Ideas@TheCentre
Class actions pose a risk we all have to bear
Except for a droll few, most people wouldn’t argue the virtues and vices of class actions at Friday night drinks. But, the ‘rising tide of shareholder class actions’ the AFR reported this week should embolden at least one brave soul to broach the topic.
There are two issues that are conflating to increase the risks of class actions:
First, since the controversial High Court decision in 2007 in the Sons of Gwalia, shareholders have been able to claim against companies as unsecured creditors. Rather than suing as shareholders and being one of the last to get what is left of an ailing bunch of liquidated assets, they can sue for damages as debtors of the company and be one of the first. Shareholders classify as debtors if they can successfully argue that the company did not fully inform them of its financial position or worth at the time they bought shares.
Second, class actions in federal jurisdiction – like liquidation cases under the federal Corporations Act – assume that anyone with similar characteristics will be party to the case, unless they explicitly ‘opt out’ of the litigation. Once the class is defined by the court, anyone who fits the category is entitled to a potential damages award.
In combination, these laws spell risk for companies. They mean shareholders can start a class action debt claim that will automatically apply to every shareholder who acted under similar circumstances. The Financial Review reports that insurance company AIG Australia has rewritten its insurance policies in response.
But this isn’t just a problem for companies – the downside of risk-averse businesses and increasing insurance costs is lower dividends or higher prices, or both. Shareholders who are being protected by generous class actions laws are also footing a growing bill.
In the end, laws that open the way for mega lawsuits can damage those they are designed to serve. The government should consider relieving some of this burden by making federal class actions ‘opt in’ rather than ‘opt out’ or reprioritising debt claims in cases similar to Sons of Gwalia.
Elise Parham is a Policy Analyst at the Centre.
