Multiple shareholder class actions: is consolidation better than picking a winner?

How courts are handling situations where multiple shareholder class actions are brought against the same defendant company for the same conduct is an important issue for a defendant company for two reasons. First, to quote the Full Federal Court, "it is likely that competing class actions are not going to go away" (Klemweb Nominees Pty Ltd v BHP Group Limited [2019] FCAFC 107). Second, defending multiple shareholder class actions instead of one is likely to increase the complexity of the litigation and add to the costs of the defendant company. Just consider the following: you may have to address different case theories from different plaintiffs, consider different expert evidence from different plaintiffs, try to negotiate a settlement with different plaintiffs and communicate with multiple law firms, and then face the risk of multiple adverse costs orders if you lose.

The two important issues for a company facing multiple shareholder class actions are:

• will it have to defend all of them; and
• if yes, will it have to pay the costs of all of them if it loses?

Courts continue to show a preference for allowing only one proceeding to go ahead, but rather than "picking a winner", some recent decisions show a tendency to consolidate several actions into one. In some cases, this may occur whether the plaintiffs' lawyers and litigation funders like it or not.

Whether consolidation is a better outcome for a defendant company than the court picking a winner is debatable. Consolidation may avoid the costs of the "beauty parade" required to choose which shareholder class action will continue. It may also reduce the risk of a group member opting out and bringing their own separate claim. There may, however, be additional costs incurred through the management of a consolidated proceeding by a committee of lawyers from different firms. Some or all of these costs may ultimately be visited upon the defendant company.

Beauty parades for competing shareholder class actions: winner takes it all

Earlier this year, we wrote about three recent decisions of the Federal Court which showed a preference for stopping all but one shareholder class action. This approach was also adopted by the NSW Supreme Court which in May 2019 chose one of five shareholder class actions to continue and when doing so said it was "firmly of the view that, absent some factor making it appropriate to allow for the continuance of duplicative proceedings, it is appropriate that only one of the competing representative proceedings should be permitted to proceed" (Wigmans v AMP Ltd [2019] NSWSC 603).

This is good news for defendant companies. It isn't such good news for plaintiff law firms and litigation funders, who have invested time and money commencing a proceeding only to have it stopped. As for group members, it's debatable whether stopping all but one class action disadvantages them. A client of the firm whose class action is stayed won't have their claim prosecuted by their choice of lawyers and litigation funder, but the likelihood is that most group members have not made an active decision to pick one class action over another. In most cases, the group member will still have their claim prosecuted in a proceeding that a court has decided, after careful analysis, is the best vehicle for promoting the interests of group members.

It's also not entirely good news for the workload of the courts. The process of choosing one shareholder class action out of several is time-consuming. The court must consider a variety of factors plus detailed submissions and evidence from multiple parties. This has resulted in hearings that last for days and then appeals, including in one recent case an application for special leave to appeal to the High Court.

… vs consolidation of competing shareholder class actions

In December 2018, the Full Federal Court said that consolidation is "unlikely to be made in the absence of agreement between the different applicants, funders and solicitors" because of the difficulties that can arise from compelling them to work together when that wasn't their plan (Perera v GetSwift Limited (2018) 363 ALR 394; [2018] FCAFC 202).

However, given the downsides of selecting one proceeding from a beauty parade, it's not surprising that the courts have recently shown a preference for encouraging the lead plaintiffs to consolidate their separate proceedings into one.

In June 2019, the Federal Court ordered the consolidation of two shareholder class actions against the wishes of one of the lead plaintiffs (Southernwood v Brambles Limited [2019] FCA 102). Later that month, the Full Federal Court ordered two lead plaintiffs to try to agree to consolidation or the matter would be relisted for further hearing. They promptly agreed to consolidation (Klemweb Nominees Pty Ltd v BHP Group Limited [2019] FCAFC 107). In August 2019, the NSW Supreme Court said that three shareholder class actions should be consolidated whether the lead plaintiffs agreed or not. Justice Beach of the Federal Court summed up matters in August 2019 saying that "consolidation is now an increasingly preferred model whether consensual or otherwise to deal with competing class actions" (Kuterba v Sirtex Medical Limited (No 3) [2019] FCA 1374).

The costs of consolidation

A common model for managing consolidated proceedings is to appoint a committee of representatives from the law firms acting in the separate proceedings. Those law firms continue to act as lawyers for the one consolidated proceeding but manage it by committee. This provides a benefit to group members, but perhaps only a small one. The group members for the consolidated proceeding will have their claim conducted by the lawyers they chose, but their lawyers will be part of a committee that includes other lawyers they did not choose.

Allowing group member to be (partly) represented by their chosen lawyers may also reduce the risk of a group member "opting out" of a proceeding to bring their own claim. The logic is that they're less likely to opt out since they're partly represented by the lawyers they chose. "Opt outs" would lead to multiple proceedings against the defendant company: the precise thing that the consolidation was supposed to prevent. Avoiding this outcome would benefit a defendant company. But there is also a possible downside of consolidation: increased costs.

Having lawyers from different firms conducting the one proceeding creates a risk of duplicative work. This is a concern for defendant companies because if they lose the proceeding, they are likely to be ordered to pay the reasonably-incurred costs of the plaintiffs in the consolidated proceeding. It is also a concern for group members since, if the matter settles, their lawyers' costs will be deducted from the settlement sum before they see any of it. To address this issue, the courts have made orders that aim to reduce the duplication of work. They have also ordered that an independent costs consultant monitor the work conducted to determine whether there is any unnecessary or duplicative work. The costs assessor must present reports about this to the court every few months.

But what if there is no consolidation and two or more shareholder class actions are allowed to continue? An attempt by a company defending two shareholder class actions to limit its cost exposure via an order made early on in the proceeding that if it ultimately lost, it should only be exposed to the costs of one shareholder class action (capped at approximately $4.5 million) was rejected by the Federal Court and again on appeal (Bellamy's Australia Limited v Basil [2019] FCAFC 147). On appeal, the Full Federal Court supported the approach taken at first instance: the court should take steps to reduce excessive costs and duplicative work but not go so far as to cap costs. Then, at the end of the proceeding, the court may decide whether there has been any unreasonably incurred costs, which the defendant company should not be required to pay.

Is consolidation a better outcome for defendant companies?

The consolidation of multiple shareholder class actions may or may not be better for defendant companies than picking one shareholder class action to continue. The defendant company will face only one shareholder class action in either case. Consolidation may avoid a costly beauty parade where a court must decide which proceeding should continue. Although the defendant company will play a lesser role in the beauty parade than the lead plaintiffs, it will still incur some costs of participating. However, it's possible that a consolidated proceeding run by a committee of lawyers from different firms may result in greater costs being incurred than if one proceeding were allowed to continue with only one set of lawyers. If the defendant company ultimately loses, it may be ordered to pay those costs.

Anyone who's been on a committee knows that things generally take longer when done by committee. To quote a recent decision of the Full Federal Court, '"serious inefficiencies and wastage of costs as solicitors from different firms, often with no love lost between them" can arise from their "checking each other’s work and arguing about the many forensic decisions that are involved in large and complex litigation"' (Klemweb). This difficulty may be more significant if more than two proceedings are being consolidated into one (the recent examples of consolidation above only involved two). An independent costs assessor provides some protection against excessive costs, but the costs of committee meetings (along with other costs) are unlikely to be considered excessive since they are a necessary part of a proceeding being managed by committee. The costs assessor will charge for their work as well. Whether consolidation results in additional costs being incurred and, if so, whether they are ultimately borne by defendants, plaintiffs or by the law firms on the committee remains to be seen.

To sum up, both picking a winner and consolidation involve additional costs, albeit in different ways. It may be debatable which is better for the defendant, although either is likely to be better than dealing with multiple class actions. Notably, the additional costs involved in either model (picking a winner or consolidation) are only likely to be picked up by the defendant in the context of a settlement or if there is judgment against it. To date, no shareholder class action has proceeded to judgment, despite more than 100 having been commenced. But it is only a matter of time before this changes.

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