COVID-19 has increased the immediate risk of corporate class actions in multiple areas, particularly shareholder-initiated disclosure claims, yet it can also serve as a much-needed industry circuit-breaker to drive lasting class actions law reform in Australia.
When the predictable becomes unpredictable
COVID-19 has made the predictable suddenly so inherently unpredictable. While this has manifested so deeply for all of us in our own personal lives in the last three months, on the corporate level it has made the task of earnings forecasts and everyday operational planning next to impossible for directors and managers. The goal posts continue to be moved as the basic rules of the game have changed so rapidly on a weekly (and sometimes daily) basis in this period.
When that is the operating context for companies – and when, additionally, the focus has been on simply trying to calm the storm and survive – the task of planning for an uncertain and unknowable future is not a realistic one.
This is a dynamic that has caught the attention of litigation funders and plaintiff law firms eager to pursue the next spate of disclosure-focused shareholder class actions. The case theory is that companies’ earnings projections and other market disclosures have not properly taken into account the COVID-19 related risks that impact on their specific operations – of course, with the full benefit of hindsight, an information advantage not available to directors at the coalface.
Adding to the concern for directors is that it is not just Australian funders in the mix. Increasingly, international funders, in partnership with specialist class actions law firms, are targeting Australian actions, particularly funders and firms based in the United States where class actions remain the most lucrative market in the world. And for Australian companies with dual local and international listings, the risk of multiple actions in multiple jurisdictions simultaneously could have a devastating impact on operations already stretched in managing the impact of COVID-19.
Incident-specific class actions
In addition to the shareholder/disclosure context, there is also a heightened risk of class actions against operating entities specifically related to their management of COVID-19 related health risks. Cruise ship companies have been the first notable companies to be impacted, with 22 lawsuits filed against entities owned by Carnival, the world’s largest cruise operator, along with other current claims against entities owned by the second and third largest operators, Royal Caribbean Cruises and Norwegian Cruise Line Holdings.
And in Australia, plaintiff law firms are currently investigating multiple class actions in the fallout over the Ruby Princess cruise ship issues currently the subject of a Special Inquiry led by Bret Walker SC.
The class action risk is also significant in the workplace health and safety context for employers in all sectors, as they seek to maintain a safe working environment that accords with changing health advice in a staggered return to the office for employees over the next few months.
Other class actions contexts – ranging from consumer-focused unfair practices/misleading and deceptive conduct claims, to franchisee and landlord/tenant claims – are also expected to arise from the unique economic circumstances that COVID-19 has created.
An interim solution for shareholder class actions
While claims of that kind, and those relating to health and employment, may be seen as a response to an entity’s management of a specific incident relating to COVID-19, shareholder class actions alleging inadequate disclosure are a different kettle of fish, seizing on the general level of financial and market uncertainty flowing from COVID-19 which is likely to continue for years, not months, and stretching concepts of reasonable foreseeability and causation to a new realm. Directors are not, after all, in the habit of crystal ball gazing.
This has led to calls from the Business Council of Australia and the Australian Institute of Company Directors for the Australian Government to step in.
One option is for the Treasurer to use his emergency power under section 1362A of the Corporations Act – introduced in the Government’s first coronavirus legislative response package in late March 2020 when COVID-19 hype was at its most extreme – to prevent COVID-19 related shareholder class actions being filed against companies at least for the next six months until the economic and financial situation becomes clearer on a macro and micro level.
To achieve an appropriate balance – upholding a robust continuous disclosure regime and enforcing serious breaches which compromise market integrity and fairness – ASIC could still be left with the power to bring regulatory enforcement proceedings (seeking fines and civil penalties). That is entirely distinct from the commercial and personal interest focus of class actions sponsored by deep pocket litigation funders seeking hundreds of millions of dollars in compensation payouts.
Indeed, that is where funders have been so successful in the shareholder class actions space to date in Australia – only one such action (last October’s Myer proceeding) has proceeded to final judgment in Australian history. The rest have settled at an early stage – and funders know that when you create enough smoke, a hefty sum of ‘go away money’ is a viable option for directors seeking to avoid years of protracted and costly court proceedings. All while being distracted from getting on with business – a task all the more important in the COVID-19 period as directors continue to be consumed with crisis management, business continuity and an eventual move to meticulously monitored, sustained recovery and a slow return to growth.
A spark for broader law reform
Apart from any temporary suspension of shareholder class actions liability, COVID-19 also provides an opportunity to achieve more meaningful, long-term class actions law reform in Australia.
That process had already started to take shape pre-coronavirus.
In its January 2019 final report, the Australian Law Reform Commission recommended greater statutory oversight of funders and a power for courts to vary the terms of litigation funding agreements as it sees fit. The Australian Government was originally due to issue its response to those recommendations early this year, before the Attorney-General on 5 March announced a new review into litigation funders, this time looking at the so-called ‘extraordinary profits being made by the booming litigation funding industry’, as well as the broader systemic reasons for and consequences of the explosion of class actions in Australia in the last decade.
The commencement of the review, to be conducted by the Parliamentary Joint Committee on Corporations and Financial Services, was delayed as the Government focused on emergency COVID-19 legislative measures. However, on 13 May, the Attorney-General officially referred the review to the Committee and it is now due to report back by 7 December 2020.
This is an opportunity for a considered probe into the fees and licensing of class actions funders, as well as the current legislative and case law uncertainty we have seen in the industry in the last two years.
Among other things, there is a need for legislative clarity following the High Court’s determination in December 2019 in the BMW/Westpac joint hearing that courts lack the statutory power to make common fund orders at the outset of proceedings requiring all class members to contribute to funders’ fees even if they did not sign up to individual costs agreements. Despite that ruling, there have since been conflicting decisions in the Federal Court – with opposite conclusions reached in the Vocus and RMBL Investments matters this month alone – about whether courts retain the power to order class members to contribute to funders’ fees during the settlement approval process. This is not a mere technical issue – its resolution is necessary not only to provide directors with greater regulatory certainty but also to mitigate a key incentive for funders to continue their aggressive pursuit of new proceedings.
If broader structural class actions reforms are not pursued – placing regulators at the centre of upholding continuous disclosure obligations and protecting against the risk of investor and consumer harm while controlling the continued proliferation of class actions sustained by a clear commercial money-making incentive on the part of funders – directors will be further distracted from getting on with business.
That is, actually managing the company in an everyday operational setting. And now, even more critically, undertaking the deep governance and risk assessment reviews and implementation plans necessitated by COVID-19, with the crisis having caught so many entities off-guard and raising concerns about the adequacy of their underlying corporate governance and risk management practices.
Directors cannot afford to be quasi-litigation managers, bombarded with the prospect of legal proceedings in making every business decisions. If they are forced into that position then, apart from the immediacy of compensation payouts from the class actions in fact pursued against a company, directors will face a further regulatory risk due to their inevitable delay in pursuing the governance, cultural and crisis management overhauls required in a post COVID-19 world.
Indeed, as ASIC, APRA and other regulators return to their business as usual supervisory and enforcement priorities over next the next six months and beyond, it is these underlying corporate governance and risk protocols that will become the focus of future policy and enforcement decisions.