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Australia | Publication | May 2020
On 4 May 2020, the Federal Court of Australia approved a $35 million settlement of the Vocus shareholder class action.
The decision is significant as it considers recent developments in the law concerning the power of the Court to make ‘class closure orders’ and ‘common fund orders’ in class action proceedings.
The applicants alleged that Vocus – one of Australia’s largest telecommunications companies – had contravened the continuous disclosure obligations and misleading or deceptive conduct provisions of the Corporations Act 2001 (Cth) following its Annual General Meeting in November 2016 and until it released profit-downgrade announcements to the ASX in May 2017.
It was alleged that those contraventions caused loss and damage to the applicants and group members, all of whom were shareholders. In particular, the applicants alleged the Vocus board knowingly withheld from shareholders information that eventually led to a 25% profit downgrade and a subsequent fall in the share price.
The proceeding was commenced in April 2019 as an ‘open class’ representative proceeding on behalf of all persons who acquired Vocus shares in the relevant period. The applicants’ claim was funded by a third party litigation funder.
In June 2019, in accordance with the Court’s orders, a notice was sent to group members. The notice stated that, subject to further order, participation in any settlement reached at or within six months of a proposed mediation was limited to group members who registered by 13 August 2019. Of particular significance was that the notice stated that group members who did not register and who did not opt out would not participate in any settlement but would nevertheless be bound by the settlement.1 In other words, the consequence for unregistered group members was that their right to make a claim in relation to the alleged contraventions would be extinguished once the settlement took effect.
On 2 December 2019, the matter was mediated and on 21 December 2019, the applicants, Vocus and other parties entered into a deed of settlement. Vocus agreed, without admission, to pay $35 million in settlement of the claims of the applicants and group members. Settlement of the proceeding was subject to Court approval.2
In February 2020, a further notice was sent to approximately 28,000 group members. The notice outlined the terms of the settlement and gave details of the approval hearing, the orders that would be sought (including as to the litigation funder’s commission) and the process by which group members could object to the settlement. The February 2020 notice reiterated that, if the settlement was approved by the Court, all group members (other than those who opted out) would be bound by the settlement.3
The settlement distribution scheme agreed between the parties relevantly provided that unless the Court ordered otherwise:4
Section 33V(1) of the Act provides that a representative proceeding may not be settled without the approval of the Court.
The central question is whether the proposed settlement is fair and reasonable and in the interests of the group members bound by the settlement considered as a whole. That entails consideration of whether the proposed settlement is fair and reasonable (1) as between the applicant and the respondent, and (2) as between the group members.
The Court helpfully restated the relevant legal principles,5 which are set out in a schedule at the end of this update.
In light of these principles, the Court was of the opinion that the settlement was fair and reasonable as between the applicant and respondent. The Court considered that $35 million was appropriate given the size of the claim, the prospects of successfully establishing the claim, the complexity of the proceedings, and the time and expense it would take for the matter to proceed to judgment.6 The Court was also of the opinion that the settlement was fair and reasonable as between the group members. The Court considered, relevantly, that group members would receive a return equal to their claims after deductions of all costs, that the settlement distribution scheme contained detailed checks and balances, and that only one group member had objected to the settlement (which did not cause the Court to question the fairness and reasonableness of the settlement distribution scheme).7
The Court then considered two further important aspects of the settlement. First, the effect of the proposed settlement on the interests of the unregistered group members. And second, the proposed deductions from the settlement fund distribution of the costs of the proceedings, including the litigation funder’s commission.
When considering fairness and reasonableness of the proposed settlement as between group members, the Court focused on the effect of the registration process.
Of particular significance was that, under the proposed settlement, unregistered group members who did not register would not receive any distribution but nevertheless be bound by the settlement and their rights against Vocus for the alleged contraventions would thereby be extinguished.
The Court decided that the treatment of unregistered group members was fair and reasonable because:
The Court considered the effect of the recent decision of the NSW Court of Appeal in Haselhurst.8 In that case, the NSW Court of Appeal held that a class closure order made by the primary judge was beyond the power in section 183 of the Civil Procedure Act 2005 (NSW) (CPA). You can read our update on the Haselhurst decision here.
The Court considered that the decision in Haselhurst was distinguishable on the basis that it concerned a pre-trial class closure order and the question before the NSW Court of Appeal was whether such an order could be made under section 183 of the CPA (which corresponds to section 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCA)).
In contrast, the application in Fisher sought approval of a settlement pursuant to section 33V(1) of the FCA and the application was made at the conclusion of the proceeding at the time when the parties were seeking approval of their settlement. The Court considered that the timing of the application meant that different considerations arose than in Haselhurst.9
Further, the NSW Court of Appeal in Haselhurst referred with apparent approval to the decision of Newstart,10 in which the Federal Court approved a settlement in which unregistered group members did not receive a distribution but were nevertheless bound by the settlement.
The Court then considered the fairness and reasonableness of the applicant’s proposed deductions from the settlement fund.
In addition to legal fees and out-of-pocket expenses, the applicants proposed to pay 17.4% of the total settlement sum to the litigation funder as commission for funding the class action (which would be approximately $6.1 million). It was proposed that the cost of the commission would be borne by all registered group members, not only those who entered into a funding agreement. This is commonly known as a ‘common fund order’ (CFO).
The applicants’ alternative proposal was for the Court to make a ‘funding equalisation order’ (FEO). This would be achieved by deducting the total contracted funding commission from the settlement amount (that is, the total of the amounts agreed to be paid by the funded registered group members under their funding agreements). Under that approach, the total amount would still be borne by both funded and unfunded registered group members, but it would be determined by reference to the total of the amounts that the funded registered group members had agreed to pay.
The litigation funder’s contractual entitlement was to a 20.5% funding commission under funding agreements entered into between the litigation funder and the 5,660 group members (totalling approximately $3.9 million).
The Court considered whether the applicant’s proposal for a CFO was inconsistent with the High Court’s decision in Brewster.11 In Brewster, the majority held that the power in section 33ZF of the FCA did not permit to the making of a CFO at an early stage of a proceeding. You can read our update on the Brewster decision here.
Similar to Haselhurst, the Court considered Brewster to be distinguishable on the basis that it concerned the power to make orders under section 33ZF of the FCA and section 183 of the CPA. The Court held that the majority in Brewster had not decided whether there is power under section 33V to make a CFO at the conclusion of proceedings. However, the Court observed that the majority in Brewster had expressed strong reasons for favouring FEOs over CFOs.12
In light of the above, whilst the Court held that it had power to make a CFO under section 33V, it did not consider it appropriate to make a CFO in the circumstances of the case. Instead, the Court held that the applicant’s alternative proposal for FEO was fair and reasonable. This was for three reasons.
First, a CFO would impose an additional $2.2 million to be paid to the litigation funder than would otherwise be the case. By contrast, an FEO reflected the actual costs incurred by the litigation funder in funding the litigation.
Second, the CFO went further than was necessary to address the problem of ‘free riding’ group members who might otherwise benefit from the settlement without sharing in the costs of the proceedings. The FEO sufficiently ensured that unfunded group members who obtained the benefit of the litigation would contribute to the cost of the proceeding.
And third, the FEO ensured that the litigation funder received the funding commission to which it was entitled under the contracts with funded group members.
By distinguishing the recent decisions of the High Court in Brewster (relevant to CFOs) and NSW Court of Appeal in Haselhurst (relevant to class closure orders), the Federal Court has emphasised the importance of the timing of these types of orders.
The Court confirmed that section 33V of FCA provides a power for the making of class closure orders and CFOs in appropriate circumstances at the conclusion of proceedings.
In making the class closure order, the Court observed the crucial role of these orders for applicants to determine a sufficient settlement sum and for respondents to achieve finality of the litigation from a settlement. This was so even if the effect of the orders was to extinguish the claims of unregistered group members who would not benefit from any judgment or settlement.
The law relating to class actions in Australia is dynamic and developing rapidly. The decision reinforces the importance of practitioners and businesses staying up-to-date with recent developments.
When assessing a proposed settlement, a court will consider the following:13
Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Limited (No 2) [2020] FCA 579 (Fisher) at [3] and [27]. See also Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Limited [2019] FCA 712.
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