Disgruntled Australian shareholders are expected to take more action, report Glenda Korporaal and Florence Chong 24 sep 05 last week’s landmark Sons of Gwalia decision has taken Australia a step closer to a US-style regime of shareholder class actions.
The decision - in favour of a shareholder in goldminer Sons of Gwalia, which went into administration in August last year - combined with the rise of litigation financiers such as IMF Australia, is expected to open the way for more action by angry shareholders.
In the Sons of Gwalia case the Federal Court found that a shareholder who had bought into the company in the final weeks before it collapsed could be ranked on the same level as a creditor. It was a test case funded by IMF Australia, a listed company chaired by former Bankers Trust chief executive Rob Ferguson, which has raised about $28 million in the past four years to be used to finance lawsuits.
IMF is also financing a range of other shareholder actions, including a $190 million claim against poker machine manufacturer Aristocrat Leisure, a $50 million claim against collapsed car parts manufacturer ION, an action for $20 million against retirement village operator Village Life and a $5 million case against Concept Sports.
Lawyer John Stumbles of Mallesons Stephen Jaques says the Sons of Gwalia decision confirmed the rights of shareholders that were envisaged under the Trade Practices Act of 1974, and subsequent laws in favour of continuous disclosure.
“The decision confirms that the Trade Practices Act and the continuous disclosure regime have given shareholders an extra leg up,” he says. “It confirms that shareholders have been given extra rights and those rights have elevated their status from shareholder to creditor in the administration of a company.”
Lawyers say that while the case is not likely to encourage reckless investing in risky companies by shareholders, it will mean more aggressive action could be taken by shareholders in the case of company collapses. Stumbles says the implications of the Sons of Gwalia case - putting shareholders who can prove they have been a victim of misleading conduct by directors on the same rank as creditors - need to be publicly debated.
IMF chief executive John Walker, an accountant and lawyer who founded the company in 1998, doubts if the case will “open the flood gates” for aggrieved shareholders. Although IMF is the largest litigation funder in Australia, Walker estimates that there are another three or four other companies in the business which have another $25 million in resources to fund cases.
Around Australia, several thousand aggrieved shareholders have lined up for claims totalling around $330 million, in class actions against listed companies.
Most base their claims on the issue of whether the companies fulfilled their obligations to disclose price-sensitive information to the market. Under what is known as the continuous disclosure provisions of the Corporations Act 2001, all listed companies are required to disclose information that could affect share prices to the Australian Stock Exchange.
The single largest claim is against Aristocrat Leisure for $190 million on behalf of 638 shareholders represented by law firm Maurice Blackman Cashman. About 22,000 GIO shareholders won damages of $97 million on breaches of disclosure and misleading conduct during a takeover by AMP in 1998-99. Slater & Gordon is acting on behalf of 1500 ION shareholders, seeking damages of $50 million. Slater & Gordon partner Lisa Nichols says the action against ION is based on breaches of the continuous disclosure obligations by the company.
Slater & Gordon partner Lisa Nichols says the action against ION is based on breaches of the continuous disclosure obligations by the company. Both Slater & Gordon and Maurice Blackman Cashman are investigating whether there are grounds to take on class actions against contractor Multiplex and Telstra under the continuous disclosure rules.
The Australian Securities and Investments Commission (ASIC) has begun investigations into both companies over their adherence to continuous disclosure rules. Early this month Telstra released an earnings guidance which warned that earnings before interest and tax were expected to decrease by 7 to 10 per cent for the current year.
The market responded by wiping out $1billion in the value of the stock on the following day. IMF Australia has more than 30 cases — half of which are on behalf of shareholders against companies — in claims totalling almost $1 billion.