In a recent decision, the Victorian Supreme Court has examined the limits on entrepreneurship by securities class action lawyers. It has stayed a class action in which the plaintiff's lawyer was also its shareholder and director. The plaintiff had a 'business model' of purchasing small shareholdings in listed companies with the objective of subsequently commencing class actions against some of them for breaches of continuous disclosure obligations. Partners Belinda Thompson and Matthew McLennan and Associate James Campbell report.*
Melbourne City Investments Pty Ltd (MCI) is an investment company managed and controlled by a Melbourne-based solicitor (the Solicitor). In late 2013, MCI commenced three separate class actions (against Treasury Wine Estates Limited, Leighton Holdings Limited and WorleyParsons Limited) alleging breaches of continuous disclosure obligations. The Solicitor acted for MCI in each proceeding.
Treasury Wine Estates and Leighton Holdings (the Defendants) each applied for orders that:
- the proceeding against them be stayed as an abuse of process;
- the Solicitor be restrained from acting in the proceeding while MCI was the representative plaintiff; or
- the proceeding not continue as a class action while MCI was the representative plaintiff and the Solicitor acted for MCI in the proceedings.
The facts underpinning the applications were not in dispute: MCI was incorporated on 1 November 2012 and on that day bought just under $700 of shares in each of the Defendants, WorleyParsons Limited and 17 other publicly listed companies. The Solicitor was the sole shareholder and sole director of MCI at all times and acted for MCI in each proceeding. Each proceeding alleged breaches of continuous disclosure obligations on behalf of an open class of shareholders.
The Defendants' applications were heard together by Justice Ferguson, who delivered judgment on 23 July 2014.
From the facts above, Justice Ferguson drew inferences pressed by the Defendants that:
- MCI was created by the Solicitor as a vehicle for bringing class actions;
- MCI's predominant purpose in initiating the class actions was to earn the Solicitor legal fees;1 and
- the Solicitor had a 'business model' of purchasing small shareholdings in listed companies with the objective of subsequently commencing class actions against some of them for breaches of continuous disclosure obligations.2
Abuse of process
Justice Ferguson considered whether the proceedings should be stayed as an abuse of process on the basis that MCI initiated the proceedings for a predominant purpose that was improper (earning legal fees for the Solicitor).
Having regard to the public interest in access to justice through class actions, as articulated in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd 3 and the high threshold required to stay proceedings, Justice Ferguson held that it would broaden the concept of abuse of process beyond its recognised boundaries to categorise the proceedings as an abuse. The fact that MCI's 'predominant' or 'ultimate purpose' was to earn the Solicitor legal fees did not render the proceedings an abuse of process, since MCI also had an 'immediate purpose' of obtaining compensation orders and that purpose was within the scope of the process. Where the Defendants' concern was the connection between the Solicitor and MCI in the context of a class action, that concern should be handled by procedures for class actions or by the court's power to control the conduct of its solicitors.
Restraining the Solicitor from acting
Justice Ferguson considered whether the Solicitor should be restrained from acting for MCI while MCI was the representative plaintiff. She found that the 'hypothetical fair-minded independent observer', who is the adjudicator of the matter, would draw the inferences above and would also be aware that the value of the Solicitor's shareholding in MCI would be reduced by the amount of an adverse costs order. This was a personal interest of the Solicitor's in the proceeding beyond that of a normal class action lawyer.
Accordingly, the observer would consider there to be a real risk that the Solicitor could not give detached, independent advice taking into account the interests of MCI and the interests of group members. The observer would expect that MCI be represented by a person without the vested interests of the Solicitor.
Justice Ferguson concluded that the Solicitor should be prevented from acting while the proceedings remained a class action with MCI as the representative plaintiff.
Class action procedures
Justice Ferguson also examined the class action provisions of the Supreme Court Act 1986 (Vic). She was not satisfied that there was anything irregular about the proceedings themselves which would justify a blanket order that the proceedings cease to be class actions. However, she was satisfied that the proceedings should not continue as class actions while MCI was the representative plaintiff and the Solicitor acted for MCI.
She summarised the issue as being:4
Whether it is good or bad, the reality is that group proceedings are lawyer driven. They will not, for that reason, be brought to a halt. Nevertheless, it does seem to me that the risks associated with entrepreneurial lawyers acting in group proceedings….are exacerbated here where the plaintiff and the solicitor are not independent of one another. I have a concern that, whilst MCI is the plaintiff and Mr Elliott its solicitor, despite their best intentions, there is a risk (which cannot be dismissed as remote) that self-interest will dominate over the interests of group members. Ordinarily, lead plaintiffs have the benefit of independent advice about what they should or should not do taking into account the interests of group members. Ordinarily, the solicitor is not facing any possibility of adverse costs orders that will affect them if the plaintiff fails in expensive interlocutory disputes or does not succeed at trail. Mr Elliott is simply not in a position to give detached advice to MCI.
Accordingly, Justice Ferguson proposed orders that the proceedings not continue as a class action while MCI was the representative plaintiff and the Solicitor acted for MCI.
The decision is an important reminder of the confidence our judicial system places in lawyers acting objectively and impartially in the interests of lead plaintiffs and group members, as well as the important role of lawyers in seeking to ensure that the court's processes are not compromised by the entrepreneurial nature of class action litigation.
* Allens is acting for Leighton Holdings Limited in the proceeding.
- Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No. 3)  VSC 340 at  to  and .
- Ibid .
- Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386.
- Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No. 3)  VSC 340 at .