There is a role for litigation funding in Australia – provided it doesn’t tamper with the scales of justice. The question is whether Australia’s funding, class actions and securities regimes have, in combination, become unbalanced. It is in the securities space that difficulties emerged.
Due to unintended amendments under the Howard government, Australian law concerning continuous disclosure became unique by not requiring a fault element for liability. To compare, in Britain, a securities claimant must prove knowledge or recklessness as to whether published information was untrue or misleading, or that an omission was a dishonest concealment of a material fact. In the United States, a claimant needs to demonstrate that a defendant acted scienter: that is, knowingly, to be successful in a securities fraud claim. Here, the law, as it applies to listed companies, is blind to honest and diligent yet mistaken conduct – it’s treated the same as fraud. Yet we don’t hold the directors or officers who engage in that conduct to the same standard.
Instead, the cost for securities class actions can be paid by today’s shareholders for innocent decisions made by the same management in which yesterday’s shareholders (the plaintiffs) determined to invest. It is in this area that litigation funding has perhaps been exploited. Litigation funders will say there is no evidence of a need to reform these laws. Yet the consequence of the explosion in shareholder class actions since those changes in the substantive law, and some procedural class action decisions in the first decade of this millennium, has been higher D&O insurance costs, a diminishing pool of willing directors, and a disincentive for entrepreneurial risk taking in listed company world. Further, the costs associated with continuous disclosure and misleading conduct claims are ultimately factored into the margin for equity capital. In short, companies seeking capital may ask whether Australian equity capital markets are worth the effort, having regard to the risks of exposure for honest mistakes. To the extent Australians look to local funding in this environment, private equity and debt financing don’t carry the same cost – furthermore, the ladder to opportunity is cut out for mum & dad investors who can’t satisfy ‘high net worth’ requirements necessary to invest in these asset classes.
Companies seeking capital may ask whether Australian equity capital markets are worth the effort, having regard to the risks of exposure for honest mistakes.
So, what can be done?
First, the Corporations Act and ASIC Act should be amended to provide for a defence on the part of equity issuers from civil compensation liability to securityholders where the conduct is not intentional, reckless or negligent. Such a defence could be limited to claims for civil compensation on the part of private claimants only. That would not curb ASIC’s power to seek penalties for non-disclosure by corporates.
Secondly, the recent announcement by the Commonwealth Treasurer that litigation funders will be subject to the default regulatory regimes in the Corporations Act should create a level playing field. This imposes the same compliance and regulatory scrutiny to which other financial services providers are subject. There is simply no reason why litigation funders shouldn’t pay the same local tax and have the same local financial resources or customer complaint systems as other Australian financial service providers.
Thirdly, consideration needs to be given to whether the regime should require the court should consider whether particular claims continue as a class action as a matter of course, rather than by exception. In the absence of such a reform, the class action regime risks encouraging lawyers and funders to search for settlements of large claims with little prospect of success, rather than looking for good claims by impecunious plaintiffs who genuinely couldn’t afford access to justice. The former claims may be good for the class action industry profits from settlement, but they could be a poison for our broader economy, personal superannuation accounts and not solve deserving claims for society.
Last, the impact our national economy of class action lawyers being paid a contingency ‘common fund’ fee based on winnings (rather than a multiple of their actual professional costs) on Federal causes of action is an issue that should be determined by the Commonwealth Parliament. It is not a matter that should have been determined by the Victorian Parliament in isolation.