Get mad, get even – but watch your wallet

Bina Brown

The Australian

18 October 2003

Running a class action is an expensive and risky business, and no place for the timid

IT'S bad enough losing money on an investment that goes pear-shaped, but when do you know when to stop throwing good money after bad?

It's a question increasing numbers of shareholders have had to ask themselves in deciding whether to participate in one of the many class actions of recent years. Former HIH shareholders are pondering the question as the action brought by Dennis & Co moves slowly through the courts.

Not every legal firm that runs a class action on behalf of investors asks for money upfront -- mostly for fear of scaring people away. But, given the size of the litigation against alleged wrongdoers, most firms would like to be able to insist on some sort of registration fee.

One of the most successful class actions to date was run by Maurice Blackburn Cashman (MBC) against GIO for misleading and deceptive conduct and negligence in relation to a Part B statement. MBC and shareholders were victorious, with AMP and other parties involved agreeing in August to settle for $112 million.

MBC partner Bernard Murphy said a decision was taken early not to ask shareholders for money because ``we thought that if we did, not enough people would join our case''.

There were about 67,000 GIO shareholders who were potentially affected. Of these, 17,000 formally opted out of the action and up to 27,000 did not identify themselves or respond to the class action, leaving 23,000 identified group members who were prepared to pay MBC a fee upon success.
“If that had been 5000 people, I would not have been prepared to ask the partners of MBC to pay $10 million in costs,'' Murphy says.

MBC decided the case was so good that it would meet the disbursement and costs in bringing the case on behalf of lead applicant Shane King. Murphy estimates the total costs and potential risk to MBC were $10 million to $15 million. Had they lost, King would have had to pay the defendants' legal costs, which were estimated to be about $40 million.

“Mr King was not overjoyed at the prospect of losing his house. Lead applicants are very brave people and they are people with the courage of their convictions. They are standing up for their rights.''

According to Bruce Dennis of Dennis & Co, there are 29,000 HIH shareholders who could join the class action he is running against the former directors, auditors and the reinsurer. So far, 1500 have expressed an interest and are prepared to pay a further $365 for every 11,000 HIH shares once held.

Many other shareholders will be awaiting the outcome of hearings in the Federal Court next week which will determine the definition of the class, among other things.

Dennis believes that if the case proceeds as planned, the registration fee will rule some shareholders out. The costs involved can be considerable; just to post a letter to the 29,000 shareholders costs $14,500.

“Charging puts people off. But we have to do something to make a living and if we don't have a method of getting revenue, it won't be a class action as such. It is only if shareholders feel particularly aggrieved they will fight,'' he says.

Concerns that there won't be any money left to distribute from the HIH debacle make the action even more of a gamble for Dennis and group members pondering whether to pay the registration.

Based on the findings of the royal commission into the collapse of HIH, Dennis thinks there is a case and that the money will be found through the directors' and officers' insurance mentioned in the annual accounts of HIH.

Running a class action is an expensive and risky business. It's also the best chance ordinary shareholders have to go after corporates that commit serious civil wrongs.

It's not as if any of the companies that have lost investors' money have willingly come forward with an offer to hand any of it back.

Former executive officer of the Australian Shareholders Association Tony McLean runs the only website (delisted.com.au) where the progress of major class actions against listed companies can be viewed. He would like to see larger shareholders carry a greater share of the costs of running a class action.

“It is hard for shareholders, having seen their investment fail, to be then asked to give financial support to legal action which may not be successful. Small shareholders should be given free entry to an action, perhaps with a reciprocal adjustment to their proceeds if the action is successful.

Larger shareholders should be prepared to share the up-front costs equally with the firm of solicitors that is prepared to take it on. The solicitors are also potentially big winners,'' he says.

On HIH, he suggests small shareholders watch from the sidelines for now. At some point they will formally get a chance to either opt out of the action or participate.