Court set to rule on who gets a piece of the class action

Company directors watching on in horror at the proliferation of competing class actions should take notice of some of the preliminary court skirmishes slated for this week and next.

To the horror of an already deeply troubled AMP, the number of class actions against it rose to five yesterday after 
Shine Lawyers announced it had secured funding for an action over alleged disclosure failings revealed at the royal commission into misconduct in the banking, superannuation and financial services industry.

They join Slater & Gordon, Phi Finney McDonald, Maurice Blackburn and Quinn Emanuel Urquhart & Sullivan in touting for shareholders aggrieved by the disclosures over the “fee for no service” scandal.

Over at Commonwealth Bank the problem is only slightly less weighty, with Phi Finney McDonald and Maurice Blackburn lodging actions on behalf of retail and heavyweight institutional investors respectively over the Austrac scandal.

BHP now faces separate actions for its Australian retail shareholders and offshore holders of its American depositary receipts over the Brazilian mine disaster.

And the problem is not confined to the big end of town, with shareholders in last-mile service business GetSwift facing three class actions.

It’s clearly an unsustainable load for a company to have to fight a multitude of cases over the same issue in one court or more and some guidance from the bench is due.

A hearing next week in front of Justice Michael Lee in the Federal Court may provide some. After Phi Finney McDonald filed its action — joining earlier actions by Squire Patton Boggs and Corrs Chambers Westgarth — the judge has already said that shareholders won’t be “vexed” with multiple actions. Quinn Emmanuel is on the other side of this argument, defending GetSwift against all three actions, which followed the company’s failure to disclose contract losses to the market.

But its still a question of which action will be allowed to go forward and there are differences between them.

Corrs’ claim includes GetSwift managing director Joel Macdonald and executive chairman Bane Hunter in action over misleading and deceptive conduct. Shareholders in any of the three are likely to flock to the winner for an action conservatively estimated to be between $75m and $140m.

It’s a little more complicated at AMP with the two actions that have already filed in different jurisdictions.

Quinn Emanuel Urquhart & Sullivan have filed in the NSW Supreme Court while Phi Finney McDonald are pursuing AMP through the Federal Court in ­Victoria.

Clearly if the five actions are going to be collapsed into one a decision is going to have to be made first about the forum in which it is heard. It will be up to AMP to argue its case for the most appropriate court, although lawyers say no judge would be obliged to collapse competing actions into one. In four recent instances — including actions against Volkswagen, Bellamy’s and Vocation — judges have allowed the competing actions to proceed and be heard together.

Justice David Hammerschlag — who rose to prominence as counsel assisting the last great financial services royal commission into the collapse of HIH — will hold a preliminary hearing in the Supreme Court on Friday.

Loathed as they are by company directors, class actions have become almost an automatic response to any corporate failing and a mechanism for shareholders to seek redress for what usually amounts to disclosure failures that meant shareholders were not buying in an informed market. They can be seen as one group of shareholders suing the others who fall outside the class that bought shares when the market was uninformed.

In reality the tab is usually picked up by the company through its directors and officers insurance policy, making it a less direct form of accountability for directors. It’s not without costs — premiums for D&O policies are estimated to have tripled in the past five years with the proliferation of class actions, and that is a cost borne by all shareholders.

The Australian Institute of Company Directors is, meanwhile, urging some form of restraint on the industry. In a submission to Victorian Law Reform Commission it has asked for federal legislative oversight for litigation funders that are among the big winners when a case settles or a judgment is given in the plaintiff’s favour.

Here at least the market is working in the shareholders’ favour: the proliferation of competing actions has seen the law firms and funders bidding away their share of the spoils. In the AMP case, Quinn Emanuel is touting a commission rate of 10 per cent for its funder, international giant Burford, against the 12.5 per cent Maurice Blackburn backer International Litigation Funding Partners wants. That compares to fees that have averaged about 30 per cent and ranged up to 50 per cent.

The split of any settlement between the lawyers, funders and plaintiffs will be among the things a judge considers in deciding which actions do go ahead.

It’s something investors might want to watch, too. The arrival of international competition is something that might have some bearing on listed Australian funders IMF Bentham and Litigation Funding Partners.

Brokers feel the heat The long overdue slashing of Shaw and Partners’ price target for Blue Sky Alternative Investments highlights the pressures being felt across the broking industry from falling fees and the rise of automated trading.

Analyst Martin Crabb had until this week allowed a hold rating with a $14.20 price target to remain on Blue Sky even as the price plummeted to below the $2.66 that short seller Glaucus Research said they were worth.

This week Crabb slapped a new price target of $5.10 and a buy recommendation on the stock, albeit with a “high” risk rating.

The valuation is nearly double that of Glaucus, but in line with more recent valuations from Ord Minnett and Morgans.

Asked about the delay by The Australian last week, Crabb, who doubles as the firm’s chief investment officer, said revising his target and recommendation was one of “50 million things” he had to do but he was waiting for things to settle in what has been a fast-­moving story.

Among the cues Crabb is looking for is words of support from institutional investors who have put money into Blue Sky’s funds. That includes Goldman Sachs, which has a student accommodation joint venture with Blue Sky that suffered some of the revisions announced yesterday that will strip $7m from Blue Sky’s earnings.

How those institutional investors view the overhaul at Blue Sky is likely to have a significant bearing on the company’s ability to grow funds under management.

Dwindling numbers of analysts on the buy side is opening up a gulf between coverage of the top 200 stocks and the rest of the 2200 in the ASX universe. Regulators are clamping down on conflicts between research and corporate arms.

It’s the small and mid-cap stocks that have traditionally been a sweet spot for smaller brokers, and as the Stockbrokers and Financial Advisers Association points out, coverage is an important part of growing them into the next crop of investible stocks.

But as the Blue Sky episode highlights, that end of the market remains a risky and dangerous place for retail investors to play.John Durie is on leave.