Australia: Is There Safety in Numbers?

Last Updated: 11 May 2006
Article by Greg Williams

Key Point

  • Whether they are defendants or plaintiffs in securities class actions, companies must consider a range of matters.

Although we are only a quarter of the way into the year, it already seems that 2006 will be a jubilee year for class actions, particularly in the field of what are commonly termed "securities class actions".

In October 2005, Hugh McLernon, a director of Australia's largest litigation funder, IMF, said in an article in the Australian Financial Review[1] that there were currently six shareholders' class actions on foot in Australia: Sons of Gwalia, Aristocrat, Concept Sports, Ion, Village Life and Media World. Perhaps coincidentally, IMF is funding five of them. However, Mr McLernon could also have mentioned the Harris Scarfe class action on foot in the Federal Court in Adelaide[2] or the class action proceedings which are on foot against the NAB in the US, on behalf of Australian investors, over the NAB's losses flowing from its involvement in HomeSide Lending.

In his article Mr McLernon predicted that fears of an explosion of such litigation in Australia were scaremongering. However, in the few months since his article we have seen class actions commenced or contemplated in relation to, allegations that Telstra failed to fulfil its continuous disclosure obligations to the share market, the collapse of the Westpoint mezzanine finance schemes, and the Australian Wheat Board scandal. Australian lawyers are also investigating the possibility of a class action against Multiplex, again in relation to continuous disclosure obligations arising from the construction of Wembley stadium.

While it is true that the past year or so has disclosed a rich vein of alleged corporate misdeeds, such allegations are not new. What is unusual is the suggestion that they might give rise to a right on the part of shareholders to sue someone, whether it be the company itself, or its officers, advisers or (in the case of Westpoint) third party financial advisers. They also represent the emergence of a model for concerted and co-operative action on behalf of shareholders which, until recently, did not exist.

This firm has elsewhere written widely on the factors which are driving the emergence of securities class actions in Australia[3], including the growth of the litigation funding industry. That ground does not need to be covered again. Suffice it to note that the odds are firmly in favour of an increase in this type of litigation in the near future, whether that increase is explosive or not.

Part of this trend is the tendency to use class actions as the preferred vehicle to advance the interests of the wronged parties. While class actions seeking damages for financial loss are not new, until recently the most publicity about class actions has focussed on product liability litigation - injured consumers suing for compensation for their injuries. The increased attention on so-called securities class actions reflects a recognition that the public now see securities and other financial instruments - whether they be shares or the mezzanine lending arrangements made famous by Westpoint - as products, the purchasers of which are entitled to the same protections and entitlements which the law affords to purchasers of products which are capable of causing physical injury. The law to some extent reflects this, with the continually increasing emphasis on regulation and disclosure in the financial services industry.

A good example of this is the recent Full Federal Court decision in Sons of Gwalia Ltd v Margaretic [2006] FCAFC 17. In February of this year the Full Federal Court affirmed the decision of a single Federal Court judge which attracted considerable publicity when it was handed down in September 2005. The Full Federal Court has confirmed that that shareholders who allege that they were induced to purchase shares by a company's unlawful conduct are entitled to sue in their capacity as members of the public, not members of the company, and therefore have their claims rank alongside other unsecured creditors in any distribution of the company's assets.

Whatever your views about the merits of this decision, it is another indication of the shift from the concept of company shareholders as participants in a company's venture to consumers in the financial market.

What are the consequences of the growth in financial products class actions for a company, its officers and employees?

The first and, perhaps most obvious point, is the increasing risk that breach of a company's legal or listing obligations may give rise to not just regulatory action, but also significant, long term and potentially highly public litigation against a company or its officers or both. Many people have written at great length about the importance of keeping abreast of the ever-increasing obligations which are imposed on companies and their officers, regardless of whether they arise from the Trade Practices Act, the Corporations Act, listing rules, prudential requirements or any other source. This new risk from breach of such obligations should act as encouragement to greater diligence.

It should also be mentioned that under the model of financial products class actions emerging in Australia there will usually be a litigation funder involved underwriting and promoting the litigation. This month the High Court heard an important case about litigation funding (an appeal from the decision of the NSW Court of Appeal in Fostif v Campbells Cash and Carry (2005) 63 NSWLR 203). The High Court's decision is likely to provide important guidance on the lawfulness of litigation funding and the obligations which the law imposes on litigation funders. For the moment, however, litigation funders have been emboldened by the Court of Appeal's decision and most of the cases mentioned at the beginning of this article are being funded.

While the involvement of the funder may mean that a defendant in a financial product class action faces a well organised and resourced opponent, it can also have its advantages. Litigation funders are usually commercial operations and they exist for the same purpose as the defendants in the litigation they underwrite - to make a profit. This means that, while litigation funders owe important obligations to the claimants in a class action (which should be, and usually are, enshrined in the litigation funding agreement), they are not inclined to spend money unless there is a prospect of a return. There is no reason to believe that litigation funders' attitude to litigation will be anything but commercial, meaning they are likely to be amenable to negotiation and will consider any commercial proposal which is consistent with their legal advice about the strength of the claimants' cases.

The final point is that companies need not always see themselves as defendants in financial products litigation. Many Australian companies, particularly those in the financial sector, hold large portfolios of Australian and international shares either in their own interest or on behalf of others. While financial products class actions may be a relatively new phenomenon in Australia, they are a well established industry in the US. The total value of settlements in US federal securities class actions for 2004 was US$2.9 billion, with an average value per settlement of $6 million[4]. The total value of settlements for 2005 was a staggering US$9.7 billion, although a large proportion of this was the US$6.1 billion settlement of the WorldCom litigation, a new record for the value of a single settlement. The record may not stand for long because it has been reported that the settlement fund for Enron has grown to $7.1 billion.

To date the most participants in financial products litigation have been small shareholders. However, institutional shareholders play a much more significant role in the US. Since 1995 institutional shareholders have been the lead plaintiffs in about 35% of US securities class actions.

Some of these issues will obviously be of considerable strategic importance to companies. Decisions about whether to settle or fight litigation, particularly large scale public litigation, cannot be taken lightly. Decisions about whether it is open to an investor to become involved in a class action and, if so, whether it is a good idea to do so require equally serious consideration There will usually be cogent arguments both for and against such involvement. To give but one example, it may be important to consider the effect of the litigation on the value of any ongoing holding in the defendant company.

Such decisions obviously need to be taken after careful evaluation of the opportunities and risks that arise from such litigation. In this regard, many of the issues raised by class actions are unique. However, if the present cluster of such actions is a guide to the future they are issues that will become increasingly familiar to corporate Australia.


[1] Class actions no easy road, Hugh McLernon, Australian Financial Review, 14 October 2005

[2] see Guglielman v Trescowthick (No 2) (2005) 220 ALR 515

[3] see, for example, Clark, Loveday and Williams, The future for product liability law in Australia (2005) 16 (9) APLR 129

[4] This and the statistics which follow are drawn from the work done by Cornerstone Research, available at the Stanford Securities Class Actions Clearing House

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)
Related Video
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.