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Client Update: Competing class actions – the court takes control

24 May 2018

In brief: The Federal Court has made orders permanently staying two competing shareholder class actions against GetSwift Limited and allowing a third class action to proceed. The latest in a series of judgments where the courts have grappled with the problem of competing class actions, Justice Lee's decision suggests an increasingly 'hands on' approach to case management by the Federal Court, and a willingness to exercise those case management powers to prevent a multiplicity of actions. Partner Ross Drinnan (view CV) and Senior Associate Jerome Entwisle report.

How does it affect you?

  • Competing class actions are becoming increasingly common and the GetSwift decision provides some comfort for defendants that the court is willing to exercise its 'gate keeping' powers to prevent a multiplicity of proceedings.
  • The decision is also indicative of a trend we have been seeing in the Federal Court where case management judges take a more 'hands on' approach to case management of class actions.
  • The court's choice to prefer a funded class action without any group members yet signed up has further entrenched the new model of 'common fund' class actions that can be launched and prosecuted without the need for a 'book build' – potentially incentivising funders and plaintiff law firms to launch class actions at an earlier stage.

The problem

GetSwift is a technology company that was listed on the ASX on 2016. On 19 January 2018, the Australian Financial Review reported that it had allegedly failed to inform the market of price sensitive information concerning agreements with some of its customers and its financier. Shortly afterwards, GetSwift shares were placed into trading halt. When trading resumed on 19 February 2018, its share price dropped from $2.92 to $0.51.

A number of shareholder class actions were quickly promoted by plaintiff firms and litigation funders. Proceedings were eventually filed by Squire Patton Boggs (SPB) (funded by International Litigation Partners No 18 Pte Ltd (ILP)), Corrs Chambers Westgarth (Corrs) (funded by Vannin Capital Operations Limited (Vannin)) and Phi Finney McDonald (PFM) (funded by Therium Capital Management Limited (Therium)). Further potential class actions initially promoted by Gadens and MC Lawyers & Advisers have not materialised.

The basic features of each class action were as follows:

SPB / ILP Corrs / Vannin  PFM / Therium
  • 103 shareholders had signed funding agreements (representing 2,575,804 shares purchased).
  • A statement of claim had been filed.
  • The funding agreement provided for commission of 25-40% of gross proceeds, but willing to accept common fund order involving payment of the less of 25% of net proceeds or 22.5% of gross proceeds
  • 441 shareholders had registered their interest and, of that group, 208 had signed funding agreements (representing 1,545,374 shares purchased).
  • A statement of claim had been filed.
  • Funding agreement provided for commission of 10-30% of gross process, and willing to accept common fund with effectively the same terms.
  • PFM/Therium had not sought to enter into agreements with any shareholders aside from the representative applicant, and no written funding agreement was in place.
  • No statement of claim had been filed.
  • Therium would seek a common fund order that would entitle it to lesser of:
    • 2.2 to 2.8 times the expenses it had paid; or
    • 20% of net proceeds.
  • PFM suggested the appointment of costs referee to periodically review the reasonableness of its costs.

After concluding that the claims brought by each class action were roughly the same, and were brought on behalf of the same group of people, Justice Lee readily accepted that the multiplicity of proceedings gave rise to a problem that the court had to solve. His Honour was concerned that the multiple proceedings had the potential to waste the court's and defendant's resources, as well as whittling away the pool available for distribution to group members following any settlement or judgment.

What powers does the court have to solve the problem?

In circumstances where consolidation was not possible (due to lack of agreement between the parties) and 'wait and see' was not practicable (as it was likely to be conducive of wasted time and costs), Justice Lee focused on two possible solutions to the problem he had identified:

  • permanently staying two of the proceedings and allowing one proceeding to continue; or
  • 'de-classing' two of the proceedings, so that they only continue as individual proceedings, and allowing one proceeding to continue as a class action.

After reviewing the history of class actions in Australia and the US, Justice Lee determined that the class action provisions in Part IVA of the Federal Court of Australia Act 1976 (Cth), together with the court's equitable jurisdiction and implied powers to control its own processes (and prevent abuse of those process), gave the court ample power to make either of these orders.

Of particular interest, Justice Lee characterised the Part IVA provisions as including 'safeguard' or 'control' mechanisms to prevent the misuse of the class action procedure. His Honour's suggestion that the court should be more active in using its 'safeguard' or 'control' powers to regulate proceedings is encouraging, and aligns with the comments we have been making for some time, including in our recent submission to the Victorian Law Reform Commission, that the court should take a greater supervisory role in the early stages of class actions.

Justice Lee determined that, in this case, he would exercise his powers to stay permanently two of the proceedings. He did, however, acknowledge that this may not be the appropriate outcome in every case.

Which action should continue?

Justice Lee considered the basis on which he would decide which proceeding would continue. He described this process as a 'multifactoral' assessment that involved consideration of:

  • the experience of the legal practitioners, the resources available to the solicitors and their funders, the state of preparation of each proceeding;
  • the respective merits of the cases pleaded and the representative applicant chosen;
  • the relative number of group members who had signed funding agreements;
  • the estimated costs of running the proceeding any proposals to reduce and control costs; and
  • public policy issues.

Despite emphasising that all of these factors needed to be considered, and the court was not simply running a reverse auction as to who could offer the lowest funding commission, Justice Lee ultimately determined that most of the above factors were neutral as between the three class actions, and he therefore focused on the funding terms and costs proposals.

In the end, his Honour preferred the proposal put forward by PFM/Therrium as, by linking the funder's return to amounts expended, it avoided windfall gains and established a 'real and demonstrable proportionately between risk and reward'. Justice Lee also considered the use of a costs referee (offered by PFM) to be a good idea that would allow better control of the costs of proceedings as they progressed, rather than at the end of proceedings on a settlement application.

Implications for future class actions

Aside for providing a template to resolve competing class actions in the future, Justice Lee's choice has important implications for how lawyers and funders can be expected to pursue class actions.

First, the decision entrenches the move away from 'closed class' actions based on litigation funders and lawyers signing up as many group members as possible to their case. Not only has Justice Lee suggested this is a waste of time and money where a common fund order is sought, in circumstances where the Federal Court has indicated a willingness to permanently stay competing actions, there is a risk that these costs will be thrown away if the lawyer/funder is not the successful party.

Second, the Federal Court is going to take a more active role in supervising litigation funding. Justice Lee held that the terms of the Therrium funding arrangement, which were not documented, would be set out in the orders made by the court when approving the common fund.

Third, there may be still be a 'race to the court'. Although Justice Lee dismissed the order of filing as a relevant consideration, his Honour did warn that delay in bringing a claim could be a highly relevant, and even decisive, factor in determining whether a particular proceeding should proceed. Considering that each of the claims in this case was brought within a matter of months of the relevant ASX announcement, the extent of delay that could result in a law firm/funder being shut out may not be great and firms/funders (unburdened by the need to 'book build') will continue to rush to get their name on the record promptly.

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