Australia: The Rise of Shareholder Class Actions in Australia

Last Updated: 21 April 2005
Article by Jason Betts

Shareholder vigilance

The Australian financial sector has undergone a facelift over the last 20 years and ‘shareholder vigilance’ is a phrase now appropriate to characterise our investment environment. Close to 55 per cent of adult Australians now own shares, either directly or though investments in managed funds and private superannuation.1 That’s the largest proportion in the world.2 The increasing privatisation of government businesses and statutory corporations, the introduction of compulsory superannuation and the de-mutualisation of major insurance players such as AMP and the NRMA have contributed to that position.

The result is a larger number of institutions and individuals concerned about the performance of their shareholdings, and seeking new or more vigilant processes to enforce their rights as corporate stakeholders. That concern translates into a heightened focus on the principles of corporate governance and securities fraud, and the means for recovering losses that arise when those principles are ignored by companies, their directors and advisers.

Enter the shareholder class action, a private enforcement mechanism designed to empower individual shareholders to aggregate their common claims and prosecute them as a group, thereby purportedly achieving the goals of increased access to justice and more efficient use of judicial resources.

Investors, advisers and major corporations (as well as their lawyers) will increasingly need to familiarise themselves with fundamental principles of class action litigation as Australia’s financial environment moves into a new era of regulatory vigilance and attention to corporate governance issues.

Building blocks of a shareholder class action

What exactly are shareholder class actions? Arguably, the best description was crafted 17 years ago by the Australian Law Reform Commission (ALCR) which said in its now famous 1988 report on grouped proceedings:

A group of small shareholders suffer considerable financial loss as a result of misleading advice received from stockbrokers and the directors of the company in which significant amounts of their savings were invested. The shareholders also claim that the company failed to comply with the Australian Stock Exchange listing rules by neglecting to inform the market of factors likely to materially affect the market price of shares. Apart from rights in negligence against the stockbrokers, the shareholders would have had rights against the directors arising from the Companies Codes and the Securities Industry Codes. A grouping procedure could facilitate the recovery of loss by those affected and would offer the advantage of helping to ensure that all concerned were informed of the claim and shared in the result without having to commence individual proceedings.3

The description remains accurate. As the ALRC predicted, the building blocks of a shareholder class action are optimistic forecasts of corporate performance in the form of representations of things to come. Investors (and their lawyers) cherish those kinds of representations because they form one of the key information sources upon which financial decisions are routinely based. But, like weather forecasts, financial performance predictions are often completely wrong. And when they are, shareholders have a variety of legal avenues available to them. These rights are well established. Examples include:

  • statutory remedies for misleading and deceptive conduct under the Trade Practices Act 1974 (TPA); section 12DA of the Australian Securities and Investments Commission Act 2001 (ASIC Act) and section 728 of the Corporations Act 2001
  • tortious rights in relation to negligent misstatements
  • rights in relation to breaches of the continuous disclosure rules of the Corporations Act (section 674(2))
  • injunctive relief and damages available for persons whose interests are affected by a contravention of the Corporations Act (section 1324)
  • proceedings to enforce compliance with the Australian Stock Exchange listing rules (section 793C).

These kinds of remedies have been litigated extensively in Australia and the United Stated in recent years.

The American experience

Most Australian lawyers are aware of the juggernaut that is the shareholder class action ‘industry’ in the United States. The February 2005 shareholder class action trend analysis prepared by NERA Economic Consulting further emphasises the magnitude and dynamics of the phenomenon.4

Three of the eight largest shareholder class action settlements in history occurred in 2004 (involving WorldCom—$2,575 million; Raytheon—$460 million and Bristol/Myers Squibb—$300 million). The value of the average shareholder class action settlement rose in 2004 by almost 33 per cent to $27.1 million and it is now thought that over any five year period, the average American public corporation faces a 10 per cent probability of being named as a defendant to at least one shareholder class action suit.

It is interesting that NERA found that in cases where an accounting firm joined as a co-defendant, settlement values increased by close to 66 per cent and cases involving an institutional investor as lead plaintiff settled for approximately 33 per cent more than other shareholder class action settlements. The reasons for this latter trend are not known, but possible theories include the retention by institutional investor plaintiffs of more effective legal counsel as well as a greater contribution by institutional investors to litigation strategy and more effective supervision of legal counsel.

Perhaps the statistic most resonant with the general public is that in over 40 per cent of cases, plaintiffs’ lawyers have recovered 33 per cent or more of the settlement amount.

Why is any of this important to Australians? The answer is that these trends indicate that shareholder class actions are being used in an aggressive fashion to regulate corporate malfeasance. As the NERA report notes, although the loss of reputation and financial cost of major litigation have always served as an incentive for good corporate governance, shareholders are now employing these suits as a type of private regulatory tool to achieve both financial compensation and specific corporate governance reforms.

The Australian experience

The last five years has seen a number of shareholder class actions commenced in Australia. A description of some of the more prominent actions demonstrates the magnitude and frequency of this type of litigation.

  • GIO: In 1999, GIO, its directors and an independent adviser were sued by Mr King on behalf of 68,000 shareholders who did not accept a takeover offer by AMP as a result of misleading statements in the Part B document required by the Corporations Act. GIO shareholders settled their proceedings for $112 million, Australia’s largest shareholder class action settlement to date and the first solid indication from the judiciary that shareholder class actions could be successfully prosecuted (albeit at the interlocutory stage).
  • Media World: In January 2005, a shareholder class action was repeatedly filed against Adam Clarke and certain of his companies for misleading and deceptive representations associated with Media World Communications. That company allegedly predicted it would achieve 14 per cent penetration of Australian television households within five years of commencing a video-on-demand service. After collecting approximately $35 million from investors between 2000 and 2004, Media World announced that the technology did not function as well as other commercially available technology and a class action was soon commenced.
  • Concept Sports: A shareholder class action was filed in 2004 against Melbourne events and merchandising company Concept Sports. The claim alleges that Concept Sports and its directors breached the Corporations Act by issuing a misleading prospectus. It is alleged that the prospectus did not contain all of the information that investors and their professional advisers would require to make an informed investment decision.
  • Sons of Gwalia: A multimillion dollar shareholder class action is proceeding against Sons of Gwalia centred on allegations that the company engaged in misleading and deceptive conduct by failing to fully disclose its gold hedging commitments. That litigation is reportedly being funded by IMF, who have recently been prevented by the Federal Court from using Gwalia’s share register to contact shareholders in order to increase the size of the class.

Can we expect more shareholder class actions of this kind? Almost certainly. The reasons arise both as a result of structural changes in the regulatory and investment environments, as well as recent changes to the law that remove some of the obstacles to the prosecution of shareholder class actions.

Sidestepping the Prudential Principle

It has been a longstanding principle of Australian law that a shareholder cannot recover damages merely because the company in which he or she has invested has suffered damage.5 The Prudential Principle, as it has become known, stands for the proposition that a shareholder cannot recover a sum equal to the diminution in the market value of an investment because such a loss is merely a reflection of a loss suffered by the company. This is a reinforcement of the ancient rule that in relation to wrongs done to a company, it is the company that is the proper plaintiff to commence proceedings, not its shareholders.6

It is becoming clear that the Prudential Principle will not foreclose Australian shareholder class actions seeking damages for loss of share value. The Federal Court has recently held that, where shareholders are seeking remedies not dependant on their status as a shareholder, such as statutory rights in relation to conduct which misleads or deceives or tortious rights in relation to negligent misstatements, then it is the shareholders who are the proper plaintiffs and not the corporation.7 This clarifies the availability of shareholder class actions in respect of the full suite if corporate malfeasance claims referred to at the outset of this paper, including remedies under the TPA, the ASIC Act and the Corporations Act.

Easier to sue multiple respondents

Since at least the decision in King v GIO (2000) 100 FCR 209, Australian lawyers had reason to believe that it was a requirement for all class actions that the lead plaintiff (the applicant) and all group members have a claim against each and every respondent.

In a shareholder class action, allegations often relate to various misrepresentations over a significant period of time, for example, some class members may have relied on misleading statements by directors as to profitability, some may have relied on an auditor’s unqualified opinion of the accuracy of financial statements, and some may have relied on the advice of a financial adviser. An argument frequently raised in opposition to multiple respondent cases was that the applicant and each group member could not possibly have relied on each separate misrepresentation by each respondent and that the claims of all shareholders lacked the requisite commonality to enable them to group together.

This requirement may no longer exist in Australian law. Recent decisions in the Federal Court suggest that all that may be required is that the applicant and all group members have a claim against one respondent.8 Although the legal position is far from determined, if it is no longer a requirement that each member of the class have a claim against each respondent, a previous obstacle to the prosecution of shareholder class actions seeking relief in relation to separate misrepresentations by various respondents over a significant period of time, may now be dissolved.

Regulator encouragement of class actions

There is an ever popular view among regulators and academics that shareholder class actions should be encouraged in order to supplement the often slow-moving cogs of government enforcement with much speedier private actions.9 Private enforcement is frequently more intimidating to corporations, particularly in the case of shareholder class actions which can aggregate the claims of thousands or even millions of shareholder and thereby significant increase a corporation’s legal exposure in comparison with the relatively meagre statutory fines that attach to corporate misfeasance.

Whatever the position, regulators in Australia are recognising that higher volumes of shareholder class actions would relieve the burden on statutory bodies such as ASIC and would mitigate the inability of small investors (who are relatively poorly resourced and have no experience of the legal mechanism), to identify corporate malfeasance and to prosecute in relation to failures in corporate governance or in respect of misleading corporate information.

To this end, it is interesting to note that ASIC investigations have been associated with a number of recent shareholder, including those against GIO and Aristocrat.

Calls for the relaxation of traditional costs rules

A number of commentators have also suggested that Australian litigation costs rules should be reformed to facilitate more shareholder class actions.10

Contingency fees are not permitted in Australia, although there are some fee arrangements that come very close to the US-style of fee levied as a proportion of any successful recovery. Speculative fees (that is, no-win no-pay arrangements) are permitted in all jurisdictions and some jurisdictions also permit a statutory uplift or loading on top of normal fees where a case is successfully prosecuted.

Notwithstanding these arrangements, Australia abides by the English rule whereby a successful party may claim its costs against the loser. The rule is generally considered to be an impediment against the prosecution of shareholder class action proceedings because of the potential burden it places on the applicant. From time to time, plaintiffs have argued (largely unsuccessfully) that the English rule should be displaced on the basis that there is a public interest in the prosecution of many types of class actions.11

Now more than ever, there is growing academic support for the proposition that public interest concerns are especially significant in the shareholder class action context because of the sheer number of individuals potentially affected by breaches of corporate governance and the benefits that can arise through aggressive private enforcement of corporate misfeasance. It is only a matter of time before these arguments are considered by the legislature in an effort to deal more effectively with the question of whether shareholder class actions should be encouraged as a form of what the Americans call ‘private attorney general’.

The fraud on the market theory

In the Unites States, the fraud on the market theory has opened the door to thousands of shareholder class actions.

Before the theory emerged, the need for each individual shareholder to prove reliance on a particular misrepresentation (in establishing the requisite causation to prosecute the claim) meant that it was commonly impossible for class members to establish a sufficient ‘commonality’ of claims. Respondents would inevitably assert that proof of reliance on a misrepresentation was an inherently individual issue and that the existence of individual issues meant that the class action did not demonstrate a substantial common question worthy of prosecution in the aggregate form.

The fraud on the market theory assumes that the price of shares in an open and developed market reflects all publicly available material information about those shares, including materially false or misleading statements issued by a company. The theory presumes that shareholders rely on the integrity of the market price in making their investment decisions. Individual reliance becomes unnecessary to establish and the effect of the presumption is to relieve plaintiffs of the unrealistic prospect of proving that they acted on any one or more particular representation (which would give rise to multiple individual issues of proof), thereby facilitate the prosecution of the shareholder class action to trial.

Although the theory has not yet gained favour with an Australian court, it is inevitable that plaintiffs’ lawyers will give it close consideration should proof of individual reliance remain an obstacle to class action prosecution.

Emergence of mainstream litigation funding

Litigation funding has traditionally been constrained by rules against maintenance and champerty. Those ancient rules restrain ‘trafficking in litigation’ and the assignment of the right to litigate to a third party.12

The position in Australia is now changing. Recent case law supports the proposition that in some circumstances a cause of action may be assigned where the assignee has some recognised interest in the cause of action.13 The apparent philosophy emerging in Australia is that litigation of the claims of shareholders in an aggregate form is increasingly in the public interest and consistent with the notions of access to justice and efficient use of judicial resources. The Federal Court has commented that increasingly the judiciary is able to take a wide view of what might be acceptable in terms of litigation funding, particularly if appropriate checks and balances on the integrity of the litigation process are otherwise able to be implemented to prevent an abuse.14

These changes in the judiciary’s attitude towards litigation funding of course coincide with the emergence of major litigation funders in Australia, most notably IMF (Australia) Limited, a publicly listed company providing funding of legal claims and other related services. IMF claims to be the largest litigation funder in Australia and the only such listed company in the world. The increased availability of funding will have an obvious effect on the frequency with which shareholder class actions are prosecuted.

Futility of interlocutory challenge

Interlocutory challenges to shareholder class actions in Australia have been notoriously difficult (particularly in comparison to the position in the United States). Although skirmishes about pleadings are inevitable, Australian courts have traditionally allowed plaintiffs significant latitude in amending their pleadings to ensure that a class action is disclosed that confirms with the threshold requirements. The results is protracted interlocutory warfare between plaintiffs and defendants requiring multiple court appearances, numerous interlocutory judgments and significant legal costs to the parties. In short, once a shareholder class action is commenced, it is difficult to dispose of it quickly or cheaply.

Further developments

A very interesting debate is emerging as to the entitlement of a shareholder to sue for damages against a company in circumstances where the shareholder has not renounced his or her holdings. In Crosbie; Re Media World Communications Ltd, Finkelstein J held that a person who has subscribed for shares in a company may not, while he or she retains those shares (that is, without renouncing the contract by which the shares were acquired), recover damages against the company on the ground that purchase was induced by fraud or misrepresentation.15

The decision is somewhat counter-intuitive, and it has been noted by some commentators that it may have the unusual result of defeating shareholder class actions in situations where a company has subsequently entered into administration or liquidation (because, at that time, shareholders are effectively barred from changing the status of their investment). It would be unusual if a potential defendant could avoid a significant shareholder class action claim by choosing to enter into administration (and also potentially inconsistent with section 729 of the Corporations Act which allows shareholders to sue over a misleading prospectus). Nevertheless, that appears to be the present position in Australia until such time as the Media World Communications decision is re-visited.


There are a variety of factors which create a potential for a greater volume of shareholder class actions in Australia. A number of legal obstacles to the prosecution of shareholder class action claims have either recently been removed or are subject to ongoing challenges.

Already we have seen an increase in the incidence of such actions in Australia, particularly since the settlement of the GIO shareholder class action and, accordingly, the long-suspected increase in the frequency of such cases is likely to become more than just a prophecy.


1. ASX media release,'Share Ownership Study — 2004 Findings', 24 February 2005, viewed on 10 March 2005.

2. ASX,'2004 Share Ownership Study — Background Information', 24 February 2005, ASX, viewed on 10 March 2005.

3. Australian Law Reform Commission, Grouped Proceedings in the Federal Court Report No 46 (AGPS, Canberra, 1988), para 65.

4. NERA Economic Consulting, Recent Trends in Shareholder Class Action Litigation: Bear Market Cases Bring Big Settlements, February 2005.

5. Prudential Assurance v Newman Industries Ltd (No 2) [1982] 1 Ch 204.

6. Foss v Harbottle (1843) 2 Hare 461; 67 ER 189.

7. Johnstone v HIH [2004] FCA 190 at [38].

8. See Bray v F Hoffman-La Roche (2003) 130 FCR 317 at [248]; Milfull v Terranora Lakes Country Club (in liquidation) [2004] FAC 1637 at [3]; but also see the recent decision of Mansfield J in Guglielmin v Trescowthick (No 2) [2005] FCA 138 which may support the existence of the threshold requirement.

9. Peta Spender, 'Securities Class Actions: A View from the Land of the Great White Shareholder' (2002) Common Law World Review 123 at 127.

10. See discussion in Spender, above at 128; and Julian Donnan, 'Class Action Securities Fraud in Australia', 18 Company and Security Law Journal 82 at 94.

11. See Qantas Airways Ltd v Leonie Cameron [1986] 765 FCA 1

12. See, for example, the discussion of these principles in Trendtex Trading Corp v Credit Suisse [1982] AC 679.

13. See Magic Menu Systems Pty Ltd v AF Facilitation Pty Ltd (1997) 142 ALR 198.

14. See Magic Menu at 206.

15. [2005] FCA 51

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.