COVID-19 has posed the biggest challenge for the Australian economy since the Depression, a public health crisis triggering an economic crash, with “normality” not expected in the foreseeable future. Against this backdrop, organisations of all sizes and stripes are struggling to govern through the crisis, making fine judgement calls about how to respond and communicate their plans to employees, suppliers, shareholders and other stakeholders.
For listed companies and directors, the uncertainty generated by the crisis poses the problem of how to keep shareholders informed and meet disclosure obligations without exposing themselves to liability. In particular, companies are struggling with what kind of forward-looking statements they can make when nobody has a clear sense of how the economy might look next month, let alone next year. The federal government has postponed delivering its budget until October.
The litigation risk posed by COVID-19 comes on the back of golden years for the class action industry. The Australian Law Reform Commission (ALRC), in its report last year, found around 50 cents in the dollar of any securities class action settlement goes to plaintiff lawyers and litigation funders. With that evidence, the ALRC queried whether current regulatory settings are operating in the public interest and called for a dedicated inquiry to examine the substantive laws that underpin these cases — laws legal experts say are too easy to breach and put Australia out of step with other international markets.
The time has come for a solution, not another inquiry. As any director will know, the D&O market is in genuine crisis with insurers exiting, premiums skyrocketing and difficult decisions being made by boards as to whether to self-insure. This is not just a problem for the big end of town. We know that the recent spate of securities class actions has driven up not only Side C cover (to meet securities claims against listed entities), but also Side A and B cover (to meet cases against individual directors). We also know of many NFPs and SMEs, not just listed companies, struggling to obtain affordable and comprehensive cover in this market. The insurance well has been poisoned. The status quo is not sustainable.
So what is the solution? To task ASIC with more vigorously enforcing continuous disclosure laws and remove the right for private actions to be brought. This was our proposed temporary solution to the disclosure conundrums posed by the pandemic, albeit our proposal was more limited, focusing only on forward-looking disclosures. But the case for a permanent reform that bans all securities class actions is compelling as the federal government looks to put in place pro-growth policy settings in the COVID-19 recovery phase.
Firstly, continuous disclosure laws will not be weakened by this proposal. ASIC would enforce breaches of the law; individuals and entities would remain personally liable, while the ASX would continue to enforce the listing rules. There is a lack of evidence that the threat of securities class actions leads to better disclosure.
Secondly, Australia needs boards to drive economic recovery, not be looking over their shoulder for lawsuits. Boards must be able to act decisively without the fear every word of a release will be picked over by profit-seeking funders.
Thirdly, ultimately, the costs of securities class actions are borne by shareholders themselves through deflated share prices and board/management time spent responding to suits. There is an absurd circularity in having shareholders effectively suing themselves with half the proceeds going to lawyers and funders, the latter of which are largely unregulated. This, of course, is not to dispute the fact that class actions are an important access-to-justice mechanism in other areas such as product liability cases.
While banning securities class actions might sound like a radical proposal, is it really? With unemployment tipped to reach 10 per cent, we need boards focused on value creation, not fending off value-destroying proceedings.