Australia’s continuous disclosure regime under the microscope as class actions rise

The rapid rise in class actions brought in Australia against corporations operating under the continuous disclosure regime for listed companies shows no signs of abating, based on latest analysis from law firm Jones Day in its recently published fifth review of Australian class actions. The recent connected rise in directors and officers (D&O) claims will inevitably continue as a result, placing Australian risk and insurance managers in an increasingly difficult position as the price of D&O cover escalates. Listed companies in Australia are required to comply with the following basic requirement under Australian Stock Exchange (ASX) rules: “Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.” In a note issued at the end of last year, law firm Herbert Smith Freehills pointed out that, on paper, this does not appear more onerous than similar requirements faced by UK, US or South African firms. But the firm states that in reality, Australian firms and their directors are actually operating under a more taxing regime. “Australian listed company boards are faced with higher reputational and personal liability risks from disclosure-based shareholder class actions than boards in the world’s major capital markets, including the UK and the US. This is reflected in significant increases in the cost of D&O liability insurance in light of the proliferation of shareholder class actions in Australia,” concluded Herbert Smith Freehills. “At first glance, Australia’s continuous disclosure regime may not appear significantly different from most other jurisdictions. Feedback from lawyers in the US, the UK, Canada, Hong Kong and South Africa confirms that, at a high level, all listed companies in those jurisdictions are obliged to disclose material information to the stock exchange in a timely manner,” it continued. “Many of those jurisdictions (but not all) have shareholder class action regimes and directors can be found personally liable for false and misleading statements. Beneath these superficial similarities [however], there are some fundamental differences that have significant consequences for Australian directors,” said the firm. The law firm added that “beneath the surface”, Australia’s market disclosure regime differs from those of its peers in three key respects: The continuous disclosure rule has the force of law and can give rise to personal liability for directors without the director engaging in any misleading or culpable conduct There is no “safe harbour” from liability for forward-looking statements in company reports, even when statements are identified as forward-looking based on sound application of business judgement and appropriately qualified The Australian facilitative class action regime provides an incentive for plaintiff firms to consider initiating class actions (with a view to settlement) whenever a market disclosure is followed by a significant change in the share price. The result of this subtle but substantial difference is a level of class action inflation seen in Australia that is seriously worrying risk managers and their insurers, and sending strong warning signals to their colleagues worldwide. Jones Day’s analysis of Australian class actions developments reviews the class actions that were commenced and settled in 2018–2019. It also examines the types of novel claims that may be commenced as class actions in the future. Jones Day pointed out that shareholder class actions attracted the most attention in 2018, as their numbers continued to grow and the Australian Law Reform Commission (ALRC) put them under the microscope. Shareholder claims, frequently through multiple class actions, were commenced against AMP, BHP, Brambles, Commonwealth Bank of Australia, Dick Smith, GetSwift, Quintis and Woolworths in 2018, relying on alleged contraventions of Australia's continuous disclosure regime for listed corporations. Similar shareholder class actions were launched against Vocus Group and Lendlease in April 2019, pointed out Jones Day. The firm said the ALRC found that for all finalised shareholder claims between 2013 and 2018, the median percentage of the settlement used to pay legal fees was 26% and the proportion that went to litigation funding fees was 23%. As a result, the median percentage of a settlement that was paid to group members was 51% – not really a good result by anyone’s standards. “The combination of shareholder class action frequency and the large transaction costs saw the ALRC recommend that the Australian government commission a review of the legal and economic impact of the operation, enforcement and effects of the continuous disclosure regime. However, this type of claim shows no sign of abating at present,” said Jones Day. Class actions against various levels of government also continued to be pursued. This included a class action commenced in 2018 against the Department of Defence over firefighting foam used in Katherine in the Northern Territory. An earlier class action was commenced for contaminated soil and groundwater in and around Oakey in Queensland, due to the use of firefighting chemicals. Similar claims in relation to other firefighting materials and methods employed elsewhere in Australia are expected to follow, said the law firm. Personal injury and product liability claims also continued to rise, said Jones Day. “[The year] 2018 saw three types of product liability or personal injury class actions commenced. Each is an example of a recognised category of class action that has been brought in the past,” stated the firm, adding that further major cases are underway this year. Employment law is another area of action said Jones Day. “Class actions alleging sham contracting, where an employer misrepresents an employment relationship as an independent contracting arrangement, are underway in the Federal Court. A further class action was commenced in 2018 over the legal right of coal companies to use casual labour in their mines and seeks the recovery of alleged unpaid benefits,” pointed out the firm.

Australia’s continuous disclosure regime under the microscope as class actions rise

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