Legislative changes will mean that funded class actions are not classed as managed investment schemes
Yesterday, the Minister for Corporate Law, Chris Bowen, announced that the Federal Government would pass regulations to clarify that litigation funded class actions are not managed investment schemes under the Corporations Act 2001 (Cth).
The Government intends to draft regulations this financial year to expressly exclude litigation funded class actions from the definition of "managed investment schemes".
The announcement ends the uncertainty for litigation funded class actions that arose from the Full Federal Court's October 2009 decision in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147. In effect, the Brookfield Multiplex decision found that the retainer and funding agreements in that case (which are largely replicated in all such funded class actions) satisfied the elements of a managed investment scheme that required registration under the Corporations Act. As such that class action, and similar class actions, had been operated in contravention of the Corporations Act.
The decision casts doubts over Australia's class action "industry" for both existing and potential class actions and potentially hindered the increased prevalence of shareholder class actions which are usually founded on allegations of breach of the ASX continuous disclosure regime.
In response to Brookfield, the Australian Securities and Investments Commission (ASIC) announced in November 2009 that it would provide transitional relief up until 30 June 2010 to litigation funded class actions affected by the findings in Brookfield. However that relief was automatically granted only to class actions commenced before 4 November 2009 and any class actions commenced after that date had to apply to ASIC for an exemption. There have been reports that numerous such exemption applications have been refused by ASIC and of litigation funders refusing to pursue class actions on behalf of retail investors (as managed investment schemes on behalf of sophisticated and professional investors do not require registration). In effect, it meant the "mums and dads" of the shareholder world were likely be shut out of any new class actions.
The Minister has signalled an intention to have the new regulations in place before the expiration of ASIC's temporary relief on 30 June 2010.
Whilst the proposed new regulations have not yet been released, it would appear from the Minister's comments that the Government has decided to take a "minimalist" approach to the decision in Brookfield. It seems the Government simply intends to exclude litigation funded class actions from relevant provisions of the Corporations Act so that such funders can avoid bearing the burden of the prudential and reporting obligations that the operators of managed investment schemes must bear. As such it would appear that the Government's desire to ensure continuing access to justice via the class action mechanism has outweighed any competing desire to increase levels of accountability and transparency applicable to those running such class actions.
The Minister has flagged some other regulations to protect claimants from the consequences of potential conflicts of interest that may arise from the involvement of litigation funders and lawyers (with their own financial interest in the litigation) negotiating financial settlements to class actions.
But it would not appear that Brookfield will be the catalyst for wider reform of the role of litigation funders or class actions generally, despite the fact that there have been numerous calls for such reform, including in the paper released by the Federal Attorney-General's Access to Justice Taskforce in September last year. Also, those hoping for legislative guidance on the highly uncertain issue of proving causation in shareholder class actions are likely to be disappointed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
