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ABSTRACT
This article examines the empirical incidence of the private and public enforcement of disclosure laws in Australia. Disclosure laws aim to ensure the reduction of information asymmetries and the accuracy of share prices, but their success is predicated on enforcement. In order to assess the enforcement landscape, this article presents two new disclosure law action datasets comprising both private and public enforcement for further examination. In light of these findings, this article addresses the question of whether the Australian system of enforcement is effective, by reference to whether the enforcement actions compensate, deter, and signal. Overall, the empirical analysis confirms the signalling function of enforcement, shows that there is likely to be a reasonable degree of deterrence where directors are targeted, however, that the compensation rationale is not met. This results in a moderately effective enforcement framework with notable room for improvement across both modalities of enforcement.
Acknowledgements
I am grateful for feedback received at presentations at the Cambridge University Law Faculty and the London School of Economics Law Faculty. I thank in particular Brian Cheffins, John Armour, Richard Williams, Marc Moore, Felix Steffek, Richard Squire, Curtis Milhaupt, Michael Klausner, and Howell Jackson for helpful comments and discussions.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes on contributor
Jenifer Varzaly is Director of Studies at Downing College, Cambridge University. Her principal research and teaching interests are in the fields of corporate and commercial law and law and economics. Jenifer has been a visiting academic at Columbia University and at Stanford University, and has consulted in the areas of corporate law and finance in the US, Australia, and the UK. She has been invited to present at a range of international forums, including the Oxford University Commercial Law Centre, UNCITRAL, UNIDROIT, and the Securities and Futures Commission of Hong Kong.
Notes
1 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 38, 244.
2 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 245; Katharina Pistor, Rainer Haselmann and Vikrant Vig, ‘How Law Affects Lending’ (2010) 23 The Review of Financial Studies 549.
3 Christian Leuz and Peter Wysocki, ‘The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research’ (2016) 54 Journal of Accounting Research 525; Michael Greenstone, Paul Oyer and Annette Vissing-Jorgensen, ‘Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments’ (2006) 121 Quarterly Journal of Economics 399; Allen Ferrell, ‘Mandated Disclosure and Stock Returns: Evidence from the Over-the-Counter Market’ (2007) 36 Journal of Legal Studies 1; Christian Leuz and Catherine M Schrand, ‘Disclosure and the Cost of Capital: Evidence from Firms’ Response to the Enron Shock’ (2009) Chicago Booth School of Business Research Paper No. 08-26, http://ssrn.com/abstract=1319646 accessed 28 April 2019; Allen Ferrel, ‘The Case for Mandatory Disclosure in Securities Regulation Around the World’ (2007) 2 Brooklyn Journal of Business Law 81; Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘What Works in Securities Laws?’ (2006) 61 Journal of Finance 1; Luzi Hail and Christian Leuz, ‘International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?’ (2006) 44 Journal of Accounting Research 485.
4 Christian Leuz and Peter Wysocki, ‘The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research’ (2016) 54 Journal of Accounting Research 525; Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 246–7. As such, the key policy questions relate to the precise scope of disclosure laws, as well as how comprehensively regulatory agencies should investigate and enforce suspected breaches.
5 Roscoe Pound, ‘Law in Books and Law in Action’ (1910) 44 American Law Review 12; Gary Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76 Journal of Political Economy 169; Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 38–9; J Armour, ‘Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment’ in John Armour and Jennifer Payne (eds), Rationality in Company Law (Hart Publishing 2009); Howell E Jackson and Jeffery Y Zhang, ‘Private and Public Enforcement in Securities Regulation’, in Jeffrey Gordon and Wolf-Georg Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford University Press 2018).
6 A range of federal laws in Australia aim to protect the interests of shareholders and other investors from failures to disclose relevant information, dishonest, misleading, or otherwise unlawful conduct by issuing companies or investment schemes, or by directors and/or officers of those companies, among others.
7 Public enforcement refers to state or public agency actions; private enforcement refers to the initiation of actions by private actors such as investors. Regarding the lack of empirical assessment of the private enforcement of corporate law more generally see J Armour and others, ‘Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States’ (2009) 6 Journal of Empirical Legal Studies 687.
8 Howell E Jackson and Mark J Roe, ‘Public and Private Enforcement of Securities Laws: Resource-Based Evidence’ (2009) 93 Journal of Financial Economics 207; Howell E Jackson and Jeffery Y Zhang, ‘Private and Public Enforcement in Securities Regulation’, in Jeffrey Gordon and Wolf-Georg Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford University Press 2018); Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘What Works in Securities Laws?’ (2006) 61 Journal of Finance 1; Andrei Shleifer, ‘Is There a Major Problem with Corporate Governance in the United States?’ in Geoffrey Owen, Tom Kirchmaier and Jeremy Grant (eds), Corporate Governance in the US and Europe: Where Are We Now? (Palgrave Macmillan 2006); M Gray, V Chandis and K Echemendia, ‘Striking the Right Balance: Public versus Private Enforcement Laws – What Will We Learn from this Financial Meltdown?’ (2010) 60 Syracuse Law Review 449; John Coffee Jr, ‘Law and the Market: The Impact of Enforcement’ (2007) 156 University of Pennsylvania Law Review 229; B Cheffins and B Black, ‘Outside Director Liability Across Countries’ (2006) 84 Texas Law Review 1385.
9 J Coffee Jr, ‘Law and the Market: The Impact of Enforcement’ (2007) 156 University of Pennsylvania Law Review 229, 281; B Cheffins and B Black, ‘Outside Director Liability Across Countries’ (2006) 84 Texas Law Review 1385, 1477; Brian R Cheffins, ‘Corporate Governance Convergence: Lessons from Australia’ (2002–2003) 16 Transnational Law 13, 19; Jenifer Varzaly, ‘The Enforcement of Directors’ Duties in Australia: An Empirical Analysis’ (2015) 16 European Business Organization Law Review 281.
10 Anna Huggins, Roger Simnett and Anil Hargovan, ‘Integrated Reporting and Directors’ Concerns about Personal Liability Exposure: Law Reform Options’ (2015) 33 Company and Securities Law Journal 176, 178; Allens Linklaters, ‘Shareholder Class Actions in Australia’ (May 2015), presenting empirical evidence regarding the growth in cases filed; Michael Legg and Sera Mirzabegian, ‘Shareholder Claims in Australia’ in Andrew Charman and Johan Du Toit (eds), Shareholder Actions (Bloomsbury Professional, 2013), ch 14; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196, 202.
11 See e.g. Michelle Welsh and Vince Morabito, ‘Public v Private Enforcement of Securities Laws: An Australian Empirical Study’ (2014) 14 Journal of Corporate Law Studies 39; Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Third Report: Class Action Facts and Figures – Five Years Later’ (1 November 2014). Available at: http://ssrn.com/abstract=2523275, accessed 30 November 2019; Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196.
12 Hence aligning the interests of directors and shareholders (reducing agency costs), and increasing overall investment. The only study known to empirically consider both public and private enforcement is: Michelle Welsh and Vince Morabito, ‘Public v Private Enforcement of Securities Laws: An Australian Empirical Study’ (2014) 14 Journal of Corporate Law Studies 39. This article focuses on investor class actions which are defined to include ‘Part IVA proceedings filed on behalf of persons who claim to have been harmed as a result of a breach of one or more of the laws that are administered by ASIC’ and related ASIC actions, 45. The study period is 4 March 1992 to 3 March 2009. This study does not include net settlement data; nor does it include empirical data on infringement notices, leaving a clear gap in the public enforcement coverage.
13 See e.g. Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Third Report: Class Action Facts and Figures – Five Years Later’ (1 November 2014). Available at: http://ssrn.com/abstract=2523275, accessed 30 November 2019; Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(2)–7.09(5); Michelle Welsh and Vince Morabito, ‘Public v Private Enforcement of Securities Laws: An Australian Empirical Study’ (2014) 14 Journal of Corporate Law Studies 39, 40; Allens Linklaters, ‘Class Actions in Australia’ (May 2015); Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196; Ian Ramsay and Miranda Webster, ‘ASIC Enforcement Outcomes: Trends and Analysis’ (2017) 35 Company and Securities Law Journal 289.
14 The resources available to ASIC per firm regulated increased over the period 2000–2013, with a decrease calculated for the period 2014–2017, based on ASIC Annual Report data. This is consistent with the research results, particularly that private enforcement predominated post 2013 in the disclosure law context.
15 The dataset includes all class action cases with alleged disclosure law breaches in the Federal Court as at 24 September 2018, with judgment/court approved settlement information up to and including 31 December 2019.
16 Here, the probability figures are likely to be understated, as class actions filed between 2014 and 2018 that may have already settled/come to judgment will not be included in the class action dataset as at 24 September 2018 (the point-in-time database date). This figure moreover excludes competing class actions and does not include public enforcement actions. In relation to filed actions which specifically name directors or officers as defendants, there is (on average) one per year in the dataset.
17 J Armour, ‘Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment’ in John Armour and Jennifer Payne (eds), Rationality in Company Law (Hart Publishing 2009).
18 The terms ‘plaintiff’ and ‘defendant’ are used throughout this article for consistency and universality across action types, although in the Federal Court of Australian class action context, ‘applicant’ and ‘respondent’ are used.
19 1 January 2016 to 30 June 2019.
20 Kenneth W Dam, ‘Class Actions: Efficiency, Compensation, Deterrence, and Conflict of Interest’ (1975) 4 The Journal of Legal Studies 47, 49; Robert E Goodin, ‘Theories of Compensation’ (1989) 9 Oxford Journal of Legal Studies 56; Edwin Peel and James Goudkamp, Winfield and Jolowicz on Tort (19th edn, Sweet & Maxwell 2014).
21 Jill E Fisch, ‘Confronting the Circularity Problem in Private Securities Litigation’ (2009) 2009 Wisconsin Law Review 333, 336.
22 See s1317H and s1317HA of Corporations Act, and ASIC Information Sheet 151, ‘ASIC's approach to enforcement’ (2013).
23 Under the Corporations Act 2001 (Cth) section 9 a civil penalty order means any of the following: (a) a declaration of contravention under section 1317E; (b) a pecuniary penalty order under section 1317G; (baa) a relinquishment order under section 1317GAB; (ba) a refund order under section 1317GA; (c) a compensation order under section 961M, 1317H, 1317HA, 1317HB, 1317HC or 1317HE; and (d) an order under section 206C disqualifying a person from managing corporations. The term ‘civil penalty provision’ has the meaning given in subsection 1317E(3).
24 Under section 50 of the Australian Securities and Investment Commission Act (ASIC Act) 2001.
25 ASIC Act 2001 (Cth), s 93AA.
26 Kenneth W Dam, ‘Class Actions: Efficiency, Compensation, Deterrence, and Conflict of Interest’ (1975) 4 The Journal of Legal Studies 47, 49; Linda Mullenix, ‘Ending Class Actions as We Know Them: Rethinking the American Class Action’ (2014) 64 Emory Law Journal 399, 409, 418: otherwise individual claimants might be disincentivised from or incapable of seeking a remedy.
27 See e.g. Roberta Romano, ‘The Shareholder Suit: Litigation Without Foundation?’ (1991) 7 Journal of Law, Economics, and Organization 55, at 85: stating that estimating the number of offences, which is needed to estimate the probability of detection, is ‘virtually impossible’. Certainly, there are some studies which attempt to measure the broader deterrent impact of, for example, punitive regulation in the corporate context, see e.g. Robert Baldwin, ‘The New Punitive Regulation’ (2004) 67 Modern Law Review 351. Here survey data from 50 staff members in 50 UK firms in the main FTSE 250 companies was taken and analysed, based on the opinions of respondents. This is a very small sample size and was done in very general terms and certainly not aimed at calculating the number of agents deterred or those actions resulting in breaches and/or penalties.
28 Roberta Romano, ‘The Shareholder Suit: Litigation Without Foundation?’ (1991) 7 Journal of Law, Economics, and Organization 55, 85.
29 Gary Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76 Journal of Political Economy 169; J Armour, ‘Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment’ in John Armour and Jennifer Payne (eds), Rationality in Company Law (Hart Publishing 2009), 77; Sharon Oded, Corporate Compliance: New Approaches to Regulatory Enforcement (Edward Elgar 2013) 17–21; George J Stigler, ‘The Optimum Enforcement of Laws’ (1970) 78 Journal of Political Economy 526.
30 Tom Baker and Sean J Griffith, Ensuring Corporate Misconduct, How Liability Insurance Undermines Shareholder Litigation (University of Chicago Press 2010), 6.
31 See s199A of the Corporations Act 2001. Compare s102(b)(7), 65 Del Laws ch 289, §§1–2 (1986), which enables a corporation in its original certificate of incorporation to eliminate or limit the personal liability of directors for breaches of fiduciary duty.
32 See s199B of the Corporations Act, as well as s199C on the effect of the provisions. See s182 and s183 regarding the use of position and use of information duties.
33 B Cheffins and B Black, ‘Outside Director Liability Across Countries’ (2006) 84 Texas Law Review 1385, 1437. See e.g. Silbermann v CGU Insurance Ltd (2003) 48 ACSR 231; Rich v CGU Insurance Ltd (2005) 214 ALR 370, here a non-executive listed public company chairman was denied D&O insurance coverage. See further, Wilkie v Gordian RunOff Ltd (2005) 214 ALR 410, in which the D&O insurer refused to advance legal expenses to a defendant in ASIC proceedings. Moreover, there are potential gaps in cover between D&O policies and professional indemnity coverage. However, D&O insurance policies and coverage limits are not made publicly available in Australia, making it difficult to specifically assess the risks posed for directors.
34 B Cheffins and B Black, ‘Outside Director Liability Across Countries’ (2006) 84 Texas Law Review 1385, 1441.
35 ibid, 1437.
36 In this context, the term ‘signal’ is simply used as a means to convey information or news, and not as an element of signalling theory.
37 This is an application of contract theory, if an additional signal regarding agent conduct can be included without cost, optimal incentive design incorporates all signals. See, e.g. Bengt Holmstrom, ‘Moral Hazard and Observability’ (1979) 10 Bell Journal of Economics 74; Steven Shavell, ‘Risk Sharing and Incentives in the Principal and Agent Relationship’ (1979) 10 The Bell Journal of Economics 55; Patrick Bolton and Mathias Dewatripont, Contract Theory (MIT Press 2005), 137; Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 346–7, 338–9.
38 Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 338–9.
39 Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford University Press 2000). For example: ‘Perhaps the most salient piece of evidence bearing on this prediction is the crash of 1987. On Monday, October 19, the Dow Jones Industrial Average fell by 22.6% – the largest one day percentage drop in history – without any apparent news. Although the event caused an aggressive search for the news that may have caused it, no persuasive culprit could be identified. In fact, many sharp moves in stock prices do not appear to accompany significant news. Cutler et al. (1991) examine the 50 largest one day stock price movements in the United States after World War II, and find that many of them came on days of no major announcements’. Common examples of market failures or inefficiencies are the cases of WorldCom and Enron. In the case of Enron, the misconduct was not reflected in lower share prices. Investors continued to buy Enron shares up until the point of bankruptcy, indicating that market-based regulation was not effective: Lisa M Fairfax, ‘Spare the Rod, Spoil the Director? Revitalizing Directors’ Fiduciary Duty Through Legal Liability’ (2005) 42 Houston Law Review 393, 432.
40 That is, increasing the signal to noise ratio regarding director conduct is desirable across all credible information sources.
41 This principle is a verified and robust result in contract theory, and has been proven through rigorous, independent economic models over numerous published pieces in relevant academic literature, and will thus not be reproduced here. See, e.g. Bengt Holmstrom, ‘Moral Hazard and Observability’ (1979) 10 Bell Journal of Economics 74; Steven Shavell, ‘Risk Sharing and Incentives in the Principal and Agent Relationship’ (1979) 10 The Bell Journal of Economics 55; Patrick Bolton and Mathias Dewatripont, Contract Theory (MIT Press 2005); Pierre Chaigneau, Alex Edmans and Daniel Gottlieb, ‘The Informativeness Principle Without the First-Order Approach’ (2018) European Corporate Governance Institute (ECGI) Finance Working Paper No 444/2014. Available at: ecgi.global/sites/default/files/working_papers/documents/finalchaigneauedmansgottlieb_1.pdf, accessed 28 September, 2018. Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337.
42 Paul Mahoney, (1995) ‘Mandatory Disclosure as a Solution to Agency Problems’ (1995) 62 The University of Chicago Law Review 1047; Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 358; Reinier Kraakman and others, Wolf-Georg Ringe and Edward B Rock, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 248. This list is non-exhaustive, there are many types of decisions which can be facilitated.
43 ibid, 357–8; Merritt B Fox, Ronald J Gilson and Darius Palia, ‘The Core Corporate Governance Puzzle: Contextualizing the Link to Performance’ (2019) 99 Boston University Law Review 1995, 2002. For example, Spamann argues the value of the signal will be larger where alternative corporate governance mechanisms are weaker or non-existent. This is principally the case when share prices are unavailable, where courts are well trained and less subject to error or bias, or in situations when agency problems are at their worst.
44 This will increase the utility of the signal to parties at an information disadvantage, such as shareholders who do not have full access to much of this information on a timely basis.
45 Explanatory Memorandum, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) (CLERP 9) at [4.219]; James Hardie Industries NV v ASIC (2010) 81 ACSR 1; [2010] NSWCA 332, paragraph 355; J Harris, A Hargovan and M Adams, Australian Corporate Law (5th edn, LexisNexis 2015), 265–6; Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196; R Austin R and I Ramsay, Ford's Principles of Corporations Law (16th edn, LexisNexis 2014), Ch 11; Merav Bloch, James Weatherhead and Jon Webster, ‘The Development and Enforcement of Australia's Continuous Disclosure Regime’ (2011) 29 Company and Securities Law Journal 253; ASX ‘Continuous Disclosure: An Abridged Guide’ (2015); ASX ‘Monitoring and Enforcing Compliance with ASX's Listing Rules’ (2012).
46 ibid; and see further the Explanatory Memorandum, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) (CLERP 9) at [4.219].
47 Chapter 6CA of the Corporations Act 2001 provides the legislative basis for the ASX Listing Rules by mandating continuous disclosure obligations for publicly listed companies and certain other entities.
48 Further, Listing Rule 15.7 and ASX Guidance Note 8 provide that disclosure must be made to the ASX before any information is released to the market. Additionally, disclosure requirements apply even if a company's securities have been suspended from trading. There are limited exceptions to this rule, set out in Listing Rule 3.1A, including when a reasonable person would not expect the information to be disclosed, and that the information needs to be kept confidential. Further, Rule 3.1B provides that if there is likely to be a false market in the entity's securities, this information must be immediately disclosed in order to correct/prevent this.
49 James Hardie Industries NV v ASIC (2010) 81 ACSR 1; [2010] NSWCA 332, paragraph 354–5.
50 See www.asic.gov.au.
51 This market supervision role was previously performed by the ASX and other markets including IMB, IR Plus (formerly SIM VSE), and SSX (formerly APX). This was in addition to the existing responsibilities of ASIC for the investigation and enforcement of financial market misconduct and the supervision of financial services licence holders. This role expansion was due to criticism of the ASX itself being a listed company while holding responsibility for market regulation, resulting in a conflict of interest: Corporations Amendment (Financial Market Supervision) Bill 2010 (Cth), Explanatory Memorandum, Chapter 3. Further, the existence of this conflict was perceived to undermine investor confidence and market integrity: Corporations Amendment (Financial Market Supervision) Bill 2010 (Cth), Explanatory Memorandum, paragraph 3.7.
52 In order to ‘promote cooperation, information sharing, and mutual assistance’ between both entities: Memorandum of Understanding between ASIC and ASX (2011), Part 1, and 10(c), respectively.
53 See Sections 793B and 793C of the Corporations Act 2001 (giving this agreement legal effect); Appendices 1A and 1B of the ASX Listing Rules, Clause 5; s674 of the Corporations Act 2001 specifically in relation to continuous disclosure; ASX ‘Monitoring and Enforcing Compliance with ASX's Listing Rules’ (2012). If a company fails to comply with the requirements of the Listing Rules, the ASX may suspend the trading of its shares or cancel the listing (Listing Rule 17.3.1 and 17.12, respectively). Although the latter is viewed as a sanction of last resort given the significant effect this can have on investors, by taking away their ability to buy or sell shares in the company on the ASX.
54 Sections 792B(2)(c) and 821B(2)(c), Corporations Act 2001. Written notice is required, known as a ‘referral’.
55 For example, criminal or civil action.
56 Memorandum of Understanding between ASIC and ASX (2011), clause 16–18.
57 Remarks given by Alan Cameron AM, ASIC Chairman, Committee for the Economic Development of Australia (CEDA) seminar ‘CLERP 6 – Government's blueprint for a single regulatory regime’, Sydney, 11 February 2000.
58 ibid; ASIC Information Sheet 151, ‘ASIC's approach to enforcement’ (2013), 4.
59 ASIC Information Sheet 151, ‘ASIC's approach to enforcement’ (2013), 4. For example, this includes the less serious option of issuing an infringement notice, as well as more serious civil and criminal penalty proceedings.
60 Part IVA of the Federal Court of Australia Act 1976 (Cth) governs the class action regime, and came into effect in March 1992. At the state level, class actions have also been available in the Supreme Court of Victoria since 2000, the Supreme Court of NSW since 2011, and the Supreme Court of Queensland since 2017. Interestingly, the first reported shareholder class action was not commenced until 1999: King v GIO Australia Holdings Limited (2000)174 ALR 715, (2000) 100 FCR 209; King v AG Australia Holdings Limited (formerly King v GIO Australia Holdings Ltd) [2003] FCA 980.
61 Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(2)–7.09(5); Michelle Welsh and Vince Morabito, ‘Public v Private Enforcement of Securities Laws: An Australian Empirical Study’ (2014) 14 Journal of Corporate Law Studies 39, 40; Allens Linklaters, ‘Class Actions in Australia’ (May 2015). Noteworthily, ASIC itself may bring a class action on behalf of a shareholder under s50 of the ASIC Act 2001.
62 See Campbells Cash and Carry v Fostif [2006] HCA 41; (2006) 229 CLR 386. This was the first High Court case where it was accepted that third party litigation funding was not contrary to public policy nor was it an abuse of process. This greatly reduced uncertainty regarding the legality of commercial litigation funding which existed at that time in Australia.
63 At the time of writing, s33ZDA had just been added to the Supreme Court Act 1986 (Vic), making Victoria the first Australian state to give the Court the power to order that plaintiff lawyers be permitted to recover a contingency fee (referred to as a group costs order). Prior to this legislative change, there was a total prohibition on lawyers charging contingency fees in any Australian jurisdiction. The prohibition exists at State level, see e.g. Legal Profession Act 2004 (NSW) s 325(1)(b); Legal Profession Act 2007 (Qld) s 325; Legal Practitioners Act 1981 (SA) s 27.
64 Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(2). Class members in a successful claim can only receive compensation for economic loss.
65 Lang Thai, ‘Shareholder Class Actions – A Critical Analysis of the Procedure under Part IVA of the Federal Court of Australia Act’ (2015) 40 The University of Western Australia Law Review 138, 148; Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(2)(d); Michael Legg, ‘Mass Settlements in Australia’ in Christopher Hodges and Astrid Stadler (eds), Resolving Mass Disputes ADR and Settlement of Mass Claims (Edward Elgar 2013), 175.
66 Michael Legg, ‘Mass Settlements in Australia’ in Christopher Hodges and Astrid Stadler (eds), Resolving Mass Disputes ADR and Settlement of Mass Claims (Edward Elgar 2013), 175.
67 ibid. This was subject to the advising lawyer meeting disclosure requirements, and it was recognised as allowing private actors increased access to the civil justice system in Australia.
68 ibid.
69 B Cheffins and B Black, ‘Outside Director Liability Across Countries’ (2006) 84 Texas Law Review 1385, 1434; Michael Legg, ‘Mass Settlements in Australia’ in Christopher Hodges and Astrid Stadler (eds), Resolving Mass Disputes ADR and Settlement of Mass Claims (Edward Elgar 2013). Australian judges almost always apply the adverse costs rule, that the loser must pay the costs of the winner.
70 Victorian Law Reform Commission, Civil Justice Review Report (2008) Chapter 11, 648; Jonathan N Eisenberg (2015) Litigating Securities Class Actions, 7.09(2)(c); Ruddock v Vadarlis (2001) 115 FCR 229; 188 ALR 143.
71 Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(2)(c). This can be contrasted with the US position, where such cost shifting rarely occurs; in the usual course of litigation an unsuccessful plaintiff will not have to pay the defendant's costs.
72 Lang Thai, ‘Shareholder Class Actions – A Critical Analysis of the Procedure under Part IVA of the Federal Court of Australia Act’ (2015) 40 The University of Western Australia Law Review 138; Michael Legg, ‘Mass Settlements in Australia’ in Christopher Hodges and Astrid Stadler (eds), Resolving Mass Disputes ADR and Settlement of Mass Claims (Edward Elgar 2013); Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09.
73 Campbells Cash and Carry v Fostif [2006] HCA 41; (2006) 229 CLR 386, by majority decision.
74 This situation can be contrasted to the US and the UK, where litigation funders are not viewed as increasingly important to private enforcement, given that contingency fee arrangements are allowed in both jurisdictions.
75 Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(2)(d); Michael Legg, ‘Mass Settlements in Australia’ in Christopher Hodges and Astrid Stadler (eds), Resolving Mass Disputes ADR and Settlement of Mass Claims (Edward Elgar 2013), 175. Further, in class actions the adverse costs rule only applies to the representative plaintiff and not to the class members: Federal Court of Australia Act 1976 (Cth), s43(1A).
76 This is permitted because such an agreement is between a third party litigation funder and the client of a lawyer, which avoids the conflict of interest situation which can arise between a lawyer and their client where a contingency fee agreement is in place. As such, litigation funders are not subject to the contingency fee prohibitions that lawyers are: Lang Thai, ‘Shareholder Class Actions – A Critical Analysis of the Procedure under Part IVA of the Federal Court of Australia Act’ (2015) 40 The University of Western Australia Law Review 138, 148.
77 Anna Huggins, Roger Simnett and Anil Hargovan ‘Integrated Reporting and Directors’ Concerns about Personal Liability Exposure: Law Reform Options’ (2015) 33 Company and Securities Law Journal 176, 178; Allens Linklaters, ‘Shareholder Class Actions in Australia’ (May 2015), presenting empirical evidence regarding the growth in cases filed; Michael Legg and Sera Mirzabegian, ‘Shareholder Claims in Australia’ in Andrew Charman and Johan Du Toit (eds), Shareholder Actions (Bloomsbury Professional, 2013), ch 14; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196, 202; J Harris, A Hargovan and M Adams, Australian Corporate Law (5th edn, LexisNexis 2015), 348, 591; Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(4)(a).
78 ibid.
79 Michelle Welsh and Vince Morabito, ‘Public v Private Enforcement of Securities Laws: An Australian Empirical Study’ (2014) 14 Journal of Corporate Law Studies 39. This article focuses on investor class actions which are defined to include ‘Part IVA proceedings filed on behalf of persons who claim to have been harmed as a result of a breach of one or more of the laws that are administered by ASIC’, 45.
80 ibid, 48. ASIC itself may bring a class action on behalf of a shareholder under s50 of the ASIC Act 2001 (Cth).
81 ibid. That is, relating to the same conduct.
82 ibid, 64.
83 The study period is 4 March 1992 to 3 March 2009.
84 Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Third Report: Class Action Facts and Figures – Five Years Later’ (1 November 2014). Available at: http://ssrn.com/abstract=2523275, accessed 30 November 2019; Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(3).
85 ibid; Jonathan N Eisenberg, Litigating Securities Class Actions (LexisNexis Matthew Bender 2015), 7.09(4)(a).
86 Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Third Report: Class Action Facts and Figures – Five Years Later’ (1 November 2014). Available at: http://ssrn.com/abstract=2523275, accessed 30 November 2019. Class actions relating to corporations increased over time, particularly those alleging breaches of disclosure obligations and/or misleading and deceptive conduct.
87 Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia’ (20 July 2017). Available at: https://ssrn.com/abstract=3005901, accessed 3 December 2019, 24.
88 ibid, 28.
89 Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Third Report: Class Action Facts and Figures – Five Years Later’ (1 November 2014). Available at: http://ssrn.com/abstract=2523275, accessed 30 November 2019, 9.
90 Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia’ (20 July 2017). Available at: https://ssrn.com/abstract=3005901, accessed 3 December 2019, 30.
91 Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260 (for the study period 2004 until 30 June 2011); Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196 (updating the Desai and Ramsay study to 31 January 2015).
92 Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260, 279; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196, 199.
93 Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196, 199.
94 ibid. These allegations were based on a contravention of one or both of the following provisions: s674(2A), where a person is involved in the listed disclosing entity's contravention; and s180(1), the directors’ duty to act with care and diligence.
95 ibid, 200.
96 ibid.
97 ibid, 201.
98 Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196.
99 Ian Ramsay and Miranda Webster, ‘ASIC Enforcement Outcomes: Trends and Analysis’ (2017) 35 Company and Securities Law Journal 289.
100 ibid.
101 Filed cases are not made widely available on an electronic platform. Even, for example, in the case of the Federal Court, which has an electronic registry which can be searched, it is not possible to categorically search for cases, such as those relating to disclosure law breaches. Further, many of the State Supreme Courts do not make filed case information electronically available, and even if attempts were made to search the hardcopy court registries, cases are not filed based on a category such as ‘disclosure laws’ or ‘corporate law’. In relation to cases which settle, settlement information, unless court approved, is kept confidential as a matter of course.
103 The cases alleging disclosure breaches make up approximately 41% of all current class actions in the dataset. Almost all of these cases include allegations in the following general terms: ‘The <party X> failed to abide by its continuous disclosure obligations under the Corporations Act 2001 and the ASX Listing Rules and engaged in misleading and deceptive conduct’. All of the cases alleged breaches of the Corporations Act and/or ASX Listing Rules.
104 That is, at some point during proceedings, prior to consolidation or permanent stay orders, or settlement. See, Perera v GetSwift Limited [2018] FCA 732 on the consolidation of proceedings point.
105 Some court filed documents state details regarding the existence of litigation funding agreements to support the class action, however, where this information was not included, party names were used to search litigation funding websites in order to determine whether an action was funded. Funders often provide information regarding allegations and settlements. Where there were competing class actions against the same defendant company, if one of these was backed by a litigation funding agreement the action was categorised as funded in .
106 The law firms acting in the class actions often provide information regarding the case, allegations, and any settlement information.
107 This includes cases at various stages of proceedings, for example, those at the filing stage, currently being heard, awaiting judgment or approval of a settlement. Settlement information is provided up to and including 31 December 2019. For the purposes of the dataset, a case is considered settled on the date the court approves the terms of the settlement.
108 This includes all of the State registries of the Federal Court, so that all relevant actions are included in the analysis.
109 As such, no further analysis was conducted in relation to the link between insolvency and class action litigation, given the statistically insignificant correlation within the dataset.
110 While settlements require court approval, the reported judgments usually do not include the amount of the settlement.
111 This is supported by empirical research indicating the average duration of class actions which settle is 1,101 days in the case of investor class actions, and 962 days in the case of shareholder class actions. Although this covers the period 1 June 1992 to 31 May 2017, without specific information on changes in these action categories over the study period: Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia’ (20 July 2017). Available at: https://ssrn.com/abstract=3005901, accessed 3 December 2019, 30.
112 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1536.
113 ibid, 1548.
114 ibid.
115 Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 338.
116 ibid, 1549.
117 This is firstly because the relevant cases naming insiders as defendants in the class actions are yet to settle/be subject to judgment; and secondly, this information is generally not made publicly available.
118 A competing claim was included in the table if it was filed, whether or not any such competing claims ultimately proceeded in parallel or were, for example, consolidated or stayed by the court.
119 These were brought against AMP Ltd.
120 Orders may include claim consolidation, permanently staying one or more competing class actions, declassing a proceeding, closing the class in a proceeding, or allowing a joint trial of the proceedings with each proceeding left constituted as open class representative proceeding: Perera v GetSwift Limited [2018] FCA 732. It may also be the case that more than one competing class action proceeds to settlement, as in the case of the Endeavour River Class Action and Webster Class Action proceedings brought against Murray Goulburn Co-Operative Co. Limited (MG) and its subsidiary, MG Responsible Entity Limited (MGRE).
121 That is, 40 of the 96 cases within the dataset.
122 The case was counted for the purpose of this assessment if there was one or more form of public enforcement action.
123 Reinier Kraakman and others, The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), 169; James D Cox, Randall S Thomas and Dana Kiku, ‘SEC Enforcement Heuristics: An Empirical Inquiry’ (2003) 53 Duke Law Journal 737, 761. Where private enforcers utilise evidence discovered during public enforcement proceedings.
124 See e.g. Ian Ramsay and Miranda Webster, ‘ASIC Enforcement Outcomes: Trends and Analysis’ (2017) 35 Company and Securities Law Journal 289; Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260; Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196. It is of course accepted that this is a smaller dataset over a shorter period of time, and while sweeping generalities cannot be made, it is interesting to observe the different patterns of public enforcement.
125 Under section 91 of the ASIC Act 2001, ASIC may make an order to recover their investigation expenses and costs if, as a result of the investigation: a person is convicted of an offence, or judgment is awarded, or a declaration or other order is made against a person in a proceeding in a court. ASIC may make an order that the person pay, or reimburse ASIC: for the whole, or a specified part, of the expenses of the investigation, or for the whole, or a specified part, of the costs to ASIC of making the investigation, including the remuneration of ASIC staff concerned in the investigation.
126 The Corporations Act 2001 provides that compliance with infringement notices is not an admission of guilt or liability. Therefore, a company is not, by reason of its compliance with the notice, regarded as having contravened section 674(2) of the Corporations Act 2001.
127 Where there were competing class actions, if at least one of these was funded this was counted towards the total.
128 Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia’ (20 July 2017). Available at: https://ssrn.com/abstract=3005901, accessed 3 December 2019, 30.
129 Vince Morabito, ‘An Empirical Study of Australia's Class Action Regimes, Third Report: Class Action Facts and Figures – Five Years Later’ (1 November 2014). Available at: http://ssrn.com/abstract=2523275, accessed 30 November 2019. It should be noted, however, that this study covered all types of class actions and was not restricted to investor/shareholder claims.
130 ibid.
131 ibid.
132 This was the CIMIC Group Ltd case. On 7 September 2015 the Court granted a permanent stay on the basis that the proceeding was brought for an improper purpose; namely to use the case as a means of generating income rather than to recover compensation.
133 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1540.
134 ibid.
135 See www.icp.net.au/icp-claims/qbe/ and www.mauriceblackburn.com.au/class-actions/current-class-actions/qbe-class-action/.
136 Under s33V of the Federal Court of Australia Act 1976 (Cth).
137 To International Litigation Funding Partners Pte Ltd as consideration for the funding of the QBE class action.
138 Paid to Maurice Blackburn in conducting the class action. Lastly, the applicant received $50,000 as compensation for time and expenditure reasonably incurred in bringing the action on behalf of the class members as a whole.
139 Although being lauded as the third largest settlement in Australia's class action history, in gross terms: www.smh.com.au/business/companies/strong-signal-qbe-settles-class-action-for-132-5m-20171229-p4yy3f.html.
141 See e.g. www.icp.net.au/icp-claims/slater-gordon/.
142 The settlement was approved by the Court on 14 December 2017, and distributions from the Settlement Fund were made to registered group members in 2018.
143 See www.abc.net.au/news/2017-07-11/slater-and-gordon-settles-class-action/8696882, accessed 30 April 2018.
144 In both May 2012 and in August 2012. It was further alleged that Macmahon made misleading representations regarding selected projects for which to tender, and failed to disclose a key risk in relation to the project known as ‘Hope Downs 4 – Rail Earthworks and Bridge Construction’, which it should have known would have a material adverse effect on its financial performance for the 2013 financial year.
145 See e.g. https://www.icp.net.au/icp-claims/macmahon/. The relevant class period was from 2 May to 18 September 2012.
146 The settlement was approved in 2018 in accordance with the Federal Court of Australia Act 1976. In considering the application, the Court determined that the proposed settlement was fair and reasonable and in the interests of the group members. As a result, Macmahon was released from any claims made against it in, or arising out of, the class action by the applicant and group members; and no admissions were made in relation to the subject matter of the class action or the liability of Macmahon.
147 To litigation funder Harbour Fund II, LP.
148 In addition to other discretionary court ordered deductions.
149 Mr Wong was then immediately released on recognisance of $10,000 to be of good behaviour for the next three years. By reason of his conviction, Mr Wong was also disqualified from managing corporations for a period of five years.
150 Rushleigh Services Pty Ltd v Forge Group Limited (in liquidation) (Receivers and Managers appointed) [2019] FCA 2113.
151 ibid.
152 Bradgate (Trustee) v Ashley Services Group Limited (No 2) [2019] FCA 1210.
153 TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747.
154 The Court found that [at 20]: ‘the hard-edged scepticism of market analysts and market makers at the time of the contraventions had already deflated Mr Brookes’ inflated views. So, any required corrective statement that should have been made at the time of the contraventions, if it had been made, is likely to have had no or no material effect on the market price of MYR ED securities’. This was also reflected in the Bloomberg consensus data before the court.
155 The acquisition of shares, at a prevailing market price, during a period of share price inflation induced by a misleading disclosure, without knowledge of the misconduct.
156 Within ASIC annual reports and the ASIC media release database, the following search terms were used: ‘disclosure’, ‘misleading disclosure’, ‘misleading’, ‘investor protection’, ‘continuous disclosure’, ‘s674(2)’.
157 Following the completion of an ASIC surveillance and scrutiny; the cooperation and actions of the company resulted in no further action being taken by ASIC.
158 This notice was used to raise approximately $72.5 million from institutional and sophisticated investors.
159 ASIC enforcement outcomes: January to June 2017, Report 536 (August 2017).
160 Specifically, in breach of s674 of the Corporations Act 2001 (Continuous disclosure – listed disclosing entity bound by a disclosure requirement in market listing rules) and s1309 (False information), after pleading guilty to the charge. Mr Kirkpatrick additionally admitted to the offence authorising the release of false information to the market.
161 The conduct relates to the company announcement on 14 October 2013, which stated that Waratah Resources Limited had established a $100 million trade finance facility with the Bank of China, when no such financing arrangement had been put in place. Between 14 and 25 October 2013, Mr Kirkpatrick did not correct this misleading announcement, causing Waratah Resources to breach its continuous disclosure obligations.
162 Justice Davies relevantly stated: ‘The penalty is towards the higher end of the statutory maximum but a penalty towards the higher end is warranted, reflecting the gravity of the contravention, the market impact and prejudice caused by the contravention, the involvement of the senior level of management in the contravention and failure of governance, and the inadequacy of MGRE's compliance policies at the time and the duration of the contravention’. Additionally, MGRE was ordered to pay ASIC's legal costs, and ASIC issued MGRE an order to recover a contribution towards ASIC's investigation expenses of $50,000 under s91 of the ASIC Act 2001, in accordance with the terms of the settlement.
163 In breach of section 674(2) of the Corporations Act 2001, from 22 March 2016 continuing until 27 April 2016. The specific forecasts were in relation to the Available Weighted Average Southern Milk Region Farmgate Milk Price for the financial year ending 30 June 2016 of $5.60 per kilogram of milk solids; and the Full-year net profit after tax for the financial year ending 30 June 2016 of approximately $63 million, as stated by MG and MGRE in their ASX announcements dated 29 February 2016: ‘Murray Goulburn – Half Year Financial Results News Release’ and ‘Murray Goulburn – Half Year Financial Results Presentation’.
164 The details of the announcements were as follows, on 6 August 2015, ANZ issued a release to the ASX entitled ‘ANZ announces Institutional Placement (fully underwritten) and share Purchase Plan to raise a total of $3 billion’. Then, on 7 August 2015, ANZ issued a release to the ASX in respect of the placement stating among other things, ‘ANZ today announced that it had raised $2.5 billion in new equity capital through the placement of approximately 80.8 million ANZ ordinary shares at the price of $30.95 per share’.
165 ASIC Commissioner Cathie Armour said, ‘ASIC will take action to disqualify directors and officers who cause a company to contravene its market disclosure obligations, or are involved in the company's contravention’.
166 In its capacity as trustee and responsible entity for the MG Unit Trust.
167 The levels of the penalty that can be imposed by ASIC are set out in s1317DAE(2)–(7) of the Corporations Act 2001. Accordingly, ASIC has no discretion as to the amount of the penalty. See further ASIC Regulatory Guide 73, Continuous disclosure obligations: Infringement notices, October 2017.
168 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1545. Specifically, this represents the relationship between the net settlement amount and overall investor losses based on the decrease in the share price, not the smaller loss directly referable to misleading or delayed disclosures. Further, not all shares which form the company's market capitalisation are held by class members; only those that were purchased during the class period and not sold during the class period are.
169 This level of compensation can be compared with US figures, with NERA Economic Reports indicating a median settlement to investor loss coverage of 2.6% in 2017 and 2018 (before the subtraction of the full costs that investors are subject to): Stefan Boettrich and Svetlana Starykh, ‘Recent Trends in Securities Class Action Litigation: 2017 Full-Year Review’ (2018) NERA Economic Consulting Report, 37–8; Stefan Boettrich and Svetlana Starykh, ‘Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review’ (2019) NERA Economic Consulting Report, 35–6. Also by way of comparison, US legal fees as a percentage of federal class action settlement amounts had a mean and a median of around 25% over 2006 and 2007: Brian Fitzpatrick, ‘An Empirical Study of Class Action Settlements and Their Fee Awards’ (2010) 7 Journal of Empirical Legal Studies 811.
170 The penalty amount for an infringement notice for listed companies is determined by reference to the market capitalisation of the company, and whether it has previously contravened its continuous disclosure obligations.
171 ASIC is able to seek a compensation order from the court under s1317HA of the Corporations Act, where s674(2) has been breached. The single action resulting in $32 million in compensation for investors was the Multiplex Group enforceable undertaking in 2006: Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196, 202. The other two relevant studies are: Aakash Desai and Ian M Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 Australian Business Law Review 260 (for the study period 2004 until 30 June 2011); and Ian Ramsay and Miranda Webster, ‘ASIC Enforcement Outcomes: Trends and Analysis’ (2017) 35 Company and Securities Law Journal 289.
172 Ian Ramsay, ‘Enforcement of Continuous Disclosure Laws by the Australian Securities and Investment Commission’ (2015) 33 Company and Securities Law Journal 196, 202–3, drawing upon ASIC Information Sheet 151, ‘ASIC's approach to enforcement’ (2013), 4 and J Cooper J, Corporate Wrongdoing: ASIC's Enforcement Role, Speech delivered by Jeremy Cooper, Deputy Chairman, Australian Securities and Investments Commission to the International Class Actions Conference (2005), 15: ‘ASIC cautiously welcomes the emergence of the shareholder class action in Australia as a “self-help” mechanism whereby shareholders are able to seek damages for loss incurred at the hands of directors and advisers who negligently or dishonestly cause loss to those shareholders’.
173 This figure is more similar to US findings than it is to the UK, indicating the importance of formal enforcement in the Australian context. See e.g. Jenifer Varzaly, ‘The Enforcement of Directors’ Duties in Australia: An Empirical Analysis’ (2015) 16 European Business Organization Law Review 281; J Armour and others, ‘Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States’ (2009) 6 Journal of Empirical Legal Studies 687; J Armour, ‘Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment’ in John Armour and Jennifer Payne (eds), Rationality in Company Law (Hart Publishing 2009).
174 Gary Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76 Journal of Political Economy 169; J Armour, ‘Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment’ in John Armour and Jennifer Payne (eds), Rationality in Company Law (Hart Publishing 2009), 77; Sharon Oded, Corporate Compliance: New Approaches to Regulatory Enforcement (Edward Elgar 2013) 17–21; George J Stigler, ‘The Optimum Enforcement of Laws’ (1970) 78 Journal of Political Economy 526; Tom Baker and Sean J Griffith, Ensuring Corporate Misconduct, How Liability Insurance Undermines Shareholder Litigation (University of Chicago Press 2010) 6.
175 John Coffee Jr, ‘The Unfaithful Champion: The Plaintiff as Monitor in Shareholder Litigation’ (1985) 48 Law and Contemporary Problems 5; Roberta Romano, ‘The Shareholder Suit: Litigation Without Foundation?’ (1991) 7 Journal of Law, Economics, and Organization 55.
176 Where the company is targeted, any consequential level of deterrence may result from internal corporate sanctions, director dismissals, or reputational penalties: John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1553; Robert Baldwin, ‘The New Punitive Regulation’ (2004) 67 Modern Law Review 351, 371; John T Scholz, ‘Enforcement Policy and Corporate Misconduct: The Changing Perspective of Deterrence Theory’ (1997) 60 Law and Contemporary Problems 253, 265.
177 See n 120 above.
178 Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337; B Cheffins and B Black, ‘Outside Director Liability Across Countries’ (2006) 84 Texas Law Review 1385, 1480; Lisa M Fairfax, ‘Spare the Rod, Spoil the Director? Revitalizing Directors’ Fiduciary Duty Through Legal Liability’ (2005) 42 Houston Law Review 393.
179 The confidentiality of both D&O insurance policy documents and indemnification clauses does not allow for specific figures to be calculated in this context.
180 See e.g. Corporations Act 2001, ss199A, 199B and 199C.
181 Civil penalties are payable to the Commonwealth and may be ordered on top of a requirement to pay compensation.
182 This was the first successful criminal penalty brought against a director in relation to a disclosure law breach in Australia.
183 The insider trading charge specifically related to the company's alleged disclosure law breach.
184 Mr Wong was sentenced to 18 months’ imprisonment after pleading guilty to insider trading, and was then immediately released on recognisance of $10,000 to be of good behaviour for three years.
185 As such, most enforcement actions include numerous media release documents arising from the same matter. In addition to this, these are almost always accompanied by news cycle stories which have the effect of more broadly disseminating enforcement action information to the general public, hence amplifying the signalling effect arising therefrom.
186 That is, assuming that post investigation ASIC media releases regarding regulatory proceedings convey information regarding managerial diligence, honesty and/or competence.
187 Indeed, following the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (February 2019), the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 has now come into force. This consolidates and expands the civil penalty regime, with a focus on the introduction of higher penalties for companies and individuals.
188 When large publicly listed companies are targeted by class actions these tend to be reported in the media, but in the generality of corporate law actions brought by private parties there is little to no public information prior to judgment or settlement.
189 Daniel Fischel and Michael Bradley, ‘The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis’ (1986) 71 Cornell Law Review 261, 267–8; Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 357. Although there is evidence that markets are not efficient, that is, share prices do not change immediately to incorporate new information: Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford University Press 2000).
190 Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 339. Judicial liability increases signal strength through mechanisms such as discovery, and it reduces directors’ exposure to share prices changes by increasing the provision of other types of raw information.
191 ASIC Infringement Notice Regulatory Guide 73 (October 2017).
192 ibid, 9–10.
193 For example, regarding diligence, honesty and/or competence, or a lack thereof.
194 See e.g. Roberta Romano, ‘The Shareholder Suit: Litigation Without Foundation?’ (1991) 7 Journal of Law, Economics, and Organization 55; John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1536; Michael Klausner, ‘Personal Liability of Officers in US Securities Class Actions’ (2009) 9 Journal of Corporate Law Studies 349.
195 See e.g. Merritt B Fox, ‘Why Civil Liability for Disclosure Violations When Issuers Do Not Trade?’ (2009) Wisconsin Law Review 297; Lawrence E Mitchell, ‘The “Innocent Shareholder”: An Essay on Compensation and Deterrence in Securities Class-Action Lawsuits’ (2009) Wisconsin Law Review 243; John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534; Richard Booth, ‘OOPs! The Inherent Ambiguity of Out-of-Pocket Damages in Securities Fraud Class Actions’ (2020) European Corporate Governance Institute- Law Working Paper 508/2020; Harvard Law Review Note, ‘Congress, the Supreme Court, and the Rise of Securities-Fraud Class Actions’ (2019) 132 Harvard Law Review 1067. Although see Jill E Fisch, ‘Confronting the Circularity Problem in Private Securities Litigation’ (2009) 2009 Wisconsin Law Review 333, arguing that there is a governance externality which justifies the compensation objective of securities class actions.
196 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534.
197 ibid.
198 ibid, at 1558: ‘if one assumes that most shareholders are diversified, the key implication of this premise is that, on an aggregate basis, diversified investors will be shareholders on both sides of the class period divide, sometimes being a shareholder within the class period and sometimes a shareholder outside the class period. As a result, at least in the aggregate, diversified investors are largely making wealth transfers among themselves’.
199 Kenneth W Dam, ‘Class Actions: Efficiency, Compensation, Deterrence, and Conflict of Interest’ (1975) 4 The Journal of Legal Studies 47, 56; Jill E Fisch, ‘Confronting the Circularity Problem in Private Securities Litigation’ (2009) 2009 Wisconsin Law Review 333, 336.
200 Jill E Fisch, ‘Confronting the Circularity Problem in Private Securities Litigation’ (2009) 2009 Wisconsin Law Review 333, 336.
201 Kenneth W Dam, ‘Class Actions: Efficiency, Compensation, Deterrence, and Conflict of Interest’ (1975) 4 The Journal of Legal Studies 47, 60.
202 Deterrence requires that the culpable party should pay, but does not specify who should receive the payment: Kenneth W Dam, ‘Class Actions: Efficiency, Compensation, Deterrence, and Conflict of Interest’ (1975) 4 The Journal of Legal Studies 47, 60.
203 Unless reputational sanctions ensue.
204 John Coffee Jr, ‘The Unfaithful Champion: The Plaintiff as Monitor in Shareholder Litigation’ (1985) 48 Law and Contemporary Problems 5; Roberta Romano, ‘The Shareholder Suit: Litigation Without Foundation?’ (1991) 7 Journal of Law, Economics, and Organization 55. From a reputational perspective, litigation or the threat of litigation may itself improve agent incentives and behaviour: Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 356. In the securities class action context, empirical evidence indicates that defendant directors do not make out-of-pocket payments into corporate settlements, making agent liability necessary to achieving deterrence aims: Michael Klausner, ‘Personal Liability of Officers in US Securities Class Actions’ (2009) 9 Journal of Corporate Law Studies 349. Conversely, it may be the case that corporations have the means of punishing agents for misconduct, in which case it has been argued that corporate liability may increase the corporation's commitment to private internal enforcement. However, when the expected gain from infringing conduct far outweighs any possible private penalty within the corporation, then agent liability is required for deterrence objectives to be met: John T Scholz, ‘Enforcement Policy and Corporate Misconduct: The Changing Perspective of Deterrence Theory’ (1997) 60 Law and Contemporary Problems 253, 265.
205 Tom Baker and Sean J Griffith, Ensuring Corporate Misconduct, How Liability Insurance Undermines Shareholder Litigation (University of Chicago Press 2010); Lisa M Fairfax, ‘Spare the Rod, Spoil the Director? Revitalizing Directors’ Fiduciary Duty Through Legal Liability’ (2005) 42 Houston Law Review 393, 414; Linda Mullenix, ‘Ending Class Actions as We Know Them: Rethinking the American Class Action’ (2014) 64 Emory Law Journal 399, 433.
206 Assuming the application of rational choice theory, where agents and corporations are primarily incentivised by the imposition of legal penalties, where the applicable laws are clear and reasonable, and where enforcement agencies optimally investigate and punish suspected infringements, subject to resource and budgetary constraints, cf: John T Scholz, ‘Enforcement Policy and Corporate Misconduct: The Changing Perspective of Deterrence Theory’ (1997) 60 Law and Contemporary Problems 253, 254.
207 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1537.
208 Which posits that society will increase the monitoring of agents who otherwise benefit from wrongful conduct.
209 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1553; Robert Baldwin, ‘The New Punitive Regulation’ (2004) 67 Modern Law Review 351, 371; John T Scholz, ‘Enforcement Policy and Corporate Misconduct: The Changing Perspective of Deterrence Theory’ (1997) 60 Law and Contemporary Problems 253, 265.
210 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1537; Roberta Romano, ‘The Shareholder Suit: Litigation Without Foundation?’ (1991) 7 Journal of Law, Economics, and Organization 55, at 84, discussing the fact that settlements are covered by D&O insurance policies and companies do not appear to revise director remuneration as a result of litigation outcomes; Michael Klausner, ‘Personal Liability of Officers in US Securities Class Actions’ (2009) 9 Journal of Corporate Law Studies 349.
211 John C Coffee Jr, ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’ (2006) 106 Columbia Law Review 1534, 1538.
212 Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 339.
213 Roberta Romano, ‘Corporate Governance in the Aftermath of the Insurance Crisis’ (1990) 39 Emory Law Journal 1155; Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 339.
214 Tom Baker and Sean J Griffith, Ensuring Corporate Misconduct, How Liability Insurance Undermines Shareholder Litigation (University of Chicago Press 2010), 20; Lisa M Fairfax, ‘Spare the Rod, Spoil the Director? Revitalizing Directors’ Fiduciary Duty Through Legal Liability’ (2005) 42 Houston Law Review 393, 414.
215 Holger Spamann, ‘Monetary Liability for Breach of the Duty of Care?’ (2016) 8 Journal of Legal Analysis 337, 338; Lisa M Fairfax, ‘Spare the Rod, Spoil the Director? Revitalizing Directors’ Fiduciary Duty Through Legal Liability’ (2005) 42 Houston Law Review 393, 446. In this manner, partial liability has thus been described as acting as ‘a necessary precondition to effective reputational sanctions’ (at 447).
216 2014–2018. The dataset includes all class action cases with alleged disclosure law breaches in the Federal Court as at 24 September 2018, with judgment/court approved settlement information up to and including 31 December 2019.
217 Here, the probability figures are likely to be understated, as class actions filed between 2014 and 2018 that may have already settled/come to judgment will not be included in the class action dataset as at 24 September 2018 (the point-in-time database date). This figure moreover excludes competing class actions and does not include public enforcement actions. In relation to filed actions which specifically name directors or officers as defendants, there is (on average) one per year in the dataset.
218 J Armour, ‘Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical Assessment’ in John Armour and Jennifer Payne (eds), Rationality in Company Law (Hart Publishing 2009).
219 See, for example, the remarks of John Abernathy, Clime Capital Limited chairman (the lead institutional claimant in the UGL Limited class action in above), ‘We believe that institutional investors have an important role to play in enforcing disclosure obligations, and recovering losses for our clients and other investors.’ As reported in the Australian Financial Review: www.afr.com/business/clime-capital-files-class-action-against-ugl-on-ichthys-power-plant-writedowns-20171219-h072qg.
220 This is necessarily linked to the issue of choice of action type, for example, infringement notices only target companies, whereas civil proceedings may be used to target both companies and directors.