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  1. Broader and more creative claims and developing insurance response

    Shareholder class actions continue to be brought and settled: the RiverCity and Billabong cases are recent examples. Recent data suggests that, while there has not been an “opening of the [class action] floodgates” in recent years, the success of litigation funders has caused a steady increase in these claims.i Further, the recent HIH decisionii supports the view that shareholders don’t need to prove that they even read the misleading information. We’ll see if that view is taken up in the higher courts. For now it is likely to encourage securities claimants and may lead to higher settlements.

    Another trend we are seeing is that litigation funders, liquidators, and other claimants are pursuing more creative approaches to maximise recovery, particularly from insured defendants. This, and the proportionate liability regime, is encouraging claimants to adopt a “shotgun” like approach, making various claims against multiple parties. In February, the High Court heard a case where liquidators sought to join a D&O insurer to the liquidators’ insolvent trading case against three former directors. iii The insurer had denied the directors’ claim for coverage. The High Court allowed the liquidators to join the insurer, and to seek a declaration that the directors’ claim was covered. (As a side note, insolvent trading is often one of the first claims against directors that liquidators look at, and during the year the Federal Treasury sought comments on legal reforms that would provide some protections to directors.iv Another possible development to monitor carefully).

    In response to these trends and tactics, there is now a growing tendency to seek to quarantine the various insurance protections afforded to directors and their companies. Companies are adopting separate coverage for shareholder class actions, so that these claims do not erode the directors’ coverage. Directors and officers are also being split into different groups and afforded their own quarantined excess cover to ensure that they have coverage if other individuals/groups in the company are sued. As the diagram below illustrates, this developing and structured approach has several advantages. However it won’t suit all companies and there are drawbacks: cover that is set aside for one sort of claim may not be accessible where there is a large claim of a different sort.


  2. Corporate and personal accountability

    The current climate of increased activism is testing corporations law here and abroad:

    1. As we have reported previously, the US Department of Justice’s (DOJ) “Yates memo” encouraged prosecutors to hold individuals responsible for corporate wrongdoing. In May, Ms Yates reported on the impact of her memo. Ms Yates stated that since the publishing of the memo, DOJ prosecutors have focused more on individuals, and companies have been more willing to “out” those individuals by providing folios of documents to regulators. On another note, the strength of US and UK anti-corruption legislation continues to have an impact on businesses with overseas operations, especially in developing countries, where some policies and procedures have been reexamined for compliance with these obligations.
    2. In Australia, ASIC’s well-documented BBSW claims have thus far been leveled against the companies involved, rather than the particular employees engaging in the conduct. Mr Medcraft has also made comments about the importance of corporate culture. There is a risk, as in the USA, that ASIC will seek to regulate culture by imposing strict obligations from the top down. This approach presents risks for company directors and senior executives.
    3. In the UK, directors exercising their duty to shareholders must have regard to the impact of the company’s operations on the community and the environment: Companies Act, s 172. This makes governance particularly difficult for directors – for example, how does a coal mining company director assess the competing interests of her or his shareholders and the interests of other stakeholders? This is not currently the law in Australia, where directors must act in the best interest of the corporation (Corporations Act, s 181) and there is no express acknowledgement of the interests of non-shareholder stakeholders. However, some preeminent Australian lawyers (former High Court Justice Dyson Heydon QC and prominent barrister Neil Young QC) have argued that directors owe a broader duty. As always, changes in attitude amongst the public will drive legislative reform, if not judicial attitude.
    4. A recent example is a case decided by the Full Court of the Federal Court in July.v An activist group which represented over 100 shareholders in the Commonwealth Bank used the “100 member power” to propose three resolutions for the Company’s AGM. The first two were framed as expressions of opinion - that the Bank’s shareholders’ opinion was that its directors should provide a report to shareholders on environmental issues. The third resolution proposed an amendment to CBA’s constitution, which would require the bank to report its greenhouse gas emissions each year. The Bank refused to include the first two resolutions. This was upheld by the Court, on the ground that the shareholders had no specific power in the circumstances to propose advisory resolutions. The third resolution was included, although the Board publicised its view that it did not consider the proposal to be in the best interests of the Company. The activist group challenged the Board’s comment, contending that it was beyond the Board’s powers. The Court rejected this argument.
  3. Creative dispute resolution solutions

    The last major trend worth mentioning, and a welcome one, is the greater readiness of corporate litigants, on both sides of the bar table, to be receptive to innovative and tailored solutions for dispute resolution. Mediation and negotiated settlements prior to trial continue to be common. In addition, there appears to be a greater willingness for business to entertain private justice, whether that be a determination or non-binding evaluation of the entire dispute, or that portion of the dispute which is preventing the parties from negotiating a commercial agreement. A good example is arbitration, with corporations in particular seeking to arbitrate disputes in respect of cross-border projects and transactions.

25 August 2016

i See Professor Morabito, An Empirical Study of Australia's Class Action Regimes: Fourth Report, "Facts and Figures on Twenty-Four Years of Class Actions In Australia". The Report discloses a gradual increase in class actions over time, taking account of the various Australian jurisdictions where class actions are now available. In terms of the success of commercial litigation funders, the report noted that funded Federal class actions achieve settlements over 92% of the time, compared with 42.7% for their unfunded counterparts.

ii In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482.

iii CGU Insurance Ltd v Blakeley & Ors [2016] HCA 2.

iv Federal Treasury, Improving bankruptcy and insolvency laws (Proposal Paper), April 2016.

v Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016] FCAFC 80.

vi In BFSL 2007 Ltd (in liquidation) v Steigrad [2013] NZSC 156, New Zealand’s highest court determined that, where a claim exceeds the available insurance, a statutory charge may be asserted to prevent the payment of defence costs in defending the claim. Similar statutory provisions exist in Australia, and there is some risk that a similar position could be determined by an Australian court. In answer to this, some corporations have sought to implement separate defence costs insurance policies that should not be impacted by an asserted statutory charge.