A number of factors have aligned to further encourage shareholder class actions, writes Angela Priestley, and corporations should be concerned.

The recent news that litigation funder IMF Australia is pitching to fund a shareholder claim against engineering firm Downer EDI is the latest in a line of possible and initiated shareholder class actions to emerge over the last 12 months.

Like other organisations to face such action, Downer EDI has made the headlines. Reporting on numerous shareholders up against the might of a major engineering firm makes for some classic story-telling and, it seems, Australians are keen to follow such affairs.

More than ever, the actions of corporations are being scrutinised - by the regulators, the shareholders, the public and the media. And with the true extent of the GFC's fallout yet to hit, a number of litigation funders now on the scene and the take-up of technology easing the burden of organising and funding a class action, the Australian business environment is ripe for a wave of shareholder class actions.

The numbers are up

Needless to say, such news of shareholder class actions is also leaving the directors of Australian boards on edge. According to the Directions 2011 report, released by Mallesons Stephen Jaques last week, 34 per cent of the 300 directors surveyed indicated they have been involved in an organisation that has given attention to class action issues in the previous 12 month period.

If fact, as Mallesons partner Roger Forbes notes, directors are increasingly finding that shareholder class actions are almost to be expected. "After any significant negative profit announcement by a listed entity there is almost an expectation now that it will be followed by a press release from a plaintiff law firm or a litigation funder," he says.

But despite such expectations and the concerns of directors, there's little evidence to suggest that we've seen a rise in shareholder class actions in recent years. A recent study by Vince Morabito, a professor at Monash University, found that although specific shareholder class actions now constitute a slightly greater proportion of total class actions than in the 1990s, the Federal Court of Australia has not been inundated with such claims. He says his research has found around 14 class actions have been filed every 12 months since 1992.

Still, Blake Dawson partner John Emmerig does not believe Morabito's figures will help directors rest any easier at night.

He says the shareholder class action numbers of the past are not an indication of what's to come in the future, and the stars are aligning to see Australia emerge as a hotbed of class action activity.

It starts, notes Emmerig, with the fact that Australians are amongst the most active global participants in the stock market.

"Take shareholder participation, then the fact we have the most demanding continuous disclosure laws, the most liberal class action regime and combine it with the precedent factor: that is that it has been done [before], results were obtained for the plaintiff groups and so the next faction follows more easily," Emmerig says.

A 'perfect storm'

Emmerig is not alone in suggesting the current environment might be ripe for a wave of shareholder class actions. At the ACLA National Conference in late 2010, Middletons partner David Hope described what he believes is the "perfect storm" facing corporations.

Hope pointed to his own range of influencing factors that are leaving corporations more exposed to class actions, such as recent legislative changes, market volatility and the decreasing costs of class actions generally - especially via technology and the arrival of litigation funders.

But it's the fallout from the GFC and the uncertainty still facing the market which is likely to have the most dramatic impact in the future.

"The fact is there's more public scrutiny on companies generally [following the GFC]," said Hope at the time. "There have been changes to the legislation with respect to enforcement of listing rules of misleading and deceptive conduct."

Dawna Wright, a partner at McGrathNicol, points to market volatility as being central to encouraging shareholder class actions. "The more volatile the market, the more difficult it is to keep up with continuous disclosure rules," she says. "And most of the regulators have been saying they're ramping up their level of scrutiny. When you combine those two things plus the impact of litigation funders, those three things together can have a serious impact."

Since their input was first legislated in 2006, litigation funders have been able to share a number of significant class action success stories. While they faced a hiccup in 2009, when the Federal Court found that such funders were akin to a managed investment scheme and therefore subject to regulation by ASIC, the introduction of temporary class orders has since made life for funders a little easier (a permanent exemption from managed investment scheme requirements is expected to be formulated in 2011, according to Mallesons).

Morabito notes that, up to March 2009 (his study period), class actions by litigation funders have seen a 100 per cent settlement rate. "That seems to suggest that litigation funders do a very good job," he says.

With returns of between 20 and 45 per cent of the settlement (according to IMF), litigation funding makes for a healthy investment too - and ultimately contributes to an environment that could encourage more shareholder class actions in the future.

Faster, cheaper, simpler

Technology is another factor that could contribute to a wave of shareholder class actions in Australia. The ability to email communications, to swiftly establish websites chasing potential plaintiffs, to use social networking to extend reach and use electronic filing and databases to track members of the class is greatly reducing the burden of plaintiff firms in preparing a class action.

Technology is also a significant enabler in raising the number of plaintiffs now getting involved in class actions - especially across more general class actions, such as the recent bank fees class action led by Maurice Blackburn, IMF and Financial Redress in which 27,000 Australians agreed to participate.

But when more specifically examining shareholder class actions, partners contacted by Lawyers Weekly indicate that the number of plaintiffs now attracted to such class actions could actually be on the decrease, with funders and lawyers instead choosing to target the high-end investors, rather than the 'mum and dads'.

"There is a lot more activity in directly approaching large institutional shareholders," says Forbes. "For every thousand shareholders, it's much more worthwhile to sign a few large intuitional shareholders."

Emmerig points to some recent examples to note such a change. "When the GIO shareholder class action was settled in 2003 there were 20-plus thousand investors in the class who shared approximately $100 million," he says. "When Multiplex settled last year, it was still $100 million dollars but only around 100 shareholders who shared in the fund."

And these days, Forbes believes large institutional players are also more likely to be involved.

"Five years ago they may have been horrified to be a large institutional shareholder with a brand name being part of a class action organised by a law firm. But now they look at those things sensibly and rationally, and make a decision as to whether they'll sign up to the action or simply vote with their feet and sell their shares."

A change of mindset

With more media attention, increased regulator scrutiny, fallout from the GFC and technology on board, Emmerig notes one final ingredient he believes will encourage a greater number of shareholder class actions in the future: a changed mode of thinking.

"Class actions have moved from being one-offs, to being the mainstream. People are more willing to participate and more willing to initiate."

For corporations, all these factors are pointing toward a risky future ahead. And the uncertainty of shareholder class actions can only add to the woes of board directors.

To date, no shareholder class action has reached judgment, thus it's difficult to ascertain just how a court would treat such a matter, especially in proving causation and determining how loss can be calculated. Meanwhile, the courts have been resistant to revealing information to defendants regarding just who is involved in the class, meaning claims have been difficult to quantify and settle.

But, according to Forbes, that may soon change, especially given the small concessions made recently in Centro's current class action, which permitted Centro to obtain some information about the class.

"The court is becoming, it seems, a little less inclined to accept the proposition that members of the class shouldn't be disturbed."

Even with such favourable outcomes for defendants, the potential reputation and market risks a shareholder class action can bring will continue to keep plenty of directors awake at night. Just the very mention of a class action can immediately affect a share price, while the 'trial by media' mentality that such action can provoke is almost impossible for an organisation to defend.

Downer EDI may be the latest corporation to face the spotlight of a litigation funder but it won't be the last. In the meantime, company directors will continue to keep their actions in check - and keep an eye on the media headlines to read of the latest proposed class action.

"The director network is tight," says Forbes. "They would all be well aware that every time they engage in profit announcements or something else that may involve some obligation of continuous disclosure that [the threat of the class action] is in the background."