Actions Are Spreading

Companies that need to focus on merely staying afloat are being hit by a rapidly increasing number of class actions. By James Mathias.

Diagnosed COVID-19 cases continued to increase this week, but these are not the only cases to rise. Globally, the number of COVID-19 class action cases has jumped significantly as funders and lawyers have sought to capitalise on the crisis.

Dozens of class actions have been lodged in the US in recent days by firms looking for opportunities to allege negligence or illegal behaviour. One case in the US accuses Amazon of price gouging when it allegedly sold 36 rolls of toilet paper for US$99.

The new cases aren’t just confined to disgruntled shoppers, festival goers with no festival and gym junkies who find themselves with useless memberships. Now shareholders and employees are joining in. Australian Firm Corrs Chambers Westgarth this week warned “there should be little doubt that listed entities sit on top of the pile of potential class action targets.”

Continuous disclosure rules in Australia mean that any listed company experiencing a share price drop is at risk of facing a class action. An action brought against Boral two weeks ago for a 6 per cent drop in its share price on one day in December highlights the low threshold. The action is being brought by US business litigators Quinn Emanuel.

For Australian businesses already faced with the most challenging environment in a generation, an explosion of class actions against them could be the final nail in the coffin. Former Macquarie Bank chairman and current chair of the Citadel Group Kevin McCann agrees. “The last thing Australian industry needs right now is a surge in the number of unmeritorious class actions filed against them driven by litigation funders seeking their commission,” he says.

Yesterday the ASX finished 28 per cent lower than its all-time high just six weeks ago. Any significant drop represents an opportunity for action, as it could be interpreted as the result of the company’s failure to disclose a profit downgrade or issue a trading hold at the correct time.

COVID-19: Read the MRC’s coverage of the debate in Australia and around the world

Shareholder class actions have increased 1,237 per cent in the past 13 years. Claims by investors over the same period also increased dramatically by 355 per cent. Australian industry is bearing the full brunt of these actions, which are conservatively estimated to be worth at least $10 billion.

In order to prevent the explosion of cases in Australia, the Federal government has the opportunity to place, as it has done with Foreign Investment Review Board decisions, a moratorium on class actions for six months. This would enable listed companies to instead focus on keeping afloat.

Kevin McCann, who Smart Company once said was the eighth most powerful person in Australian boardrooms, goes one step further. “The litigation industry should be subject to proper regulatory oversight, especially from ASIC given the service they provide is a financial product.” He refers to the fact that since 2013, the litigation funding industry was exempted from any ASIC or regulatory oversight due to an enactment signed by the then Minister – Chris Bowen.

Since that exemption, class actions have increased from 17 per year to 54. The number of cases underwritten by litigation funders has increased from 33 per cent to more than 70. Put simply, the sector has flourished.

This increase needs to be nipped in the bud. While it would be unwise to rule out class actions altogether, businesses need to be given as much help as reasonably possible to stay solvent. This is not the time for opportunistic litigation.