As regular readers know, over the last few months, I have been closely following the rise of coronavirus outbreak-related securities class action lawsuits. To date, though the pandemic is a global health and economic phenomenon, the pandemic-related securities litigation activity has been limited to the United States. In the following guest post, Jason Symons, Persia Navidi, Claudia George, and Luke Roper of the HWL Ebsworth law firm take a look at the possibilities for COVID-19-related securities class action lawsuits in Australia. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Australia is notorious for being a fertile ground for class actions, with the number of actions and litigation funders steadily increasing over the past decade. In response to the COVID-19 pandemic, and with mounting concerns over the class action environment, the Australian Federal Government has acted to narrow directors’ obligations during the pandemic and turned the spotlight on litigation funders and the class action system generally, in an attempt to provide some reprieve.
However, the Government’s actions may still not shield Australian companies from ‘opportunistic’ COVID-19 related class actions. Moreover, directors and officers of Australian listed companies, and their D&O insurers, should be alert to the ongoing risk of class actions arising from COVID-19 related circumstances. They would do well especially to monitor the impact of the pandemic on the class action landscape in the United States given history has shown that Australia has a tendency to follow securities class action trends in the US.
Against this backdrop, and given the number of COVID-19 related securities class actions continue to grow in the United States, we explore in this article the potential for COVID-19 related securities class actions in Australia.
US COVID-19 related securities class actions
Regular readers of The D&O Diary will have seen that there have been a number of securities class actions relating to COVID-19 filed in the United States since March. See Kevin’s latest update on US COVID-19 actions here.
Interestingly, they have ranged across a variety of sectors and industries such as cruise ship operators, pharmaceutical companies, healthcare software services, animal supplies and video conferencing technology. The circumstances leading to the class actions have also been varied, with allegations relating to misleading statements about the impact of the virus on customers, COVID-19 cases on board cruise ships, claims to finding a coronavirus ‘cure’, the order of rapid testing kits, technology security weaknesses and, more generally, just the impact of the pandemic on a company’s financial fortunes (especially in the context of capital raisings).
Australia’s class action market in the pandemic
Class actions and litigation funders in the spotlight
It has been reported there has been a 325% increase in class actions in Australia in the Federal Court alone over the last decade[i], with many stakeholders referring to an apparent ‘explosion’ of class actions in recent years[ii]. The Australian class action market continues to be attractive to funders[iii], with at least 25 litigation funders now calling Australia home.[iv]
There has always been particular concern over the prevalence of shareholder class actions given Australia’s strict continuous disclosure laws requiring listed entities to immediately disclose to the market matters likely to impact an entity’s share price.
The Aussie appetite for class actions over many years would suggest the time could be ripe for COVID-19 related securities class actions. However, recent events may potentially curb funders’ appetite to take on such actions.
While inquiries into the Australian class actions market and the potential regulation of litigation funders are not new[v], the Federal Government in the past two months has sharply turned its attention on litigation funders by taking two significant steps:
- Litigation funding inquiry: On 13 May 2020, the Commonwealth Attorney-General announced an inquiry into litigation funding and the regulation of the class action industry. The Government is due to report on the inquiry by 7 December 2020. The Attorney-General hopes the inquiry will “improve justice” by prompting reforms that will ensure plaintiffs get their ‘fair share’ of settlements.[vi]
- Regulation of litigation funders: On 22 May 2020, the Government announced that from 22 August 2020 litigation funders will no longer be exempted under the Corporations Act 2001 (Cth) from requiring an Australian Financial Services Licence (AFSL). Litigation funders will be categorised as financial service providers and therefore subject to the applicable regulatory obligations to act honestly, efficiently and fairly, and maintain appropriate levels of competence and resources to provide the financial services covered by their AFSL. The Government says the “removal of these exemptions will also require greater transparency around the operations of litigation funders in Australia”.[vii]
In light of the Government taking these steps, some commentators go so far as to say the Government has effectively ‘declared war’ on litigation funders in Australia.[viii] While these initiatives have been on the Government’s agenda, there is no doubt they were fast-tracked by the recession brought about by the COVID-19 pandemic.
Legislative responses to the pandemic – the ‘shield’ from opportunistic class actions
The pandemic has also accelerated the long-running debate as to whether current Australian law makes it too easy to bring securities class actions against companies and their boards, and whether it in fact may not protect ‘ordinary’ Australian shareholders notwithstanding the ‘access to justice’ rhetoric used to justify such actions.
The Federal Government has responded to the possibility of what it calls ‘opportunistic class actions’[ix] being brought against companies and their directors during the global pandemic by enacting legislation to relax directors’ obligations until November this year.
The Government has used its temporary power to exempt specified classes of persons from the operation of specified provisions of the Corporations Act[x], not only to relax certain requirements for company meetings and execution of documents[xi], but, importantly for this discussion, to ease the burden of continuous disclosure laws.
On 25 May 2020, with its Corporations (Coronavirus Economic Response) Determination (No. 2) 2020, the Government temporarily (from 26 May 2020 to 26 November 2020[xii]) eased the continuous disclosure rules by modifying the threshold test for when disclosure is required. Instead of disclosure being required when “a reasonable person would expect” information to materially affect the price or value of securities, such disclosure is now only necessary if the entity “knows or is reckless or negligent” with respect to whether the information is so material.[xiii]
The Explanatory Memorandum indicated the changes are designed “to facilitate the continuation of business in circumstances relating to COVID-19”. Critically, Federal Treasurer Frydenberg believes the changes to the continuous disclosure provisions will “shield boards from opportunistic class actions” by making “it harder to bring such actions against companies and officers’ during the Coronavirus crisis and while allowing the market to continue to stay informed and function effectively”.[xiv] The Government says this will allow companies to “hold back from making forecasts of future earnings or other forward-looking estimates and limiting the amount of information available to investors during this period”.
ASX disclosure guidance during pandemic
The Government’s approach is consistent with previous guidance released by the Australian Stock Exchange (ASX). Prior to the above temporary change to the continuous disclosure obligations, on 31 March 2020, the ASX issued a Compliance Update[xv] addressing concerns regarding disclosure during the pandemic. The ASX acknowledged the challenges faced by companies as a result of COVID-19 and reminded the market that a listed entity’s continuous disclosure obligations do not extend to “predicting the unpredictable”, announcing information that is “insufficiently definite” or to “make forward-looking statements to the market unless they have a clear and reasonable basis for doing so”.[xvi]
The ASX offered further ‘practical guidance’ that it is “acceptable and understandable” that a company may withdraw earnings guidance issued prior to the outbreak of COVID-19 and “many companies” had taken up that opportunity at the time of the Compliance Update. The ASX encouraged all entities to review their published guidance in light of COVID-19.
However, the ASX also reminded entities they still need to announce to the market any material operational decisions (e.g. letting a material number of employees go or closing facilities) or if they get in financial difficulty (e.g. if a major lender has declared a default event) in the usual way under the listing rules.
Discussion – is there potential for COVID-19 related securities class actions in Australia?
Whilst it is probably less likely securities class actions will be commenced in Australia during the temporary relief periods, we see significant potential for COVID-19 related securities class actions in Australia in the next 12-18 months. This potential arises in two ways:
- firstly, the legislative relief is not a perfect ‘shield’ for boards; and
- secondly, the sectors already facing class actions in the US are getting a lot of attention in Australia even if not the subject of a class action yet.
Does the ‘shield’ from opportunistic class actions even work?
Significantly, the so-called ‘shield’ from opportunistic class actions against companies and directors does nothing to prevent plaintiffs from bringing actions based on alleged misleading and deceptive conduct or negligence during the pandemic.
- Misleading and deceptive conduct: As outlined above, the temporary legislation protects disclosing entities (and persons involved with disclosures) from disclosure-related claims based on the ‘old test’, but it does not prevent plaintiffs bringing actions for misleading and deceptive conduct under s 1041H of the Corporations Act. Given that misleading and deceptive conduct allegations are fairly standard in securities class actions (like in the Myer class action), the effectiveness of the legislation as a complete shield is therefore questionable.
- Negligence: Similarly, as indicated above, the temporary ‘new test’ for disclosure replaces an objective reasonable person test with a test requiring knowledge, recklessness or negligence. Applying the lowest evidentiary bar (that would apply to a negligence case, as opposed to a case based on knowledge or recklessness), in order to get around the so-called temporary ‘shield’, plaintiffs may just refocus their attention on alleged negligence. Further, it is questionable how much of a substantive difference exists between the two tests given the test for negligence incorporates an objective reasonable person test. Requiring negligence therefore may not necessarily present much more of a hurdle for plaintiffs.
Sectors getting attention in Australia
Having observed the developments in securities class actions in the wake of the COVID-19 pandemic in the US, and noting that historically Australia has followed in the footsteps of the US when it comes to class action trends, the sectors receiving attention in Australia that have seen class actions in the US should pay particular attention to developments.
- Travel operators: The way travel operators, particularly cruise ship operators, responded to the initial outbreak is currently under the microscope in Australia.[xvii] Australian securities class actions like those commenced against US based cruise liners following these investigations are a distinct possibility if any failure to protect passengers from the virus can be linked to a failure to inform shareholders.
- Healthcare: Similarly, the health care industry’s response to the pandemic, particularly the response by aged care providers given the large number of resident deaths, is being closely reviewed.[xviii] If a listed aged care provider’s failure to respond properly to the pandemic is also linked to a lack of disclosure to the market, that in itself could lead to securities action risks. Moreover, the ASX in its Compliance Update on 31 March 2020 indicated that a “significant number” of potentially misleading announcements had been made by entities regarding a new treatment or test for COVID-19 and manufacturing other medical supplies such as face masks. This is precisely what has seen securities class actions commenced in the US. While the ASX is closely monitoring all such announcements (including revising or even rejecting some announcements), the evidence of such announcements being made in Australia suggests similar class actions to the US are quite possible.
- Technology: At its core, the US class action against Zoom relates to its alleged cyber security weaknesses. It is easy to imagine that an Australian company could face such an action coming out of the pandemic, particularly given the potential for cyber-related securities class actions in Australia.[xix] A number of Australian regulators and government agencies[xx] have identified a heightened cyber security risk and greater frequency of cyber security incidents during the pandemic. That heightened risk is not, however, an excuse for existing poor security; if anything, it’s the opposite. Notably, no temporary relief has been granted by the Government with respect to the mandatory data breach notification obligations of companies in Australia during the pandemic.
- Capital raisings: Emergency capital raising has been required by many Australian companies in order to survive the economic impact of the pandemic. The ASX has helped struggling companies by introducing temporary measures to help facilitate such emergency capital raisings including allowing back-to-back trading halts.[xxi] However, plaintiff law firms have warned that this could lead to small retail investors being exploited when capital is raised under possible false pretences and overly optimistic forecasts.[xxii] The ASX is carefully monitoring whether capital raisings taking advantage of its temporary measures have ulterior motives and are not COVID-19 related nor particularly urgent. Time will tell whether failed capital raisings fall into the latter category and get the attention of plaintiff firms and funders.
Opinion is divided as to the likely impact of the Federal Government’s new initiatives. On the one hand, plaintiff law firms, not surprisingly, try to downplay any sense of impending doom brought about by COVID-19 related securities class actions eventuating.[xxiii] Insurance brokers, however, see the potential for COVID-19 related securities class actions in Australia and an exacerbation over the next 12-18 months of the already hardening D&O insurance market (where upwards of 100% increases in premium costs have been experienced).[xxiv]
Either way, Australian listed companies, their boards, and their insurers, need to be vigilant of the current securities class action environment in the United States. The Australian Federal Government may have eased disclosure obligations temporarily, but this will not completely ‘shield’ them from COVID-19 related securities class actions, if plaintiff firms and funders look back at disclosures made (or not made) and decide to test the cracks in the shield.
The pandemic is far from over, with the state of Victoria experiencing a ‘second wave’ at the time of this post. Unless the Federal Government extends its temporary measures which expire in November or introduces other regulatory reform in relation to class actions, the risk of COVID-19 related securities class actions relating to disclosures based on the ‘old test’ will kick back in and Australia will be back to the pre-COVID-19 shareholder class action environment with the additional risks the pandemic and economic crisis have brought about.
[iii] Omni Bridgeway, formerly IMF Bentham, recently merged with its namesake and Dutch counterpart. In March, Omni Bridgeway’s chief executive Andrew Saker spoke about the attractiveness of the Australian market for reasons including “the growth and sophistication of the Australian economy and financial markets“, and the “courts’ endorsement of common fund orders” (here).
[v] Relevant recent inquiries have included: Productivity Commission, ‘Access to Justice’ Inquiry, 2014 (here); Victorian Law Reform Commission, ‘Litigation Funding and Group Proceedings Inquiry’, March 2018 (here); Australian Law Reform Commission, ‘Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders’, December 2018 (here).
[vi] Media Release, “Improving justice outcomes for class action members”, Attorney-General for Australia and Minister for Industrial Relations, 13 May 2020 (here); Jerome Doraisamy, “A-G to proceed with class actions parliamentary inquiry”, LawyersWeekly, 12 May 2020 (here).
[viii] Op. cit., 2.
[x] On 25 March 2020, the Federal Government introduced the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), which brought an ‘omnibus’ of amendments to legislation to “respond to the economic impacts of the coronavirus” (here). Relevantly, the legislation inserted s 1362A of the Corporations Act, which gives the Government temporary power (from 24 April 2020 to 24 October 2020[x]) to “exempt specified classes of persons from the operation of specified provisions of the Act” for a maximum period of 6 months.
[xii] Determination (No.2) is automatically repealed on 26 November 2020 (s 10).
[xiii] Determination (No.2) does this by modifying ss 674(2)(c), 675(2)(b) and 677 of the Corporations Act to reflect the new test of “the entity knows or is reckless or negligent with respect to whether that information would, if it were generally available, have a material effect on the price or value of ED securities of the entity”.
[xiv] Op.cit., 9.
[xvi] This may be contrasted with the approach taken by the US Securities and Exchange Commission, which emphasised the importance of disclosure during the pandemic and urged “companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning” (here). This approach is made possible in the US, as opposed to Australia, as a result of the safe-harbours available for such disclosure statements.
[xviii] The Royal Commission into Aged Care Quality and Safety currently ongoing in Australia has called for submissions from the general public and organisations relating to the impact of COVID-19 on the aged care sector (here). The Royal Commission into Violence, Abuse, Neglect and Exploitation of People with Disability currently ongoing will host a public hearing in the week commencing 17 August 2020 to examine the experiences of people with disability during the ongoing COVID-19 pandemic (here).
[xix] D&O Diary, “Guest Post: Cyber and Privacy Risks: The Next Australian Securities Litigation Frontier?”, Andrew Miers, Jason Symons and Shonagh Rasmussen, HWL Ebsworth Lawyers, 5 September 2018 (here).
[xx] For example, ASIC’s Market Integrity Update, “Heightened cyber security vigilance advised due to COVID-19”, April 2020.