This article of interest about Class Actions appeared in The Australian today.
http://www.theaustralian.com.au/bus...-retail-investor/story-e6frg8zx-1225838879023
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When a MIS is as good as a mile for the retail investor
Bryan Frith From:The Australian March 10, 2010 12:00AM
WHETHER or not the Full Federal Court was right in its recent controversial ruling that funded class actions constitute managed investment schemes (MIS) the consequences that flow from the decision cannot have been the intention of the legislature.
While the ruling is a setback for litigation funders, retail investors are the parties who stand to be most disadvantaged, yet they are the very people class actions are designed to protect.
Litigation funder IMF (Australia) this week announced that it proposed to fund a class action by current and former shareholders of Transpacific Industries (TPI). The claims relate to alleged misleading or deceptive conduct and breaches of TPI's continuous disclosure obligations over a 12-month period, between February 28, 2008 and February 16, 2009. However, as a direct result of the recent court ruling, IMF will only proceed with claims on behalf of sophisticated and professional investors. Retail investors will be excluded.
Typically, retail investors make up the bulk of the claimants but represent a small portion of the value of the claim. It is the existence of the institutional base of claimants which enable the litigation funders to include retail investors in a class action.
From a financial viewpoint the litigation funders would not be harmed by the exclusion of retail investors, and may even be disadvantaged because they would much lower administrative costs.
But the litigation funders from the outset have taken the pragmatic view that offering to fund all claimants, and not just the big end of town, would be better received by the courts, the public and the media. It's also the right thing to do.
Theoretically, retail investors who are excluded from funded multi-party actions (class actions) could initiate their own representative actions, but the escalating cost of litigation would put it beyond the reach of most, which is one of the reasons why class actions have been introduced.
The practical effect of excluding retail investors from class will be to deny them access to justice.
It need not have come to this as the corporate regulator, ASIC, has the power to exempt a class action from having to comply with the requirements for an MIS.
IMF sought an exemption for the TPI action but it was rejected by ASIC.
ASIC has granted exemptions for some class actions, including some by IMF, but they appear to be actions brought before November 4. Exemptions sought for cases initiated after that date have been rejected, although some are still pending.
The significance of November 4 last year appears to be that it was the date the Full Federal Court brought down its ruling on Brookfield Multiplex v International Litigation Funding Partners (ILF), which related to alleged failures of disclosure in relation to the redevelopment of London's Wembley Stadium.
ASIC's stance is curious, if not regrettable. IMF actually applied for an exemption for all of its class actions in late 2008 after Brookfield first contended that the funding arrangements constituted an MIS (a possibility not considered in the many earlier class actions).
ASIC declined, waiting to see the outcome of the court case but it approved IMF with a "no action" letter to enable it to continue running its class actions on the basis that they were not bound by the MIS requirements. Under a funded class action each claimant enters into a funding agreement under which the claimants are not out of pocket. Brookfield Multiplex contended the funding agreement constituted an MIS. The major features of an MIS are that people contribute money or "money's worth" to acquire an interest in benefits produced by the scheme, the contributions are pooled or used in a common enterprise to produce benefits and the members do not have day to day control over the operation of the scheme.
MIS's generally have to be registered. They must have an RE (responsible entity) that is authorised by an Australian Financial Services licence to operate an MIS. An MIS must also have a constitution and a compliance plan and parties must be given a PDS (product disclosure statement) before becoming a member of the MIS.
Moreover, the RE must prepare annual reports and hold annual meetings, though what purpose that would serve for class actions, often in limbo for several years waiting for the litigation to get underway, is difficult to fathom. However, an MIS does not have to be registered if the MIS is offered exclusively to wholesale clients (sophisticated and professional investors who do not need a PDS). IMF is now running its action against TPI as an unregistered MIS.
It is expected to allege that TPI breached its continuous disclosure requirements and/or engaged in misleading or deceptive conduct in relation to its 2008 and 2009 earnings forecasts..
Judge Ray Finkelstein ruled that a class action did not satisfy all of the features of an MIS and, therefore, was not an MIS.
Brookfield appealed to the Full Court which, by a 2-1 majority over-ruled Finkelstein and held that the funding arrangements for the class action constituted an MIS. Justices Alan Sundberg and John Dowsett considered that the definition of an MIS was deliberately wide and they should not read it down, particularly as several matters were specifically excluded, such as superannuation, and the legislation provided for further exclusions via the Corporations Act.
In addition, ASIC has the power to grant exemptions.
Justice Peter Jacobson agreed with Finkelstein that a class action was not an MIS.
That means two Federal Court judges have found class actions constitute an MIS and two have found that they don't.
But the majority decision prevails and is currently the law.
ILF has sought leave to appeal to the High Court and if it overturns the Full Federal Court decision that will determine the issue. But it could take several months to be decided, and unless the government amends the Corporations Act (by legislation or regulation) to stipulate that class actions are not MIS's, or ASIC reverses its current stance and provides an exemption for all class actions, then litigation funders will have little choice but to follow IMF's lead and exclude retail investors (the majority of claimants) from class actions.
The Law Council supports class actions as "an effective and efficient means of ensuring access to justice". It also believes that third-party litigation funding arrangements are important to ensure class actions are able to proceed. The government seems to recognise there is a problem as Treasury has formed a stake to examine the issue and to consider with parties, including litigation funders and plaintiff and defence lawyers. The Law Council is also working with Treasury and other stakeholders "to resolve the uncertainty around funded class actions". In the meantime, it is unfortunate ASIC did not see fit to provide some certainty (and effectively disenfranchised retail investors) until the matter is resolved.
bfrith@acenet.com.au"