In August the reforms to the continuous disclosure laws became permanent. The government, the insurance industry, corporations, lawyers and litigation funders are now watching the impact on the frequency of class actions and the affordability and availability of D&O liability insurance.
“So what this law now does is mean even if you sue the company, you’ll have to prove negligence,” said Craig Claughton (pictured), head of financial and professional services for Marsh, the global brokerage firm.
According to the Treasurer Josh Frydenberg the changes will discourage opportunistic class actions.
This follows years of advocacy work by Marsh. Its campaign to change the law was a result of the brokerage giant’s increasing concern about the number of class actions against their clients.
Three years ago, Claughton co-authored a submission to the Australia Law Reform Commission’s Inquiry into class actions and litigation funders. That submission used empirical data to support the law change.
“The data over the past seven years suggest that there is a direct link between the growing size and number of securities class action claims involving D&O insurance and the cost and availability of that insurance,” said the submission’s conclusion, citing premium increases of more than 350%.
The final report from that inquiry came up with numerous recommendations. Nothing happened.
“Not surprisingly, not one of those was taken up. That report probably sits in some treasury official’s bottom draw,” said Claughton.
He said not one politician was willing to take the political risk of pushing for a law change that would be seen to be favouring major corporations.
However, the situation soon changed.
“One of the reasons it became so topical for politicians is that plaintiffs, in this case the mum and dad investors, were lucky if they were getting 30 to 50 cents in the dollar,” he said.
Claughton said litigation funders and lawyers were soaking up the rest of that money.
Then COVID-19 came along and somewhat complicated the issue.
Claughton said the pandemic contributed to nervousness among insurers in the D&O space. However, at the same time, the share-price of many companies actually steadied or increased which, said Claughton, contributed to a drop in the number of class action lawsuits.
“It’s a bit unclear, now that we’re potentially coming out of the end of this pandemic, about whether those class actions ramp up again. I suspect that they probably will,” he said.
Early last year, the government also launched a joint parliamentary inquiry into the funding and the regulation of the class action industry.
“The federal liberal government was pro-business and they could see the problem here,” said Claughton.
Meanwhile, the Treasurer announced a temporary hold on the continuous disclosure laws for 12 months and temporary changes.
The government said the temporary changes would protect company directors from opportunistic class actions for allegedly breaching their continuous disclosure obligations when their economic forecasts were found to be inaccurate.
However, the Labour party wasn’t convinced.
“The Labour party was the opposite, they took the view, ‘We’re not going to change laws and benefit companies over our voters, who are mum and dad investors,’” said Claughton.
The legislation stalled in the Senate and its future depended heavily on the position of independents and One Nation.
“At the end of the day we knew there was enough support for that committee to recommend for the legislation to be proposed, and it was, that’s what happened,” he said. “But then, when it got down to crunch time, getting it through the Senate became tricky.”
Meanwhile, Claughton was one of many stakeholders to appear at a joint parliamentary inquiry.
“That was just a complete waste of time,” he said. “It was an embarrassment on our political system. The politicians pretty much just argued with each other while the industry experts just sat giving worried looks to each other.”
In the end, Claughton said the key was empirical evidence that showed the sceptical politicians how this problem was impacting their constituents.
“That’s how we got the numbers through the Senate,” he said.
But it took more months of waiting for the legislation to get passed.
Claughton said the law reform brings two important changes.
“That is the change to the Corporations Law which created a level playing field and the other one is that litigation funders have to be regulated,” he said.
After many years working on this issue, how does Claughton and Marsh regard the law change?
“It’s not really so much our reaction it’s what our clients’ reactions are that is most important,” he noted. “Generally, it’s been positive because they say, ‘Phew! At least now I’ve got half a chance if I’m sued. I either say I’ve done the wrong and I pay up and settle. Or if I don’t believe I’ve done the wrong thing then I have a basis to defend myself.’”
Not everyone is happy about the changes, however, including some lawyers.
“You might say they have a conflict of interest here but what they’re saying is that there are all sorts of other pieces of legislation that could be used and so it’s probably not going to be any different,” said Claughton.
Now it’s a matter of giving the law change enough time, likely a couple of years, to have an impact.
“As new class actions come in, what I’m encouraging our clients and directors to do is to actually go ahead and defend them. So previously they weren’t brave enough to do that, hopefully they now will be brave enough. And that’s when we’ll know if the law is actually going to produce a better outcome for them,” said Claughton.
