Company directors are being urged to pay extra attention to continuous disclosure rules as not only the corporate regulator but disgruntled shareholders jump on the litigation bandwagon with class action law suits.
Company directors are being urged to pay extra attention to continuous disclosure rules as not only the corporate regulator but disgruntled shareholders jump on the litigation bandwagon with class action law suits.
The Australian Securities and Investments Commission last week announced it had commenced proceedings against Fortescue Metals Group Limited and its chairman Andrew Forrest for misleading and deceptive conduct and failure to comply with continuous disclosure obligations, and the possibility of a class action lawsuit by shareholders was immediately raised.
Shareholders have traditionally been among the last to be paid out by failed companies, but a recent Federal Court case brought by a shareholder in Sons of Gwalia has endorsed the right of shareholders who purchased shares after alleged misleading and deceptive conduct to lodge claims for compensation as creditors.
The case was appealed to the full bench of the Federal Court by Sons of Gwalia administrators Ferrier Hodgson, who said allowing share-holders to pursue claims could make the winding up of failed companies much slower and more costly.
The appeal was dismissed late last month, and although Ferrier Hodgson are expected to appeal to the High Court, shareholders currently have a court endorsement to pursue claims for misleading and deceptive conduct.
This, coupled with recent moves by the courts to endorse litigation funding, may lead to a rapid escalation in class action lawsuits, and company directors need to ensure they comply with continuous disclosure obligations in order to avoid liability for such claims.
Listed litigation funder IMF Australia Ltd is proceeding with a class action lawsuit on behalf of Sons of Gwalia shareholders. It has listed the claim value at $25 million.
Freehills partner Justin Mannolini said he believed class actions arising from breaches of continuous disclosure rules would become more prevalent.
“There are a mix of practical and legal changes that will cause this: shareholders are more diverse, ASIC and other regulators are encouraging class actions and the eroding of old rules around litigation funding is an effective means to get smaller shareholders involved,” Mr Mannolini said.
“Most boards action due diligence around things like fund raising, but they need to make sure to put in robust due diligence around things like continuous disclosure.
“This might slow the process down but liability for market conduct is going to have an impact on boards.”
He added that boards should no longer regard continuous disclosure as routine and needed to make sure their policies were robust and compiled with.
Stock exchange rules require listed companies to immediately disclose price sensitive information, with limited exceptions. Failure to do so can incur heavy penalties for the company, with ASIC seeking $3 a million penalty for Fortescue and a $600,000 penalty against Mr Forrest.
Class actions are not just an issue for listed companies, with IMF also being approached by 150 investors in collapsed developer Westpoint’s mezzanine finance schemes, and the company says it is undertaking an investigation with a view to pursuing legal proceedings against financial planners who advised investors to put their money in the Westpoint schemes.
IMF announced in February that it expected to fund litigation against 75-100 financial planners on behalf of about 2000 investors, seeking approximately $200 million.
In taking on actions, litigation funders like IMF cover legal fees, and in the case of a recovery by settlement or judgment, retain the entitlement to recover that cost and an additional amount of the balance.