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Company directors want ban on class actions, ASIC to replace funders
One-third of listed company directors want a total ban on class actions, while business lobbies have called for a complete overhaul of the current system.
Tony Zhang
A survey conducted by the Australian Institute of Company Directors (AICD) has called on the government to ban shareholder class actions with the introduction of a more efficient continuous disclosure agreement.
In a submission to the joint parliamentary committee inquiry on litigation funding, the AICD argues the market for securities class actions is “motivated by profit over the public interest” and the regulator can restore some balance.
“It is a strong first step and an important acknowledgment by the government that this is an issue that is having a significant impact on companies. But we need to go a bit further to get a more effective regime in place,” AICD CEO and managing director Angus Armour said.
Mr Armour took issue with the ability of shareholders to bring a class action alleging misleading and deceptive behaviour by directors but with no need to prove fault or intent.
“The challenge is there is a low bar to comment on a class action. If a director sets out to mislead the market they should be held accountable. I don’t think the current settings are balanced in that way,” Mr Armour said.
Companies and their officers are only liable for continuous disclosure breaches if there is “knowledge, recklessness or negligence” with respect to updates on price-sensitive information.
Under the proposed AICD model, the Australian Securities and Investments Commission would seek compensation on behalf of affected shareholders.
“This could include, where a company is found to have breached the continuous disclosure rules and ordered to pay damages, facilitating a compensation mechanism that affected shareholders could then claim against,” the AICD stated.
“The benefits of such a mechanism [are] that it would maximise returns to class members by reducing litigation fees, as well as costs of competing claims.”
The AICD suggests ASIC should be given more resources to perform the task and says the proposal would not touch other claims, such as product liability and environment cases.
Business Council of Australia CEO Jennifer Westacott said the move would allow companies to “keep markets well informed” during the COVID-19 crisis without fear of “opportunistic class actions” by shareholders.
She said it would “give company directors the space they need to more confidently provide guidance to the market during this uncertain period”.
The insurance industry stood firm against the litigation industry saying that company directors were finding it harder to insure their company.
They noted that it was a response to a market that had become prohibitively expensive, “as insurers increasingly worry the companies they underwrite will be subject to class actions bankrolled by litigation funders.”
Other business interest groups have also been taking an increasing interest in Australia's class action industry, with the powerful US lobby the Chamber Institute for Legal Reform advocating for reforms to continuous disclosure agreements.
Meanwhile the ASX noted in its submission that listed Australian companies face “the highest exposure to securities class action risk” in the world and is backing calls to rein in the class actions industry.
In a late submission to the inquiry, the securities exchange says the fact that global insurers have given Australia the top ranking is “an issue of increasing concern”.
However, ASX provided a different stance provided by others such as the AICD and Business Council of Australia, conceding the high bar it has set on disclosing market-sensitive information has contributed to the malaise.
ASIC itself welcomed the inquiry but offered no particular stance and said it was working with the Treasury on various implementation and transitional issues.
However, its counterpart, the Australian Competition and Consumer Commission chairman Rod Sims said in his submission that the government should be careful “not to make any changes that may make class actions less available”.
