Client Update: Multiplex class action settlement – a bird in the hand?
27 September 2010
In brief: Recently, the Federal Court handed down its reasons for approving the settlement of the Multiplex shareholder class action proceedings. Partner Ross Drinnan (view CV), Senior Associate Jenny Campbell and Lawyer Mark Hare report on the settlement and the court's reasons for its approval. Of interest are Justice Finkelstein's comments about the settlement of class actions generally, the factors his Honour considered in deciding whether to approve the proposed settlement and issues surrounding the question of causation in shareholder class actions.
- The proceedings
- Key features of the settlement
- The court's observations in relation to class action settlements
- Uncertainties relating to causation and loss calculation
- The court's reasons for approving the settlement
The central allegations made in the proceedings were that the Multiplex companies contravened the provisions of the continuous disclosure regime in the Corporations Act 2001 (Cth) and engaged in misleading and deceptive conduct. The Multiplex companies denied the allegations.
The settlement was reached (and approved by the court) in July 2010 – approximately three months before the case was scheduled for trial. The court gave its reason for that approval on 21 September 2010.1
The parties agreed to settle the proceedings (subject to court approval) on the basis that Multiplex would pay $110 million in settlement of the claims by the applicants and group members, without admission of liability. That amount included provision for approximately $11 million to be paid in respect of the applicants' legal costs, leaving just under $100 million to be distributed between the applicants and 109 represented class members. It has been reported that approximately $35 million of that amount will be paid to the litigation funder.
According to the applicants' solicitors, the settlement will result in class members recovering in the order of 62 cents in the dollar of their estimate of the reasonable value of the claim.
The applicants' solicitors have also said that the settlement achieves compensation for group members 20 times greater than what those group members would have obtained had they accepted the settlement offer made through the enforceable undertaking Multiplex gave to the Australian Securities and Investments Commission in 2006.
By way of general comment, Justice Finkelstein said that class actions (perhaps more than other cases) lend themselves to compromise because of the uncertainty of their results, difficulties of proof, complexities in the assessment of damages and the expense of long trials. His Honour noted that there remains, however, a need for courts to ensure that, by a settlement, the interests of class members are 'adequately looked after'. His Honour reinforced that, to enable the court to consider the reasonableness of a proposed settlement, the solicitors for both sides should bear responsibility for ensuring that the court has all the information that objectively describes the merits of the case, the obstacles to recovery and the benefits of the proposed settlement.
To assist the court in evaluating the proposed settlement, the applicants' solicitors and counsel each filed a confidential memorandum in support of the settlement. His Honour noted that the solicitors expressed 'some confidence that the action will succeed', but also 'readily acknowledge that proving loss will be difficult'. That difficulty was said to relate to the question of causation.
The question is whether in order to prove causation it is necessary for class members to prove that they relied upon the statements published by Multiplex or whether the 'market-based' causation theory is available to applicants under Australian law. His Honour did not, of course, express a view on how that issue would have been decided had the proceedings progressed to trial. The limited remarks made, however, seem to indicate a tentative view that the shareholder reliance approach may be preferred over the market-based approach. In any event, his Honour observed that the relative novelty and importance of the issue suggests that it would likely have gone to appeal, perhaps to the High Court.
His Honour also noted (without comment) that a further reason given in support of the settlement in counsel's opinion was the uncertainty as to the approach the court might take to expert evidence of economists called to assess the 'true value' of the securities.
The question for Justice Finkelstein was whether the proposed settlement was 'fair and reasonable'. In concluding it was, his Honour took into account the following factors:
- that the settlement was agreed in arm's length negotiations and at a stage of the proceedings where the applicants' solicitors and counsel had sufficient information to assess the merits of the case;
- the settlement was recommended by the applicants' solicitors and counsel;
- the fact that class members would recover in the order of 62 cents in the dollar, which, his Honour noted, was a 'significant recovery';
- that no class member opposed the settlement (particularly given that a large number of the class members were 'experienced' institutional investors with in-house legal departments and were therefore more able than most to assess the benefits of the settlement); and
- the vagaries of litigation, the risks of failure, the expense of protracted litigation and the likely appeals that would follow, which meant that the parties were well served by a 'bird in the hand' approach.
Justice Finkelstein's reasons provide useful guidance to parties engaged in representative proceedings about the factors courts will consider when deciding whether to approve a proposed class action settlement.
- Ross DrinnanPartner, Practice Leader, Disputes & Investigations,
Ph: +61 2 9230 4931
- Peter O'DonahooPartner,
Ph: +61 3 9613 8742
- Kim ReidPartner, Sector Leader, Banks & Financial Institutions,
Ph: +61 2 9230 4037
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