Earlier this month, a judgement was handed down in a shareholder class action against Iluka Resources. The defendant company was successful on all counts in what is only the third ever judgement in a shareholder class action in Australia.
The global law firm Clyde & Co ran the defence for Iluka and has now mounted the only two entirely successful shareholder class actions defences in Australia.
“The judgement provides useful guidance on relevant issues but also shows that shareholder class actions can be successfully defended, where previously there was little evidence of that,” said Patrick Boardman (pictured), a Clyde & Co partner. Boardman acted for the lead primary D&O insurer of Iluka.
Since class actions were introduced in Australia in 1992 there have been about 150. Many have resulted in costly settlements running into tens of millions of dollars paid out under insurance policies. The result has been intense pressure on the D&O insurance space and extremely high premiums.
Read more: Is the D&O insurance crisis finally over?
Some brokerages hope that recent changes to the continuous disclosure laws will help encourage companies to fight more D&O related class action battles in court, rather than settle.
Interestingly, the issues in dispute for this Iluka case occurred in 2012. The changes in the disclosure laws, said Boardman, “had no impact or relevance to the judgement.”
However, he said, Clyde & Co’s successful defence is positive news for insurance companies and their D&O clients.
“The judgement provides firstly assurance to companies and their D&O insurers that shareholder class actions are not necessarily merely a cheque-writing exercise and that robust defences will be accepted by the courts,” said Boardman.
However, Boardman cautioned against companies and insurers in the D&O space concluding too much from this third judgement.
“This is only the third shareholder class action that has gone to judgement so there is a lack of authority on the relevant issues such as whether the representations as alleged by the group members were made, what matters have to be disclosed to the market and causation,” he said.
Nonetheless, Boardman described the judgement as “important” for companies, their directors and officers and their D&O insurers.
“For 20 years, shareholder class actions were all settled, usually at great expense, as there was incredible uncertainty with the outcome,” he explained.
“This judgement provides further guidance on both the prosecution and defence of class actions, and importantly gives the support that the courts will listen to a well-run defence,” added Boardman.
The Clyde & Co partner said a well-run defence hinges on a good working relationship between the company, its defence team and its D&O insurers.
However, some industry players in the D&O insurance space argue that early settlement, rather than defending a case through to a judgement, is usually the better option.
Martin Jones, Australia client executive for Xceedance, told Insurance Business that with claims costs escalating across multiple product lines insurers must develop new strategies that facilitate early settlement and not “extensive use of external law firms” that contribute to “major claims inflation.”
Boardman said shareholder class actions are difficult to settle early.
“It is difficult to settle any claim if neither party knows the basis of the allegations - which is addressed by the liability evidence - obtained after review of the company’s documents. Also, how important issues of causation and loss are put forward - which are the event study and loss analysis,” he said.
Boardman added that even if the parties have an early idea of liability, determining actual loss requires service of the “quantum evidence”.
“The matter is further complicated by any settlement requiring approval of the court, which requires each of those issues to be addressed,” he said.
Boardman said class actions with early settlements “still required vast sums to be incurred by both parties in setting out the claim and particularly the alleged loss.”
“Shareholder class actions are difficult to settle early and to settle claims with little or no evidence or basis to the claims will only assist the poor and spurious claims that otherwise would not be brought,” he said.
Boardman said insurers tried to settle the Iluka matter early, without it having to go to trial, but the applicant and funder refused.
