alleged conduct.
The causes of action that form the basis for most Australian shareholder class actions are:
- misleading or deceptive conduct in respect of inaccurate or incomplete statements and/or a failure to disclose or correct certain information; and
- breach of a listed company’s continuous disclosure obligations.
Importantly, says Allens, neither of these causes of action requires proof of intent to mislead or defraud shareholders.
According to the Australian Financial Review, there have been 34 class action settlements since 2003, worth $1.834 billion, with another nine estimated to have been settled, without being disclosed publicly. Companies that have been hit with shareholder class actions and settled out of court include gaming machine maker Aristocrat Leisure, the since-delisted builder Multiplex (after no less than seven profit warnings flowed from the company’s rebuilding of the famous Wembley Stadium in London), the also-delisted grain marketer AWB (in relation to its dealings with the Iraqi government), National Australia Bank (shareholders alleged that the bank failed to disclose provisions for losses, or the need for such provisions, on certain financial instruments in the lead-up to the GFC), also-delisted shopping centre owner Centro (after a four-year case that also saw Centro’s auditing firm, PricewaterhouseCoopers, make certain admissions about negligence in the way it handled the audit of Centro’s 2006-07 accounts.)
More recently, AMP has been the subject of a shareholder class action arising from revelations at the Financial Services Royal Commission of systemic misconduct at the company; BHP has been sued in a class action by shareholders alleging that they suffered losses due to the share price fall following the Fundão Dam collapse in Brazil in November 2015; property giant Lendlease has suffered the same action, by shareholders saying that the company misled the market and failed to adequately disclose the long-running problems affecting its Engineering and Services Business, which led to a single-day share price drop of 18% in November 2018; and department store operator Myer has also been taken to court. Now it is the turn of supermarket heavyweight Woolworths.
Each case has specific allegations, and class members – of which there could be thousands – must qualify under the criteria of these allegations. For example, Woolworths is being sued by a class of investors who bought shares in the period 29 August 2014–5 May 2015, to recover losses alleged to have been suffered after Woolworths’ share price dropped on the back of its announcements on 27 February 2015 and 6 May 2015, which stated that the company would not meet its previously announced guidance for FY15 net profit after tax, and that it would take time and significant investment to restore sales momentum that had been lost during the relevant period.
The most common argument advanced in favour of class actions is that if successful, they allow small investors, who otherwise would be denied any measure of justice and redress, to claw back some of their capital losses; that they allow ordinary Australians to hold large and powerful organisations accountable when they have been negligent, incompetent or engaged in serious misconduct.
Just as important is the likelihood that the possibility of facing a class action is increasingly making listed companies aware of the importance of complying with their disclosure obligations – given that most class action cases seem to hone-in on poor disclosure.
There are two developments that have made class actions more common in recent years. The first is the willingness of certain law firms to mount the cases “entrepreneurially” – that is, to advertise for affected investors and to run the case on a “no win, no fee” basis. The second is the rise in the legal marketplace of specialist litigation funders, who will assess the merits of the case, and if they believe it is sound, they will provide the funding for the class actions. A litigation funder will pay all the legal fees and disbursements in the case, and will pay the other side’s costs if the case is lost. If the case is won, the litigation funder receives back the legal fees it has paid, and receives a percentage of the proceeds before funds are distributed to the members of the class.
The listed companies being sued might not like these developments, but for affected shareholders, they are a good thing – with the caveat that the shareholders will get more from a successful case conducted by a law firm on a “no win, no fee” basis than they will from the litigation-funder method. But in both formats, if successful, they will get some financial redress for their loss.
Last month, the class action sphere received something of a bombshell ruling, when a Federal Court judge found that Myer misled the market in late 2014. judgment. This was the first class action brought by shareholders in a listed company in this country to go to judgment – every other case had been settled before this point.
The claim centred on statements made by Myer’s then CEO, Bernie Brookes, during “earnings calls” with equity analysts and financial journalists on 11 September 2014, at the time of Myer’s FY14 results announcement.
The Court found that from 21 November 2014 until March 2015, Myer breached its continuous disclosure obligations and engaged in misleading or deceptive conduct by failing to correct the 11 September 2014 representation at various intervals. However, the Court found that, because the market – as in, equity analysts, who did not collectively believe Brookes’ version of Myer’s outlook – had already factored in a lower outlook, the company’s contraventions may not have caused any loss to shareholders.
Myer shares fell by 10% following its profit downgrade. The shareholders had claimed this loss was caused by the company’s earlier deception.
Justice Beach said Myer should have corrected the information in November when it became clear that it was significantly wrong. But because the information that the court held Myer should have disclosed was already factored-in to analysts’ forecasts of Myer’s position, it could not be demonstrated to Justice Beach’s satisfaction the that the non-disclosure of the information caused any appreciation or undue strength in Myer’s share price, and as a result, no loss could be shown to have occurred to the shareholders forming the group.
To sum this up, Justice Beach found that Myer did mislead and deceive its shareholders and did breach its obligations to keep investors informed of movements in its stated forecasts – but the judge also found there was no proof that the deception resulted in shareholder loss, because the consensus of analysts covering Myer was that the CEO’s optimistic outlook was not credible, and that enough doubt had been factored into Myer’s share price.
It is interesting that Justice Beach found, in effect, that once Myer had issued guidance, that was a continuing representation that it was obliged to correct – and it didn’t. But giving guidance is not mandatory for companies.
It remains likely that we will see more class actions – the Myer decision does not dissuade them. But there is one way that share investors can hedge against the likelihood of a class action against one of their companies – by investing in one of the companies that funds such litigation.
Litigation funder IMF Bentham (IMF) is the only litigation funder listed on the ASX. The company has funded class actions against the likes of National Australia Bank, Commonwealth Bank, Sirtex Medical and Murray Goulburn, but that is not all it does – while most of its cases are class actions, IMF funds a diverse range of legal actions around the world. IMF Bentham is acquiring Netherlands-based litigation funder Omni Bridgeway for $141 million, as part of a five-year plan to diversify its risks. Omni Bridgeway specialises in civil law jurisdictions across Central Europe, the Middle East, North Africa and Central Asia, where it funds litigation, arbitration and enforcement proceedings.
In almost 19 years as an ASX-listed company, IMF has successfully recovered $2.4 billion, out of which it has returned more than $1.5 billion to funded claimants. Here is the tale of the tape for IMF.
IMF Bentham (IMF, $3.40)
Market capitalisation: $795 million
Three-year total return: 26.7% a year
Estimated FY20 dividend: 2.6%, fully franked
Estimated FY20 price/earnings (P/E) ratio: 9.9 times earnings
Analysts’ consensus valuation: $3.94 (Thomson Reuters)
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