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University of Otago Law Theses and Dissertations |
Last Updated: 25 September 2023
Class Actions are in Session, but is School Out for No-Fault Continuous Disclosure?
Preparing New Zealand for Shareholder Class Actions
Hannah Cross
A dissertation submitted in partial fulfilment of the degree of Bachelor of Laws (Honours) at the University of Otago, Dunedin, New Zealand – Te Whare Wānanga o Ōtākou
October 2022
Acknowledgements
Thank you to my amazing supervisor Shelley Griffiths. I am so grateful for your encouragement and guidance, our meetings always boosted my morale!
Thank you to Michael Heron and Elaine Campbell for your invaluable insights.
Thank you to my fabulous parents, Mark and Angela, for being my biggest fans, proof- readers and support crew.
Lastly, thank you to Rupert and the girls of CY5, Studio 54, Villa and 38 Heriot - I couldn’t have done it without you, or at least laughed that much while doing it!
Table of Contents
FMCA: Financial Markets Conduct Act 2013FMA: Financial Markets Authority
Listing Rules: New Zealand Exchange Listing Rules
NZX: New Zealand Exchange
NZ RegCo: RegCo
ASX: Australian Securities ExchangeASIC: Australian Securities and Investments Commission
EMH: Efficient Market Hypothesis
D&O insurance: Directors’ and officers’ insurance
Introduction
Continuous disclosure is a pillar of ‘fair, orderly and transparent financial markets’, but a shaky pillar in the current New Zealand landscape.1 New Zealand and Australia’s enduring political and business relationship has meant that the two continuous disclosure regimes have always been closely aligned – so much so that any divergence speaks volumes. The rise of shareholder class actions for continuous disclosure contraventions in Australia has created one of the most litigious securities class action environments in the world. 2 Concerns of over- enforcement from ‘opportunistic’ class actions led to an addition of a ‘knowledge, recklessness or negligence’ test to the civil penalty provisions for continuous disclosure in the Corporations Act 2001.3 Although New Zealand is now unique for its no-fault continuous disclosure regime, this amendment was not a cause for concern until the New Zealand Law Commission (NZLC) review into class actions and litigation funding. This dissertation will investigate whether the civil liability provisions should be amended to prepare for the introduction of shareholder class actions. The approach to enforcement is crucial for achieving the optimal balance between protecting investors and protecting markets – an inherent problem of securities regulation.
Chapter 1 unpacks the susceptibility of continuous disclosure breaches to collective litigation. The NZLC’s recommendation to introduce a statutory class action regime should be a catalyst for a review of the current continuous disclosure regime. There are problems with the regime and with incoming shareholder class actions that need to be addressed.
To adequately assess the suitability of class actions, it is necessary to understand ‘the substantive goals of the regulatory scheme, and the likely interaction of private lawsuits with other elements of the government’s enforcement strategy’.4 With that in mind, chapter 2 compares the extent to which private actions and public enforcement can address the objectives of continuous disclosure. There are concerns with the ‘consumer protection model’
1 NZX Guidance Note – Continuous Disclosure (10 December 2020) at 4; and Financial Markets Conduct Act 2013, s 229(a).
2 David Kistenbroker, Joni Jacobson and Angela Liu Global Securities Trends: December 2020 Update
(Dechert LLP, December 2020) at 11.
3 Corporations Act 2001 (Cth); and Josh Frydenberg “Temporary changes to continuous disclosure provisions for companies and officers” (press release, 25 May 2020).
4 Matthew Stephenson “Public Regulation or Private Enforcement: The Case for Expanding the Role of Administrative Agencies” (2005) 91 Va L Rev 93 at 106.
of enforcement for continuous disclosure.5 Excessive investor protection at the expense of over-enforcement of companies risks undermining disclosure’s role in facilitating informed investment decisions and maintaining an efficient market.6
Chapter 3 focuses on the dual rationales of class actions – deterrence and compensation – and whether they can be achieved by private and public enforcement. The limited ability of shareholder class actions to deter future wrongdoing makes it difficult to see them as a supplementary enforcement mechanism. However, there may be a place for shareholder class actions for their compensatory role, provided there is a strong regulator maintaining an appropriate balancing of issuers’ and shareholders’ interests.
Chapter 4 critically examines three possible responses to the concerns with continuous disclosure class actions. This dissertation argues that limiting shareholders’ access to justice by carving out continuous disclosure from the proposed statutory class action regime is undesirable. The debate as to whether or not New Zealand should introduce a fault test to the continuous disclosure provisions cannot be concluded in this dissertation. However, if a fault test is introduced, the negligence limb may be too ambiguous to operate effectively. Chapter 5 discusses four procedural mechanisms of a statutory class action regime that would facilitate an answer to whether strict liability for continuous disclosure still makes sense.
5 Michael Legg “Shareholder class actions in Australia – the perfect storm?” [2008] UNSWLawJl 37; (2008) 31(3) UNSWLJ 669 at 709.
6 Legg, above n 5, at 709.
Chapter One: The Rise of Shareholder Class Actions
Continuous disclosure plays a fundamental role in promoting ‘confident and informed participation of businesses, investor and consumers in the financial markets’.7 In the secondary market, there is an inherent debate as to the optimal balance in protecting both issuers’ and investors’ interests.8 Information asymmetry between these two parties is generally accepted to unfairly tip the balance towards issuers, as it deceives the market and provides opportunity for market abuse.9 According to the Efficient Market Hypothesis (EMH), share prices in a fair and efficient market ‘fully reflect’ relevant information.10 Where there is only selective disclosure by issuers, the price does not represent the true underlying value of the security. It follows that timely disclosure counteracts this risk of an inaccurate share price, subsequently ensuring the protection of investors’ interests. 11 The core principle of disclosure is set out as an additional purpose of the FMCA, requiring disclosure of ‘timely, accurate, and understandable information’ to facilitate investment decisions.12
I Continuous Disclosure in New Zealand
The FMCA and the Listing Rules operate to establish and govern the continuous disclosure obligations for listed issuers in New Zealand. The NZX is a ‘licensed market operator’ under the FMCA13, with an obligation to ensure its licensed market is ‘fair, orderly and transparent’.14 As part of its obligations, the NZX has established listing rules to govern the licensed market, approved by the FMA.15 A Memorandum of Understanding between the two parties facilitates the ‘co-regulatory model’.16 Continuous disclosure is primarily governed by
7 Financial Markets Conduct Act, s 3.
8 Shelley Griffiths “History, Policy and Structure of New Zealand Securities Law” in Susan Watson and Lynne Taylor (eds) Corporate Law in New Zealand (Thomson Reuters, Wellington, 2018) 1101 at 1104.
9 Shelley Griffiths “Trading Securities on Markets” in Susan Watson and Lynne Taylor (eds) Corporate Law in New Zealand (Thomson Reuters, Wellington, 2018) 1159 at 1160.
10 Eugene Fama “Efficient Capital Markets: A Review of Theory and Empirical Work” (1970) 25(2) The Journal of Finance 383 at 383.
11 Griffiths, above n 9, at 1160.
12 Financial Markets Conduct Act, s 4.
13 Financial Markets Conduct Act, s 6(1).
14 Financial Markets Conduct Act, s 314(1).
15 Financial Markets Conduct Act, s 328 and s 331.
16 Griffiths, above n 9, at 1169; and Memorandum of Understanding Between the Financial Markets Authority and NZX Limited (January 2015).
the Listing Rules, whilst the FMCA provides the legislative framework empowering the NZX to create the Rules.17
Section 270 of the FMCA states that listed issuers with a listing agreement with the licensed market operator are required to disclose all ‘material information that is not generally available to the market’ in accordance with the continuous disclosure provisions in the Listing Rules.18 Material information is defined as ‘information that a reasonable person would expect, if it were generally available to the market, to have a material effect on the price of quoted financial products’.19 Information is ‘generally available to the market’ if it would likely be brought to the attention of persons who commonly invest in relevant financial products.20
Listing Rule 3.1 sets out the continuous disclosure provisions. Once becoming aware of any material information relating to them, issuers must promptly and without delay release the material information through the NZX Market Announcement Platform (MAP).21 The issuer must not disclose the information to any other party before release to the MAP.22 An exception is available if the information meets one of 5 different criteria and is confidential, and a reasonable person would not expect the information to be disclosed.23
The NZX Guidance Note for Continuous Disclosure elaborates on Listing Rule 3.1. Neither ‘reasonable person’ nor ‘material effect’ is defined in the FMCA for the purposes of the s 231 definition of ‘material information’. The NZX considers a ‘reasonable person’ to be someone ‘who commonly invests in securities, and holds securities for a period of time based on their view of the inherent value of the securities’.24 The reasonable person test is objectively assessed from ‘the perspective of an independent fair-minded bystander’.25 Whether information has a material effect on the price of the issuer’s securities will largely depend on
17 Griffiths, above n 9, at 1169.
18 Financial Markets Conduct Act, s 270. 19 Financial Markets Conduct Act, s 231. 20 Financial Markets Conduct Act, s 232. 21 NZX Listing Rules, r 3.1.1(a).
22 NZX Listing Rules, r 3.1.1(b).
23 NZX Listing Rules, r 3.1.2.
24 NZX, above n 1, at 7.
25 NZX, above n 1, at 7.
the specifics of the issuer and the securities.26 When determining whether a review is warranted, NZX uses a forward-looking approach, looking at the actual effect the eventual disclosure of the information had on the price of securities.27 The NZX recommends a cautious approach to decisions made surrounding the disclosure of information.28
First and foremost, the NZX is in charge of compliance and enforcement of Listing Rule
3.1.29 These regulatory functions are performed by RegCo, an independent agency.30 Both RegCo and the FMA consider continuous disclosure an enforcement priority, due to their crucial role in promoting and facilitating ‘the operation of fair, orderly and transparent markets’.31 RegCo may refer a breach of continuous disclosure to the FMA to be investigated.32 The FMA has a wide range of enforcement tools that will be deployed depending on the circumstances and severity of the offence.33 Any enforcement action taken does not preclude the commencement of a private action for that breach. In determining whether an issuer is liable and therefore could face sanctions, there is no requisite state of mind on the part of the issuer – all that must be established is the elements of Listing Rule
3.1. Directors and senior managers can also be liable for the breach as an accessory34, but escape liability if they took all reasonable steps to ensure compliance with the obligation.35
Strict liability is a very plaintiff-oriented approach to disclosure.36 The strict liability status of continuous disclosure is indicative of the weight disclosure carries in upholding the integrity of New Zealand’s capital markets. The irrelevance of their state of mind to find a breach means issuers are compelled to take a cautious approach to disclosure to avoid regulatory or private enforcement. Notably, in the last year New Zealand has become atypical in this respect among the comparable jurisdictions of Australia, the United Kingdom and Canada. In
26 NZX, above n 1, at 8.
27 NZX, above n 1, at 8.
28 NZX, above n 1, at 6, 8 and 13.
29 Griffiths, above n 9, at 1173.
30 NZ RegCo Approach To Enforcement (March 2022) at 1.
31 NZ RegCo, above n 30, at 3; and Financial Markets Authority Market Operator Obligations Review – NZX
(June 2021) at 12.
32 NZ RegCo “About NZ RegCo” < www.nzx.com>.
33 Financial Markets Authority “Enforcement” (23 April 2019) <www.fma.govt.nz>.
34 Financial Markets Conduct Act, s 533.
35 Financial Markets Conduct Act, s 272.
36 Samuel Issacharoff and Thad Eagles “The Australian Alternative: A View From Abroad of Recent Developments in Securities Class Actions” [2015] UNSWLawJl 7; (2015) 38(1) UNSWLJ 179 at 185.
August 2021, Australia introduced a ‘knowledge, recklessness and negligence’ test to its continuous disclosure provisions, which previously paralleled the New Zealand counterparts.37 The change was attributed to the growing number of class actions creating a need to readjust the balance between protecting markets and investors.38 At the time, there was no prospect of problematic private enforcement in New Zealand.
The Capital Markets 2029 report recommended a review of New Zealand’s position on continuous disclosure obligations, in response to a number of reported negative consequences such as increasing D&O insurance premiums and excessive attention paid to continuous disclosure at the expense of other governance and strategy matters.39 With a strong likelihood of a statutory class action regime in the near future following the NZLC’s review into class actions and litigation funding, a review of the strict liability regime is more important than ever.
II Shareholder Class Actions for Continuous Disclosure
Contraventions of continuous disclosure obligations are particularly ripe for collective private enforcement, because they have the potential to affect a large class of shareholders. When material information is eventually disclosed, the share price, now an accurate reflection of all relevant information, can materially change in value.40 This mispricing creates an inefficient allocation of resources and those who sold at a lower price suffer an opportunity loss and those who purchased shares at the inflated price face a loss.41 A large group of shareholders who have all suffered loss as a result of the same contravention is a fertile ground for a class action.42
37 Capital Markets 2029 Growing New Zealand’s Capital Markets 2029 - A vision and growth agenda to promote stronger capital markets for all New Zealanders (September 2019) at 36.
38 Josh Frydenberg “Permanent changes to Australia's continuous disclosure laws” (press release, 17 February 2021).
39 Capital Markets 2029, above n 37, at 37.
40 Paul Miller “Shareholder class actions: Are they good for shareholders?” (2012) 86 ALJ 633 at 635.
41 Michael Duffy “Australian Private Securities Class Actions and Public Interest: Assessing the 'Private Attorney-General' by Reference to the Rationales of Public Enforcement” (2017) 32(2) Aust Jnl of Corp Law 162 at 168.
42 Legg, above n 5, at 670.
A class action includes a representative plaintiff that participates in the proceedings on behalf of the group of class members who share common issues due to the defendant’s conduct.43 All class members are bound by the outcome of the proceedings.44 A class action departs from a typical private action as there is no need for every class member to individually prove this identical issue, such as the defendant’s non-disclosure of material information. This key element is particularly attractive to shareholders who alone may not consider their loss to be significant enough to warrant costly legal action, but together are empowered to fight for compensation.45
In recent years, Australia has seen a rise in shareholder class actions – they are the most common type of class action filed in Australia.46 A large portion of these are class actions for continuous disclosure breaches.47 With increased availability of litigation funding, private actions are more accessible than ever.48 Shareholder class actions are attractive to litigation funders and plaintiff lawyers for the potentially lucrative monetary gain, due to the typically large class sizes and well-insured corporations.49 No certification test or requirement to prove fault for continuous disclosure contraventions is especially encouraging.50 Michael Legg contends that this combination of factors creates ‘the perfect storm’ for a high frequency of shareholder class actions.51 ASIC ‘cautiously’ welcomes class actions as a ‘self-help mechanism’ and form of corporate regulation.52
In 2018, the Australian Law Reform Commission (ALRC) conducted a review regarding class actions and third-party litigation funders. The continuous disclosure provisions and the resulting class actions were given particular attention due to their increasing prevalence and
43 Michael Duffy “Causation in Australian securities class actions: Searching for an efficient but balanced approach” (2019) 93(1) ALJ 833 at 834.
44 Duffy, above n 43, at 835.
45 Peta Spender “Securities Class Actions: A View from The Land of the Great White Shareholder” (2002) 31 CLWR 123 at 124.
46 Australian Law Reform Commission Integrity, Fairness and Efficiency - An inquiry into Class Action Proceedings and Third-Party Litigation Funders (ALRC R134, 2018) at 23.
47 Parliamentary Joint Committee on Corporations and Financial Services Litigation funding and the regulation of the class action industry (December 2020) at 30.
48 Parliamentary Joint Committee on Corporations and Financial Services, above n 47, at 323.
49 Legg, above n 5, at 705.
50 Parliamentary Joint Committee on Corporations and Financial Services, above n 47, at 323; Legg, above n 5, at 692.
51 Legg, above n 5, at 669.
52 Jeremy Cooper “Corporate Wrongdoing: ASIC’s Enforcement Role” (keynote address to International Class Actions Conference, Melbourne, 2 December 2005) at 15.
adverse consequences, including the negative effect of a class action on the value of shareholders’ investments and increasing D&O insurance premiums.53 The dispute amongst submitters as to whether there should be a legislative change depended on whether or not the price of compliance with continuous disclosure was justified. Plaintiff-oriented submitters argued that compliance costs and prospects of litigation were a small price to pay in exchange for the access to capital and other economic benefits of being publicly listed.54
These stakeholders failed to recognise the complexity of a board’s decision-making process as to whether to disclose information or not. One submitter claimed ‘the real complaint’ was merely about increased issuer accountability.55 Indeed, continuous disclosure obligations are typically straightforward to comply with – in this scenario the benefits of an informed market undoubtedly outweigh any cost. However, information may reach the board in a premature or ambiguous state making it incredibly difficult to make a decision ‘promptly and without delay’ as to whether the information is sufficiently material.56 Cybersecurity is currently one of the most pressing issues of corporate governance in New Zealand.57 The occurrence and severity of ransomware attacks and other cybersecurity breaches can be difficult to ascertain until it is too late.58 To take a cautious approach and disclose the information about the attack too soon could lead to liability in itself in the form of misleading or deceptive conduct.59 Companies may face a ‘perverse ‘double whammy’ effect’, as not only the cybersecurity breach, but also the likely class action that will follow, will have significant negative
53 Australian Law Reform Commission Inquiry into class action proceedings and third-party litigation funders
(DP85, 30 July 2018) at 29-30.
54 Maurice Blackburn “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”; Norton Rose Fullbright “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”; and Slater and Gordon “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”.
55 Slater and Gordon, above n 54, at 9.
56 MinterEllison “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”; and Allens “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”. 57 Institute of Directors “The top five issues for directors in 2021” (16 December 2020) <www.iod.org.nz>; and Institute of Directors “The top five issues for directors in 2022” (17 December 2021) < www.iod.org.nz>.
58 Nicole Pedler, Lauren Selby and Samuel Slattery “You’re under attack...now what? Continuous disclosure in the context of cyber incidents and data breaches” Herbert Smith Freehills <www.herbertsmithfreehills.com>; and Cary Di Lernia, Catherine Hardy and Asaf Dori “Cyber-Related Risk Disclosure in Australia: Evidence from the ASX200” (2020) 37(4) C&SLJ 255 at 256.
59 Financial Markets Conduct Act, s 19; and Rosemary Langford “Data Explosion, Disclosure and Stepping Stones” in Andrew Godwin, Pey Woan Lee and Rosemary Langford (eds) Technology and Corporate Law: How Innovation Shapes Corporate Activity (Edward Elgar Publishing, Cheltenham, 2021) 99 at 103.
implications.60 Unintentional non-compliance therefore can have disproportionately detrimental effects on the company. With such a high risk of culpability under strict liability, comes overly cautious decision-making and distraction away from the development of company strategies that will generate value for all shareholders.
The division of opinions in the ALRC review reflects the immense difficulty in striking a balance between the protection of investors and corporations. The ALRC ultimately decided to recommend that the government review the continuous disclosure provisions.61 This sparked the eventual changes to the regime in 2021.
A Recent Changes in Australia
Up until recent years, New Zealand took the same approach to continuous disclosure as Australia. A unique but common element of each regime was that entities could face regulatory or civil enforcement regardless of the entity’s state of mind. 62 This is no longer the case.
In May 2020, the Australian Government made temporary amendments to the continuous disclosure laws by introducing a fault element. 63 For both civil and criminal contraventions, the entity must have had knowledge of, or was reckless or negligent as to whether the information would have had a material effect on the price or value of the entity’s securities.64 In response to the financial uncertainty that came with the COVID-19 pandemic, particularly with regard to forecasting, the amendment was intended to curb ‘opportunistic shareholder class actions’ during this period.65
In December 2020, the Australian Parliamentary Joint Committee on Corporations and Financial Services said that ‘shareholder class actions are generally economically inefficient and not in the public interest’ and recommended the temporary continuous disclosure laws
60 Brendan Read “Cyber-security class actions a ‘ticking time’ bomb for directors” Governance Institute of Australia <www.governanceinstitute.com.au>.
61 Australian Law Reform Commission, above n 46, at 12.
62 Capital Markets 2029, above n 37, at 36.
63 Corporations (Coronavirus Economic Response) Determination (No. 2) 2020.
64 Corporations (Coronavirus Economic Response) Determination (No. 2) 2020.
65 Frydenberg, above n 3.
become permanent.66 The amendments to the continuous disclosure regime took effect on 14 August 2021.67 One notable difference from the temporary changes is that criminal liability has retained the objective ‘reasonable person’ test, representing a continued willingness of ASIC to come down hard on severe breaches where necessary.68 ASX Listing Rule 3.1 governing continuous disclosure has not been amended to reflect the changes to the Corporations Act.69 Only the civil liability provision has added the ‘knowledge, recklessness or negligence’ test, offering a more nuanced approach that is intended to achieve greater balance.70
III Group Litigation in New Zealand
The FMA has acknowledged Australia’s significant amendment, but took the view that the New Zealand regime continues to adequately govern issuer disclosures.71 This belief was largely due to the absence of ‘opportunistic’ class actions in New Zealand.72 Currently, there is no statutory class action regime in New Zealand. Rather, representative actions are pursued through the High Court Rule 4.24.73 Under r 4.24, a person can take an action ‘on behalf of, or for the benefit of, all other persons with the same interest in the subject matter of a proceeding’.74
Overtime, representative actions have been developed through the courts to take a similar form as a class action.75 Although considered to be the same in substance, representative actions may not be the most suitable avenue for collective redress in modern society. 76 Courts have been attempting to introduce modern elements of class actions, such as opt-in and opt-
66 This recommendation was part of its inquiry into litigation funding and the class action landscape: Parliamentary Joint Committee on Corporations and Financial Services, above n 47, at xxxi, xx and 348. 67 Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth), s 2.
68 Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (Cth) (explanatory memorandum) at 26; and Corporations Act, s 674(2).
69 ASX Listing Rules, r 3.1.
70 Corporations Act, s 674A(2).
71 Financial Markets Authority “FMA statement on director liability and continuous disclosure” (press release, 17 June 2020).
72 Financial Markets Authority, above n 71.
73 High Court Rules 2016, r 4.24.
74 This rule has been used by shareholders, see: Hedley v Kiwi Co-Operative Dairies Ltd (2000) 15 PRNZ 210 (HC); Houghton v Saunders [2008] NZHC 1569; [2009] NZCCLR 13 (HC); Livingstone v CBL Corp Ltd CIV-2019-404-2727 HC Auckland; and T.E.A. Custodians Ltd v Wells and Ors CIV-2019-485-642 HC Auckland.
75 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding | Ko ngā Hunga Take Whaipānga me ngā Pūtea Tautiringa (NZLC IP45, 2020) at 78.
76 Nikki Chamberlain “Class Actions in New Zealand: An Empirical Study” (2018) 24 NZBLQ 132 at 138.
out procedures, as class sizes become larger and more complex.77 For shareholder class actions, the ability for class members to consent to be bound by a decision protects the interests of both parties. However, Wicks pointed out that the wording of r 4.24 indicates that all persons, not some, will be brought under the representative action and therefore prevents the determination of the class through consent.78 Rule 4.24 is being ‘required to bear a weight for which it was not designed’.79
Another criticism of the incremental development through the courts is the uncertainty that comes without clear legislation.80 A relevant representative action is the Feltex proceedings, involving allegations of false and misleading statements in Feltex Carpet Limited’s prospectus on behalf of 3,000 shareholders.81 Over the course of five years there was an abundance of interlocutory and costs judgments as the defendants constantly brought challenges on unclear areas of group litigation.82 In 2020, the Court of Appeal upheld the High Court’s decision to strike out the case.83 Such constant uncertainty indicates that ad hoc, context-specific case judgments creates inconsistencies in approach.84
In the context of representative actions for continuous disclosure breaches, the primary issue is the lack of opportunity for public policy discussions.85 Without consultation and the injection of policy considerations, there is a risk of imbalanced protection of plaintiffs’ and defendants’ interests.86 Issuers are arguably already facing an uphill battle due to the no-fault regime. Courts do not have the time or resources to adequately consider issuers’ interests or hear input from key stakeholders in the business community when developing the law case- by-case. If excessive weight is placed on investor protection, over-enforcement could undermine the purpose of continuous disclosure. As litigation funding grows more popular in
77 Anthony Wicks “Class Actions in New Zealand: Is Legislation Still Necessary?” (2015) NZ L Rev 73 at 80.
78 Wicks, above n 77, at 80.
79 Credit Suisse Private Equity LLC v Houghton [2014] NZSC 37 at [49] per Elias CJ; citing Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 at [3] per Gleeson CJ.
80 Te Aka Matua o te Ture | Law Commission, above n 75, at 81-82; and Wicks, above n 77, at 102.
81 Houghton v Saunders [2008] NZHC 1569; [2009] NZCCLR 13 (HC).
82 Wicks, above n 77, at 107.
83 Houghton v Saunders [2020] NZCA 638.
84 Wicks, above n 77, at 109; and Saunders v Houghton (No 1) [2009] NZCA 610 at [21].
85 Te Aka Matua o te Ture | Law Commission, above n 75, at 80.
86 Wicks, above n 77, at 109.
New Zealand, issuers are lacking protection.87 At this point in time, a review of the current regime makes sense in the interests of maintaining fair and efficient capital markets.
A New Zealand Law Commission Review
Since the FMA’s rejection of any need to amend New Zealand’s continuous disclosure provisions, there have been developments regarding the prospect of class actions as a result of the NZLC’s review of class actions and litigation funding.
The NZLC’s view that a statutory class action regime would be beneficial led to the overarching recommendation in its Final Report released in May 2022 to introduce the Class Actions Act as the governing legislation for a regime.88 The main reasons given included the inadequacy of current collective action mechanisms, improving access to justice and efficiently managing multiple claims.89 Under a class action regime, New Zealand should expect to see an increase in securities class actions and also ‘follow-on’ actions off the back of regulatory responses.90 The NZLC clearly considered the prospect of greater collective action against corporate defendants to be a positive implication, as it would provide greater access to justice to class members, particularly small retail investors.91
Despite submitters’ urges to consider the implications for the continuous disclosure laws in light of the Australian issues with shareholder class actions, the NZLC declined to address it.92 Any laws that could result in problematic class actions were instead to be considered substantively and separately from this review regarding procedural matters.93 The NZLC was adamant that both plaintiffs’ and defendants’ were taken into account when developing these recommendations.94 However, it is arguable that the general tone throughout the review was
87 Nick Butcher “Litigation funding and class actions: What’s happening in New Zealand?” (2019) 929 LawTalk 66 at 66-67.
88 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding: Supplementary Issues Paper (NZLC IP48, 2021) at 14; and Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding (NZLC R147, 2022) at 44, 21.
89 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 63. 90 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 65. 91 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 65.
92 Bell Gully “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 3; Institute of Directors “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 1; and Institute of Directors “Submission to the New Zealand Law Commission on the Supplementary Issues Paper on Class Actions and Litigation Funding” at 3; Te Aka Matua o te Ture | Law Commission, above n 75, at 45.
93 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 45; 67
94 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 70.
fairly dismissive of any dangers related to shareholder class actions. This leaves publicly listed issuers with the imminent threat of culpability for non-compliance with continuous disclosure looming over their heads, with this review offering no form of reparation.
Chapter Two: Public versus Private Enforcement of Continuous Disclosure
One must consider the legislative purpose and how it can be achieved, in order to effectively develop the law.95 The extent to which regulatory enforcement is addressing the objectives of the continuous disclosure regime in New Zealand will inform the necessity of shareholder class actions to further the regime’s purpose.
I The Purpose of Continuous Disclosure
The Securities Commission named disclosure as the ‘cornerstone’ of its proposed Securities Act 1978 regulations.96 The purpose of secondary market disclosure is generally thought to be two-fold: to facilitate the price setting process for securities on the secondary market, and to prevent market abuse.97 As Professor Loss contended, disclosure obligations ‘prevent some fraudulent transactions that cannot stand the light of publicity’.98 Specifically, continuous disclosure operates to reduce information asymmetry between issuers and investors, which in turn furthers its statutory purpose of promoting ‘fair, orderly and transparent’ financial markets.99 Timely disclosure of information maintains confidence in the market, ensuring capital is circulating among market participants.100
Continuous disclosure was first introduced into New Zealand legislation when the Securities Market Amendment Act 2002 inserted statutory provisions of continuous disclosure obligations into the Securities Market Act 1988.101 With this legislative change, Parliament aimed to achieve ‘an effective balancing of the rights of companies and investors’ – continuous disclosure created a ‘flat field’.102 The FMCA was enacted in the wake of the
95 Campbell Heggen “Continuous Disclosure and the Harmonisation of International Securities Disclosure Regimes” (2005) 1 Corporate Governance Law Review 426 at 428.
96 The Securities Commission was the predecessor to the Financial Markets Authority. Securities Commission
Proposals for the Enactment of Regulations under the Securities Act 1978 (31 March 1980) at 13.
97 Shelley Griffiths “Trading Securities on Markets” in John Farrar and Susan Watson (eds) A to Z of New Zealand Law – Company Law (online ed, Thomson Reuters) at [16.39.1].
98 Louis Loss Fundamentals of Securities Regulation (Little, Brown & Company, Boston, 1988) at 37; Securities Commission, above n 96, at 15.
99 Griffiths, above n 97, at [16.39.2]; and Financial Markets Conduct Act, s 229(1)(a).
100 Heggen, above n 95, at 428; and Ministry of Business, Innovation and Employment Financial Markets Conduct Regulations Discussion Paper (December 2012) at 12.
101 (19 November 2002) 604 NZPD; and Shelley Griffiths “History, Policy and Structure of New Zealand Securities Law” in John Farrar and Susan Watson (eds) A to Z of New Zealand Law – Company Law (online ed, Thomson Reuters) at [16.36.2].
102 (19 November 2002) 604 NZPD.
Global Financial Crisis (GFC) to restore investors’ faith in New Zealand’s capital markets.103 When drafting the FMCA, Parliament was determined to strike an appropriate balance between providing protection for investors, particularly ‘mum and dad’ retail investors, and facilitating the raising of capital for businesses.104 Even following the GFC, which was a product of the exploitation of investor trust, it was still recognised that corporations need support in order to maintain strong capital markets.105 The tension between investor protection and corporate rescue has been hotly debated ever since.106
II The Consumer Protection Model
The appropriate balance between protecting investors and issuers is crucial for ascertaining the implications of introducing continuous disclosure class actions in New Zealand.Kingsford Smith and Dixon highlight an important paradox in financial markets regulation regarding the view of investors as consumers.107 The investor is subsumed under the broader category of the consumer, in the sense that investors are in the same unfair bargaining position against a corporation as consumers in a sale and purchase of goods.108 The ‘consumerist narrative’ of financial markets regulation refers to the inherent power imbalance between investors and businesses.109 As a result, investors need increased protection by the law. Although there are similiarities between the investor and the consumer, this paradox problematically promotes an exaggerated level of investor protection, at the expense of issuer protection.
The inherent information asymmetry involved in market transactions is the principal element of the consumerist narrative.110 This is addressed by the FMCA’s additional purpose to
103 (7 March 2012) 678 NZPD 872.
104 (7 March 2012) 678 NZPD 872; and (25 October 2012) 685 NZPD 6255.
105 (7 March 2012) 678 NZPD 872.
106 Jason Harris and Michael Legg “What price investor protection? Class action vs Corporate rescue” (2009) 17 Insolv LJ 185 at 186.
107 Dimity Kingsford Smith and Olivia Dixon “The Consumer Interest and the Financial Markets” in Niamh Molony, Eilis Ferran and Jennifer Payne (eds) The Oxford Handbook of Financial Regulation (Oxford University Press, Oxford, 2015) 695 at 696.
108 Shelley Griffiths “Securities Regulation, Securities Law and Financial Markets Law: From Investor Protection to Consumer Protection in New Zealand, 1985-2016” in Susan Watson (ed) The Changing Landscape of Corporate Law in New Zealand (The Centre for Commercial and Corporate Law Inc, Canterbury, 2017) 289 at 291.
109 Joanna Benjamin “The Narratives of Financial Law” (2010) 30(4) OJLS 787 at 799; as cited in Griffiths, above n 108, at 291.
110 Griffiths, above n 108, at 308; and Harris and Legg, above n 106, at 186.
facilitate the disclosure of information.111 Under the ‘consumer protection model’, shareholder class actions are desirable as vulnerable investors require this procedural mechanism as an added layer of protection against corporations.112 There has been rising popularity for this model, particularly following the GFC.113 It is therefore surprising that investor protection is not expressly found in the purposes of the FMCA.114 Although Parliament intended to provide greater protection for retail investors by enacting the FMCA, the Act’s purpose is to protect three parties, consumers, investors and businesses, equally.115 The consumer-investor paradox hinders the ability to reach a regulatory balance, due to its contradictory perspective as to the extent of protection warranted in light of the risks investors face.116
As Griffiths notes, ‘there are limits to equating financial products with toasters and stereos’.117 The investor is not on equal footing with the consumer in terms of the risk they bear. To view shares as simply another consumer product does not reflect the nature of market transactions. Investment risk is the very essence of the share market, as without it there are no gains to be made.118 Investors receive rewards in return for putting their own capital on the line with no guarantee they will get it back.119 By contrast, consumers do not purchase a product with an underlying acceptance of a risk that the product could be faulty.120 Businesses and investors share the risk when dealing on the market.121 The market that securities law aims to regulate has been defined as the medium in which the capital of investors can find its way to businesses seeking that capital.122 This is more consistent with the ‘arm’s length narrative’, whereby the market provides a platform for two parties, partners
111 Financial Markets Conduct Act, s 4.
112 Legg, above n 5, at 674, 709.
113 Kingsford Smith and Dixon, above n 107, at 715.
114 David L Johnston Canadian Securities Regulation (Butterworths, Toronto, 1977) at 1; and Harris and Legg, above n 106, at 185-186.
115 Financial Markets Conduct Act, s 3; and Peter Fitzsimons “Securities Act 1978, Financial Markets Conduct Bill and Primary Securities Offerings – Part 1” (2011) CSLB 97 at 100.
116 Kingsford Smith and Dixon, above n 107, at 697.
117 Griffiths, above n 108, at 292.
118 Johnston, above n 114, at 1.
119 Dimity Kingsford Smith “ASIC regulation for the investor as consumer” (2011) 29 C&SLJ 327 at 333; and (27 August 2013) 693 NZPD 12999.
120 Gail Pearson “Risk and the Consumer in Australian Financial Services Reform” [2006] SydLawRw 6; (2006) 28 Syd LR 99 at 104; as cited in Dimity Kingsford Smith, above n 119, at 333; and Legg, above n 5, at 672.
121 Griffiths, above n 97, at [16.36.1].
122 Robert Baxt, Ashley Black and Pamela Hanrahan Securities and Financial Services Law (9th ed, LexisNexis Butterworths, Chatswood, 2016) at [1.1]; as cited in Griffiths, above n 97, at [16.36.1].
of sorts, to transact to each achieve a desired, self-interested outcome.123 In this sense the investor is a ‘junior entrepreneur’, rather than a helpless consumer at the mercy of the business who requires a product warranty for protection.124 This view was clearly expressed in the Australian Financial System Inquiry.125 In New Zealand, conversations during the drafting of the Securities Act 1978 and FMCA also appear to reflect an acceptance of this inevitable shared risk. 126 There was an intention to mitigate a power imbalance, but only to the extent that it created the potential for market abuse.127 The consumerist narrative fails to distinguish between the necessary innate risk and the risk of issuer exploitation of the information asymmetry.128 Financial markets regulation should ensure all the risks of an investment are fully disclosed to facilitate informed investment decisions – but this is as far as the law should go.129
Legg expressed his doubts of the consumerist narrative for shareholder class actions.130 It arguably creates a false sense of security that investors are entitled to compensation any time the share price drops.131 A continuous disclosure breach is a relatively straightforward way to place blame on the corporation, particularly with a strict liability standard.132 Issuers’ fear of legal action leads to the possibility of a market overwhelmed with information not required for disclosure, due to incompleteness or triviality.133 Disclosure of insignificant or fragmented bits of information makes it harder for retail investors to make informed decisions – simply put, investors face corporations ‘who cried wolf’.134 Although the requirement to disclose material information is the price for accessing capital135, it reaches a point where investors are no longer benefiting and resources become inefficiently allocated.136 Corporations will waste
123 Benjamin, above n 109, at 792; Griffiths, above n 108, at 289.
124 Kingsford Smith and Dixon, above n 107, at 697.
125 Treasury Financial System Inquiry: Final Report (March 1997) at 177.
126 (14 December 1977) 416 NZPD 5339; (7 March 2012) 678 NZPD 872; (25 October 2012) 685 NZPD 6255;
and (27 August 2013) 693 NZPD 12999.
127 (14 December 1977) 416 NZPD 5339; and (25 October 2012) 685 NZPD 6255.
128 Kingsford Smith and Dixon, above n 107, at 717.
129 Houghton v Saunders [2014] NZHC 2229 at [56] per Dobson J.
130 Legg, above n 5, at 709.
131 William Felstiner, Richard Abel and Austin Sarat “The Emergence and Transformation of Disputes: Naming, Blaming, Claiming” (1980–81) 15(3) L & Soc Rev 631 at 641; as cited in Legg, above n 5, at 672.
132 Legg, above n 5, at 674.
133 Legg, above n 5, at 709.
134 Homer Kripke “The Myth of the Informed Layman” (1973) 28 Bus Law 631 at 635; as cited in Kenneth Firtel "Plain English: A reappraisal of the intended audience of disclosure under the Securities Act of 1933" (1999) 72 S Cal L Rev 851 at 870.
135 Securities Commission, above n 96, 21.
136 Amanda Rose “The Multienforcer Approach to Securities Fraud Deterrence: A Critical Analysis” (2010) 158(7) U Pa L Rev 2173 at 2186.
time and resources on compliance and liability costs instead of strategy to the detriment of the investors, a concern expressed by Parliament in drafting the FMCA.137 Essentially, over- enforcement will undermine the purposes of continuous disclosure and impose an excessive burden on issuers.138 Australia’s decision to raise the bar for class actions for continuous disclosure breaches reflects this. The danger of excessive investor protection under the consumer protection model should be taken into account when determining whether shareholder class actions could be introduced without compromising New Zealand’s continuous disclosure regime.
III Public Enforcement of Continuous Disclosure
With no statutory class action regime in New Zealand, continuous disclosure obligations are primarily enforced by the public regulator. How well public enforcement is addressing the objectives of continuous disclosure will indicate whether shareholder class actions are needed to fill any gaps. Both regulatory bodies, RegCo and FMA, are committed to maintaining fair, orderly and transparent capital markets through effective regulation.139 This is also the FMA’s principal objective. 140
RegCo, the primary regulator of the continuous disclosure regime, has four enforcement goals, including the encouragement of a compliance culture and investor protection.141 In achieving these goals, its approach entails ‘proactive engagement’ and ‘fair, considered and consistent’ investigation and enforcement action.142 RegCo has an armoury of responses to breaches, from infringement notices for minor breaches to cancellation of a listing for very serious breaches.143 RegCo may refer to the New Zealand Markets Disciplinary Tribunal to investigate a breach and possibly impose a penalty, but this does not include ordering compensation for aggrieved parties.144 If RegCo refers the contravention to the FMA, the
137 (25 October 2012) 685 NZPD 6255.
138 Legg, above n 5, at 709.
139 Memorandum of Understanding Between the Financial Markets Authority and NZX Limited, above n 16, at 2.
140 Financial Markets Authority Act 2011, s 8.
141 NZ RegCo Approach To Enforcement (March 2022) at 2.
142 NZ RegCo, above n 141, at 2.
143 NZ RegCo, above n 32.
144 NZ RegCo “Role” <www.nzx.com>; and NZ RegCo, above n 141, at 5.
severity of the breach will determine the action the FMA decides to take, if any.145 The FMA’s dual purposes of enforcement are to hold contraveners to account and deterrence.146 Regulatory responses to serious contraventions of the continuous disclosure obligations include ordering a declaration of contravention147, pecuniary penalties148 or compensatory orders149. The FMA may also accept undertakings which involve the issuer acknowledging wrongdoing and the need for remedy, and can include compensatory orders or penalties.150
According to responsive regulation theory, a range of regulatory responses along the stringency continuum are necessary to achieve a desirable level of compliance.151 The FMCA affords ‘an escalating hierarchy of liability’, which enables RegCo and the FMA to give a proportionate response to a breach.152 This is a significant benefit of a public regulator that distinguishes it from private enforcement. The FMA has a co-operation policy that involves the discretion to respond with lower order enforcement, or no regulatory response at all, if the entity or individual is fully cooperative throughout the investigative process.153 Comparatively, these ideas of proportionality and cooperation are foreign in shareholder class actions – it is expensive, big stick court proceedings or nothing.154 The FMA does not decide to take the litigation path lightly, court action is in no way a first resort.155 The FMA Head of Enforcement acknowledged the tension between its supervisory function, focused on guidance and assisting entities with compliance issues, and its enforcement function.156
145 Financial Markets Authority Regulatory response guidelines (August 2016) at 8.
146 Financial Markets Authority, above n 33.
147 Financial Markets Conduct Act, s 487(1). For a recent example of an enforcement response, see: Financial Markets Authority “FMA files civil proceedings against CBL Corporation, its directors and chief financial officer” (press release, 17 December 2019).
148 Financial Markets Conduct Act, s 489(2).
149 Financial Markets Conduct Act, s 494(1).
150 Financial Markets Authority Act, ss 46 and 46A; and Financial Markets Authority, above n 145, at 11. 151 Ian Ayres and John Braithwaite Responsive Regulation: Transcending the Deregulation Debate (Oxford University Press, New York, 1992) at 24-6; as cited in Michelle Welsh Continuous Disclosure: Testing the
Correspondence between state enforcement and compliance (Monash University, Working Paper No 14, May 2009) at 4.
152 Officer of the Minister of Commerce “Cabinet Paper to the Chair of the Economic Growth and Infrastructure Committee: Securities Law Reform” (February 2011) at [191].
153 Financial Markets Authority Co-operation policy (August 2016) at 1.
154 Nicholas Bentley “War on two fronts: Harmonising the public and private enforcement of Australia’s corporate disclosure laws” (2016) 34 C&SLJ 567 at 585.
155 Chang, above n 156; Financial Markets Authority, above n 33. See statements made by Nick Kynoch, former FMA General Counsel, in relation to the CBL Corporation proceedings: Financial Markets Authority, above n 147.
156 Karen Chang, Financial Markets Authority acting General Counsel “Speech to MinterEllisonRuddWatts clients” (online, 4 November 2021).
Taking a proactive approach to enforcement encourages careful disclosures. Responsive regulation supports socially responsible corporate actors who want to and will comply.157 There is a risk that genuinely honest market participants will be disincentivised to comply if the regulator expresses unfair scepticism or harsh punishment.158 The FMA will not take action against a continuous disclosure contravention if the issuer can demonstrate it acted appropriately and reasonably in the circumstances, nor will the FMA and RegCo base their investigations on hindsight.159 It is unlikely disgruntled shareholders would show this kind of understanding if they have the option to come down harder on the issuer. Under strategic regulation theory, market participants are encouraged to meet their obligations voluntarily, because it would be impossible for the regulator to enforce every contravention.160 This aligns with New Zealand’s regulatory approach to continuous disclosure. Notwithstanding the fact that RegCo and the FMA have finite resources, responding to every breach of every size would place an excessive burden on issuers.161 As a public regulator with a statutory purpose, both RegCo and the FMA are compelled to maintain relationships with issuers, to encourage cooperation and thus strength in financial markets.162 There is no public interest consideration for shareholders when they bring a class action, rather they are primarily focused on compensation.163 That being said, there has been support for shareholder class actions on the basis that they can successfully operate alongside or in replacement of the public regulator.164
IV Private Enforcement of Continuous Disclosure
The FMA recognised ‘class actions play a crucial part in addressing defective corporate disclosure’ when it responded to Australia’s new continuous disclosure fault test.165 There may be growing popularity for private enforcement as a better alternative for those harmed by continuous disclosure breaches.166 Securities class actions are thought to offer more comprehensive reparation for aggrieved investors than the public regulator in the United
157 Ayres and Braithwaite, above n 151, at 24-5.
158 John Braithwaite “Responsive Business Regulatory Institutions” in C A J Coady and Charles Sampford (eds)
Business Ethics and the Law (Federation Press, Sydney, 1993) 83 at 85; as cited in Welsh, above n 151, at 4.
159 Financial Markets Authority, above n 71; and NZX, above n 1, at 7.
160 Welsh, above n 151, at 3.
161 Memorandum of Understanding Between the Financial Markets Authority and NZX Limited, above n 16, at 3; and Johnston, above n 114, at 1.
162 Chang, above n 156; and NZ RegCo Approach To Enforcement (March 2022) at 2.
163 Financial Markets Authority, above n 147; and Bentley, above n 154, at 582.
164 Duffy, above n 41, at 166.
165 Financial Markets Authority, above n 71.
166 Legg, above n 5, at 708.
States, the Securities Exchange Commission (SEC).167 While this may be so, investor protection is not the goal of continuous disclosure. It has a broader scope, protecting the integrity and efficiency of the market.168 That is the basis on which the private class action is to be evaluated.
There is an idea that private class actions can step in and hold wrongdoers to account where public enforcement does not.169 This concept of the ‘private attorney-general’ is popular amongst shareholder class action advocates in the United States and Australia.170 Shareholder class actions can fill the gaps left by regulators typically due to limits on resources and funding, hence they are a ‘necessary supplement’ to regulatory action.171
This view supports the idea that shareholder class actions have a public benefit.172 The ‘ultimate dilemma’ with this idea is the fact that parties to a class action are not motivated to achieve outcomes that are not directly in their self-interests.173 The idea of private enforcement for public benefit is at odds with concerns of ‘entrepreneurial litigation’, referring to the opportunistic nature of litigation funders and lawyers acting for class members against a corporation.174 These parties are not interested in how the outcome of the proceedings can further the purpose of continuous disclosure, they simply want compensation.175 This is not necessarily undesirable considering profit-seeking can lead to access to justice for shareholders who would have never recovered their losses otherwise.176 According to Coffee the negative term ‘bounty hunter’ used to describe class action lawyers
167 James Cox, Randall Thomas and Dana Kiku “SEC Enforcement Heuristics: An Empirical Inquiry” 53 Duke LJ 737 (2003) at 779; and John Coffee Entrepreneurial Litigation: Its Rise, Fall, and Future (Harvard University Press, Cambridge, 2015) at 175.
168 See Cox, Thomas and Kiku, above n 167, at 745.
169 Duffy, above n 41, at 166.
170 Duffy, above n 41, at 162; and Amanda Rose “Reforming Securities Litigation Reform: Restructuring the Relationship between Public and Private Enforcement of Rule 10b-5” (2008) 108 Colum L Rev 1301 at 1304. 171 Kirby v Centro Properties Ltd [2008] FCA 1505 at [8] citing Bateman Eichler, Hill Richards Inc v Berner [1985] USSC 152; 472 US 299 (1985) at 310 & J I Case Co v Borack [1964] USSC 118; 377 US 426 (1964) at 432; and Bentley, above n 154, at 572.
172 Duffy, above n 41, at 162, 165.
173 Duffy, above n 41, at 187.
174 Bernard Murphy and Camille Cameron “Access to Justice and the Evolution of Class Action Litigation in Australia” [2006] MelbULawRw 14; (2006) 30 MULR 399 at 405. See further discussion in Kirby v Centro Properties Ltd, above n 171, at [5] per Finkelstein J.
175 Bentley, above n 154, at 582; Harris and Legg, above n 106; and Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) HCA 41 at [266].
176 See John Coffee “Rescuing the Private Attorney-general: Why the Model of the Lawyer as Bounty Hunter is Not Working” (1983) 42(2) Md L Rev 215 at 220.
and the positive concept of the private attorney-general represent ‘different sides of the same legal coin’.177
Where this commercially driven approach becomes problematic is when litigation funders and plaintiff lawyers are not making decisions in the best interests of the shareholders.178 Class members are typically at the mercy of their lawyers and funders.179 Economic prospects may cloud legal judgment, creating conflicts of interest between the plaintiff lawyers and class members, particularly during settlement negotiations.180 For example, the plaintiff lawyers in the Centro class actions were suspected of acting in their own self-interests at the expense of greater difficulty for the shareholders in reaching a settlement.181 The continuous disclosure regime was not established for litigation funders and lawyers, and yet they may be reaping all the benefits.182 Entrepreneurial litigation is a particular concern in the context of continuous disclosure as strict liability makes it easier for these parties to achieve financial gain. Corporate fear of liability is thus exacerbated along with the problems of over-cautious disclosures and undermining the purpose of the regime.
Theoretically, the substitution of private collective actions would allow the public regulator to focus its resources elsewhere.183 The private attorney-general idea does not align with situations where a class action commences following regulatory enforcement proceedings.184 This is relatively common in Canada and Australia.185 ‘Free riding’ effects refers to how a regulatory investigation into a breach provides ammunition for private litigation and can assist plaintiff lawyers in the discovery phase, ultimately reducing costs.186 In the United States the SEC’s enforcement response appeared to be operating as a ‘litmus test for a more
177 Coffee, above n 176, at 218.
178 Michael Legg “Entrepreneurs and Figureheads – Addressing Multiple Class Actions and Conflicts of Interest” (2009) 32 UNSWLJ 911 at 912; Allens, above n 56, at 12; and Louise Cantrill “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”.
179 Legg, above n 178, at 912.
180 Legg, above n 178, at 913; and Deborah Hensler and Thomas Rowe Jr “Beyond ‘It Just Ain’t Worth It’: Alternative Strategies for Damage Class Action Reform” (2001) 64 LCP 137 at 138.
181 Kirby v Centro Properties Ltd, above n 171, at [6].
182 See Elizabeth Burch “Reassessing Damages in Securities Fraud Class Actions” (2007) 66 Mary LR 348 at 375.
183 Cox, Thomas and Kiku, above n 167, at 762; and Australian Law Reform Commission, above n 46, at 266.
184 Te Aka Matua o te Ture | Law Commission, above n 75, at 89; and Coffee, above n 176, at 222.
185 Te Aka Matua o te Ture | Law Commission, above n above n 75, at 89.
186 Cox, Thomas and Kiku, above n 167, at 761; and Legg, above n 5, at 690.
meritorious’ private action, which could be a positive if it mitigates attempts to proceed with unfounded or frivolous claims that waste the court’s time and resources.187
Similarly, in New Zealand, representative actions have been commenced following a regulatory investigation.188 The concern with these follow-on class actions is unfair double punishment and consequently a subversion of the purpose of continuous disclosure.189 Companies who would typically cooperate with the regulator may be discouraged if there is a prospect of a shareholder class action riding on the regulator’s coat tails.190 Opting to deny guilt instead, and damaging its relationship with the regulator in the process, creates hostility and distrust – not an ideal environment for collaboratively working towards a fair, orderly and transparent market.
V Enforcement of Continuous Disclosure in Australia
The comparative success of Australia’s continuous disclosure dual enforcement regime can help to inform New Zealand of the potential for shareholder class actions to either bolster the regulatory regime or lead to over-deterrence. ASIC’s approach mirrors the FMA’s responsive regulation approach in that it will not enforce every breach, instead prioritising responses that will have greater public benefit in the form of deterrence.191 It would follow then that shareholder class actions can force the heavier, punitive hand.192
Bentley argues that the ‘enforcement duality’ of ASIC and shareholder class actions has created a ‘war on two fronts’ for listed issuers in Australia.193 It is not the shortfalls of either enforcement form in isolation, but the lack of harmony between the two that is responsible for this war.194 There are concerns with the negative effects of shareholder class actions on ASIC’s enforcement strategies. ASIC’s hierarchical enforcement structure, which encourages
187 Cox, Thomas and Kiku, above n 167, at 762.
188 NZ Herald “Feltex IPO prospectus not misleading: Securities Commission” (11 October 2007)
<www.nzherald.co.nz>; and Scott v ANZ Bank New Zealand Ltd [2019] NZHC 1908 as cited in Te Aka Matua o te Ture | Law Commission, above n 75, at 90.
189 Linda Willett “Litigation as an Alternative to Regulation: Problems Created by Follow-On Lawsuits with Multiple Outcomes” (2005) 18 Geo J Legal Ethics 1477 at 1491.
190 Legg, above n 5, at 709.
191 Australian Securities and Investments Commission Information Sheet 151: ASIC’s Approach to Enforcement
(September 2013) at 3.
192 See Welsh, above n 151, at 4.
193 Bentley, above n 154, at 568.
194 Bentley, above n 154, at 582.
cooperation and promotes self-regulation, is at risk of being undermined by the unforgiving nature of shareholder class actions.195 If the exercise of discretion becomes obsolete, ASIC may be forced to utilise its harsher punishment responses.196 Not only is this costly and prevents the public regulator from directing its resources elsewhere, proportionality is lost and the issues with over-enforcement come back into focus.197 That is not to say that both approaches do not play a critical role in regulating continuous disclosure – a unitary regime is desirable.198 Shareholder class actions are clearly beneficial where they compensate for a lack of public enforcement due to resources wearing thin – a ‘safety valve’ function of sorts.199 Bentley suggests better coordination through communication and a ‘uniform compliance message’ can mitigate this war for the benefit of the market as a whole.200 Therefore, the Australian experience suggests that a dual enforcement regime could be beneficial for New Zealand, provided public and private enforcement can co-exist effectively.
195 Joel Trachtman and Philip Moremen “Costs and Benefits of Private Participation in WTO Dispute Settlement: Whose Right is it Anyway?” (2003) 44 Harvard Intl LJ 221 at 235–236; and Richard Nagareda “Class Actions in the Administrative State: Kelven and Rosenfield Revisited” (2008) 75 U Chi L Rev 603 at 616; as cited in Bentley, above n 154, at 583.
196 Bentley, above n 154, at 585.
197 Michael Legg “ASIC’s Nod to Class Actions May Backfire” The Australian (Sydney, 12 April 2012) at 24. 198 Bentley, above n 154, at 582. See Poonam Puri, “Securities Litigation and Enforcement: The Canadian Perspective” (2012) 37 Brooklyn Journal of International Law 967.
199 Coffee, above n 167, at 175; and Peta Spender “The Class Action as Sheriff: Private Enforcement and Remedial Roulette” in Jeff Berryman and Rick Bigwood (eds) The Law of Remedies: New Directions in the Common Law (Irwin Law, Toronto, 2010) 695 at 696.
200 Bentley, above n 154, at 597 and 588; and Ray Schoer “Self-Regulation and the Australian Stock Exchange” in Peter Grabosky and John Braithwaite (eds) Business Regulation and Australia’s Future (Australian Institute of Criminology, Canberra, 1993) 107 at 108.
Chapter Three: Achieving Compensation and Deterrence
A principal rationale of enforcement is deterrence of wrongdoing.201 In the context of private enforcement, compensating those who suffered loss as a result of a breach is an equally fundamental purpose.202 Compensation and deterrence are the dual rationales for a shareholder class action regime.203 There are doubts that class actions can achieve deterrence.204 Commentators view the rationale as better suited to public enforcement and prefer to defer to the compensatory rationale to support their argument for securities class actions, yet this has also proven hard to discern.205 If shareholders are not duly compensated, and corporate actors are not deterred from fraudulent behaviour, it becomes difficult to see what purpose these actions are actually achieving.
I Objectives of a Class Action Regime
It is well established that class actions can provide greater access to justice.206 This is the statutory objective of the class action regime the NZLC recommended, along with managing multiple claims in an efficient way.207 With the help of litigation funders, shareholders who purchased mispriced securities as a result of a failure to disclose material information have an opportunity to hold the corporation to account. Individually, litigating against large listed companies would be an overwhelming task, but together it becomes feasible.208 Comparatively, the regulator has discretion to enforce breaches where it sees fit.209 If the
201 Michael Legg Public and Private Enforcement of Securities Laws: The Regulator and the Class Action in Australia’s Continuous Disclosure Regime (Hart Publishing, Oxford, 2022) at 48; Duffy, above n 41, at 174; and Bentley, above n 154, at 571.
202 Miller, above n 40, at 633.
203 John Coffee “Reforming the Securities Class Action: An Essay on Deterrence and its Implementation” (2006) 106 Colum L Rev 1534 at 1538; Martin Gelter “Risk-shifting Through Issuer Liability and Corporate Monitoring” (2013) 14(4) EBOR 497 at 501; Lawrence Mitchell “The Innocent Shareholder: An Essay on Compensation and Deterrence in Securities Class-Action Lawsuits” (2009) Wis L Rev 243 at 291; Elizabeth Boros “Public and Private Enforcement of Disclosure Breaches in Australia” (2009) 9 JCLS 409; and Russell Gold “Compensation's Role in Deterrence” (2016) 91(5) Notre Dame L Rev 1997 at 1997.
204 Miller, above n 40, at 644; Coffee, above n 203, at 1536; Cox, Thomas and Kiku, above n 167, at 743; and Te Aka Matua o te Ture | Law Commission, above n 75, at 104.
205 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 69; Rose, above n 170, at 1314; and Legg, above n 201, at 9.
206 Murphy and Cameron, above n 174, at 402; Harris and Legg, above n 106, at 190; Michelle Welsh and Vince Morabito “Public V Private Enforcement of Securities Laws: An Australian Empirical Study” (2015) 14(1) JCLS 39 at 41; Bentley, above n 154, at 572; and Legg, above n 5, at 698.
207 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 21.
208 Murphy and Cameron, above n 174, at 402; and Legg, above n 201, at 64.
209 Legg, above n 5, at 708; and Financial Markets Authority Co-operation policy (August 2016) at 1.
regulator decides to respond, punitive sanctions are rare, resulting in very few shareholders who receive access to justice through public enforcement.210
Although the NZLC declined to adopt the compensation and deterrence rationales as part of their overarching statutory objectives for a class action regime, they form a critical part of why continuous disclosure class actions are beneficial. Access to justice alone may not be enough to justify shareholder class actions considering the compliance and potential liability burdens that public issuers face. Furthermore, access to justice does not only apply to shareholders – defendants must also be considered.211
The NZLC noted a crucial aspect of access to justice is ‘obtaining a substantively just result’.212 Substantive justice for shareholders equates to compensation for the financial loss caused by the breach, hence the existence of the compensatory rationale.213 A complementary, or alternative, rationale is deterrence, in the sense that issuers are discouraged from future breaches of their obligations due to the prospect of legal action.214 The dual rationales are frequently referenced throughout Australian commentary, including in the ALRC class actions and litigation funders review.215 They were also recognised by the Federal Court of Australia.216 There is an overlap of public and private enforcement in relation to deterrence and compensation.217 The extent to which both forms can achieve these rationales must be contemplated to ensure that it is not resulting in ‘over-deterrence’.218
210 Legg, above n 201, at 8.
211 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 55; Bell Gully, above n 92, at 2; Michael Duffy “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”; Tom Weston “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 5 and 10; and Te Aka Matua o te Ture | Law Commission, above n 75, at 98-99. See also Houghton v Saunders [2020] NZHC 1088 at [70].
212 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 55; and Jasminka Kalajdzic Class Actions in Canada: The Promise and Reality of Access to Justice (UBC Press, Vancouver, 2018) at 51 and 70.
213 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding: Supplementary Issues Paper, above n 88, at 128.
214 Miller, above n 40, at 633.
215 Legg, above n 201, at 36; and Australian Law Reform Commission, above n 46, at 266.
216 Kirby v Centro Properties Ltd [2008] FCA 1505 at [8].
217 Legg, above n 201, at 2 and 219.
218 Legg, above n 201, at 219.
II Deterrence
The prospect of a shareholder class action following a breach of continuous disclosure is thought to deter such a breach.219 This rationale is connected to the ‘private attorney-general’ argument.220 Deterrence is possible in the context of private actions provided there is some form of punishment.221 Optimal deterrence requires equal costs of enforcement and net social cost of the misconduct multiplied by the likelihood of being caught – any more or less will result in over- or under-deterrence.222 For example, a breach with a social harm of $100 and a 50% chance of detection warrants a sanction of $200.223 An issue with securities class actions is the misalignment between the sanctions associated with issuer liability and the harm to the shareholders, thus inhibiting deterrence.224 This misalignment is attributed to the fact that those who are guilty of committing the breach are not held accountable, nor is the penalty being paid by the right party.
The existence of a deterrent effect depends largely on whether those who are at fault are held to be responsible.225 In class actions for continuous disclosure breaches, the culpable directors or senior managers are rarely pursued individually in proceedings, let alone face personal sanctions for their wrongdoing.226 Note that in New Zealand, individuals can only be liable by way of being an accessory to the issuer’s breach, 227 but establishing directorial liability is still minimally desirable due to the availability of a due diligence defence.228 Targeting the issuer alone is efficient and results in far more lucrative outcomes.229 When the optimum remedy for loss caused by a continuous disclosure breach is compensation, it is logical to go for thedeep-pocketed issuers with insurance rather than pursue anyone personally. It follows that payment of compensation alone is not resulting in positive behaviour modification effects.230
219 Duffy, above n 41, at 181.
220 James Cox “Making the Securities Fraud Class Action Virtuous” (1997) 39 Ariz L Rev 497 at 497.
221 David Kennedy Deterrence and Crime Prevention (Routledge, New York, 2009) at 32; and Miller, above n 40, at 644.
222 Rose, above n 170, at 1322; A Mitchell Polinsky and Steven Shavell “Punitive Damages: An Economic Analysis” (1998) 111 Harv L Rev 869 at 900; and Rose, above n 136, at 2188-2189.
223 Legg, above n 201, at 52.
224 Gelter, above n 203, at 504.
225 Coffee, above n 203, at 1536.
226 Gelter, above n 203, at 508.
227 Capital Markets 2029, above n 37, at 37; and Financial Markets Conduct Act, s 533.
228 Financial Markets Conduct Act, s 272.
229 Jenifer Varzaly “The effectiveness of disclosure law enforcement in Australia” (2021) 21(1) JCLS 135 at 153.
230 Varzaly, above n 229, at 172.
That is not to say that without individual sanctions, corporate executives are unfazed by the prospect of proceedings. There are deterrent effects – reputational damage being one of the most convincing.231 Reputational deterrence is thought to have its most significant effect in relation to executives of publicly listed companies due to humiliation amongst the ‘close- knit’, ‘status-conscious’ corporate community and anxiety regarding future career prospects.232 It is plausible these effects would occur in New Zealand considering the smaller population size thus smaller pool of high-ranking executives.233 However, these disadvantages of a class action arguably do not have a significant enough impact, considering the size of the punishment correlates with the size of the deterrent effect.234
At first glance, it would make sense to advocate for increased personal liability and contributions to settlement by directors and senior officers in order to expand the deterrence role.235 Firstly, this would be at odds with the compensation rationale as the payout would inevitably be much lower. Secondly, even if directors were exposed to personal liability, any monetary sanctions would be covered by their D&O insurance.236 Side A and B insurance policies cover personal liability and indemnification of directors and officers, and Side C provides cover for liability of the listed issuer itself.237 Such all-encompassing coverage is thought to undermine deterrence because directors and officers know it is unlikely they will have to truly bear the weight of any amount of compensation.238 Rather than enhanced compliance with continuous disclosure, prospects of a shareholder class action simply expand a company’s insurance budget.239 It is also important to note that class actions happen years after the breach.240 The average class action period in the Federal Court of Australia is 931
231 Welsh and Morabito, above n 206, at 66.
232 Jayne Barnard “Reintegrative Shaming in Corporate Sentencing” (1999) 72 S Cal L Rev 959 at 966.
233 Allan Chang “Analysis on corporate governance compliance standards in New Zealand – a qualitative study on disclosures using content analysis and interviews” (2018) 26(4) Journal of Financial Regulation and Compliance 505 at 509.
234 John Coffee “No Soul to Damn, No Body to Kick”: An Unscandalized Inquiry into the Problem of Corporate Punishment” (1981) 79(3) Mich L Rev 386 at 435.
235 Coffee, above n 203, at 1534, 1538 and 1571; Legg, above n 201, at 8; and Lachlan Peake “Testing the Regulator’s Priorities: To Sanction Wrongdoers or Compensate Victims?” (2020) 39(2) UQLJ 278 at 309. 236 Duffy, above n 41, at 182;
237 Guy Narburgh and Sally-Anne Ivimey “Side by Side (A, B and C): Securities Class Actions and D&O Insurance” in Damian Grave and Helen Mould (eds) 25 years of class actions in Australia: 1992-2017 (Ross Parsons Centre of Commercial, Corporate and Taxation Law, Sydney, 2017) 371 at 372-73.
238 Legg, above n 201, at 126; and Gelter, above n 203, at 511.
239 Burch, above n 182, at 385.
240 Allens, above n 56, at 6; and ASX “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry” at 2.
days.241 The lessons to be learned from the events in question and the people involved are so far removed from the original situation, that by the time any sort of repercussions occur, there are doubts as to whether those responsible are disincentivised from future wrongdoing.
The deterrence rationale for shareholder class actions is at odds with strict liability continuous disclosure.242 There is no criteria on which to base the punishment, it is an all or nothing approach and maximum deterrence does not translate to optimal deterrence.243 With strict liability, in a class action an issuer that made an unintentional mistake or misjudgment faces the same sanction as an issuer who dishonestly withheld material information from the market.244 This reduces the extent of ‘moral blameworthiness’.245 A company will likely not be deterred when there is a lack of calibration between the wrongdoing and the sanction, because there is no incentive to comply when they can receive an astronomical compensatory order despite going to great lengths to ensure obligations were met.246 Not only does this weaken the rationale ‘to the point of extinction’247, it greatly risks over-deterrence and disproportionate compliance costs imposed on issuers.248
On the contrary, the range of enforcement options available to a public regulator facilitates a deterrent effect because the punishment fits the severity of the breach, depending on the level of culpability.249 The regulator can tailor its enforcement response to ensure the market returns to an optimal equilibrium of deterrence.250 Alternative sanctions to compensation include public warnings with the aim of protecting the public from misconduct, or infringement notices and warning letters for lower-level offences.251 Deterrence is one of the FMA’s strategic priorities.252 The FMA can target the culpable individuals through criminal
241 Vince Morabito An Empirical Study of Australia's Class Action Regimes, Fourth Report: Facts and Figures on Twenty-Four Years of Class Actions in Australia (Monash University, 2016) at 10.
242 Miller, above n 40, at 644-646.
243 Gold, above n 203, at 2004.
244 Miller, above n 40, at 644; Peake, above n 235, at 308.
245 Legg, above n 201, at 50.
246 Ashley Black “Session 4: Questions and comments from participants in Sydney and Melbourne” in Kristian Lindgren (ed) Investor Class Actions (Ross Parsons Centre of Commercial, Corporate and Taxation Law, Sydney, 2009) 110 at 114; and Peake, above n 235, at 308.
247 Black, above n 33, at 114. See Peake, above n 235, at 308.
248 Rose, above n 136, at 2184 and 2186.
249 Miller, above n 40, at 644.
250 Rose, above n 170, at 1304.
251 Financial Markets Authority Regulatory response guidelines (August 2016) at 10-12.
252 Financial Markets Authority Strategic Risk Outlook 2019 (2019) at 9.
proceedings or injunctions, if that best serves its statutory purpose.253 Furthermore, these alternatives to compensation are thought to ‘offer a distinct and irreplaceable kind of accountability’. 254 Compensation holds issuers accountable in a tangible and quantifiable way, but other regulatory tools indicate the behaviour is actually socially wrong255 – similar to how criminal behaviour is disincentivised by a general sense of immorality.256 RegCo revocations or suspensions of an issuer’s designation as market participant257, or the FMA’s banning orders, amount to total exclusion from the market258 – one cannot quantify the message this would send to other market participants, and insurance cannot save them here.259 Essentially, ‘public enforcement allows regulatory intervention with a scalpel rather than the hatchet of attorneys' fees or damages enhancements applied across the board’.260
Deterrence and compensation are inextricably linked because payment of compensation is the main form of punishment that can have a deterrent effect on the issuer in class actions261 - some consider compensation to be an essential component of deterrence.262 Sanctions must surpass any benefit of the breach in order to deter.263 Monetary sanctions from shareholder class actions are likely much higher than what a public regulator would order, even though the FMA does have statutory power to take the same route.264 A higher value of compensation should equal a higher deterrent effect – however, this is not the reality.265 Compensation is borne by the issuer’s insurer or its shareholders.266 If the issuer is not actually bearing, and
253 Financial Markets Authority, above n 251, at 13-14.
254 Peake, above n 235, at 309.
255 Peake, above n 235, at 309.
256 Jan-Willem Van Prooijen “Retributive versus Compensatory Justice: Observers’ Preference for Punishing in Response to Criminal Offences” (2010) 40(1) European Journal of Social Psychology 72; and Peake, above n 235, at 309.
257 NZ RegCo, above n 32.
258 Financial Markets Authority, above n 251, at 13.
259 Legg, above n 201, at 163.
260 Gold, above n 203, at 2040.
261 Kenneth Dam “Class Actions: Efficiency, Compensation, Deterrence, and Conflict of Interest” (1975) 4 JLS 47 at 56; Jill Fisch “Confronting the Circularity Problem in Private Securities Litigation” (2009) Wis L Rev 333 at 336; Mitchell, above n 1, at 246; and Miller, above n 40, at 645.
262 Coffee, above n 234, at 435; Roderick Dorman “The Case for Compensation: Why Compensatory Components are Required for Efficient Antitrust Enforcement” (1980) 68(5) Geo L J 1113 at 1117; and Stephen Calkins “Corporate Compliance and the Antitrust Agencies’ Bi-Modal Penalties” (1997) 60(3) LCP 127 at 149– 54.
263 Howell Jackson and Mark Roe “Public and private enforcement of securities laws: Resource-based evidence” (2009) 93(2) JFE 207 at 209; and Coffee, above n 203, at 1555.
264 Australian Law Reform Commission, above n 46, at 267; Peake, above n 235, at 308; and Financial Markets Conduct Act, s 494.
265 Coffee, above n 203, at 1543.
266 Legg, above n 5, at 709.
therefore not internalising, the cost of its own penalty, it is not likely to be optimally deterred from contravening.267 According to Gold, ‘the magnitude of reputational deterrence depends in part on whether victims are typically compensated’, as that will determine the ‘social legitimacy’ of a class action.268 So long as it is the victims, not the perpetrators, that are being punished, the deterrence rationale is not particularly attainable.
III Compensation
Despite it being the most widely recognised principle for class actions, there are strong arguments against the compensatory rationale to the extent that some commentators are confused about why it continues to be advocated for.269 Compensation aims to provide monetary redress equal to the harms suffered by the aggrieved shareholders as a result of the non-disclosure of material information.270 In the interests of corrective justice, ‘the injurer must make the injured party whole’.271 There are a number of reasons for why this may not occur in continuous disclosure class actions.
Class members are each entitled to receive the difference between the price they paid for the share and the price the market would have set for the share had all relevant information been available.272 There are many direct and indirect costs associated with a shareholder class action. Once the litigation funder and lawyers receive their portion of the compensation, plus all the transaction costs associated with the litigation itself, the class members are left with a much lower amount.273 The ALRC reported the median return to shareholders in funded actions was 51%, ranging from 29% to 69%.274 Every legal action involves transaction costs and legal fees, but not litigation funding fees. When class actions are funded, that fee is
267 Coffee, above n 203, at 1554; and Janet Alexander “Rethinking Damages in Securities Class Actions” (1996) 48 Stan L Rev 1487 at 1507.
268 Gold, above n 203, at 2047.
269 Coffee, above n 203, at 1536 and 1545; Rose, above n 170, at 1312-14; Elizabeth Burch “Securities Class Actions as Pragmatic Ex Post Regulation” (2008) 43 Ga L Rev 63 at 86; and Alexander, above n 267, at 1507. 270 Varzaly, above n 229, at 138.
271 Benjamin Zipurskey “Civil Recourse, Not Corrective Justice” (2003) 91 Geo L J 695 at 695.
272 Alexander, above n 267, at 1489.
273 Peake, above n 235, at 302; Rose, above n 170, at 1317; Michael Legg “ADR and Class Actions Compared” in Michael Legg (ed) The Future of Dispute Resolution (LexisNexis, Chatswood, 2013) 180 at 186-88; Legg, above n 201, at 69-70 and 159; and Alexander, above n 267, at 1500.
274 Australian Law Reform Commission, above n 46, at 275.
typically the most significant deduction from the amount recovered by class members.275 Class actions are also often more expensive than an individual action due to the additional court processes and interlocutory judgments.276
There is clear statistical evidence of a tendency for parties to settle before a judgment is made in shareholder class actions.277 Taking into account the strict liability standard of the continuous disclosure provisions, the prospect of losing is not worth the lengthy litigation process and associated costs.278 This is problematic for defendants if they feel they have no choice but to settle despite their innocence, but also for class members because settlements do not equal the full recoverable amount.279 Notably, Australia has a settlement approval process whereby the court must be satisfied the settlement is fair and reasonable, or in the class members’ interests.280 Though this was recommended by the NZLC, the settlement quantum will still involve a subtraction of the likelihood of an unsuccessful judgment and the transaction costs had the litigation continued.281
Any amount of compensation is better than nothing, but to add salt to the wound, the portion these shareholders receive is rarely paid by the issuer. The whole structure amounts to ‘little more than a massive, leaky, money-go-round’.282
Compensation awarded to class members in shareholder class actions is ultimately borne by the issuer’s shareholders – it is a ‘pocket-shifting’ exercise.283 Miller refers to current shareholders of an issuer facing a class action as ‘targets’, who suffer a great deal from the
275 See Michael Legg “Securities Regulation in Australia: The Role of the Class Action” in Robin Huang and Nicholas Howson (eds) Enforcement of Corporate and Securities Law: China and the World (Cambridge University Press, Cambridge, 2017) 312 at 318-20.
276 Legg, above n 201, at 158.
277 Vince Morabito An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty- Five Years of Class Actions in Australia (Monash University, 2017) at 30; and Australian Law Reform Commission, above n 46, at 273.
278 S Stuart Clark and Christina Harris “Class Actions in Australia: (Still) a Work in Progress” (2008) 31 Aus Bar Rev 63 at 85.
279 Legg, above n 201, at 157.
280 Federal Court of Australia Act 1976 (Cth), s 33V; and Murphy and Cameron, above n 174, at 428.
281 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 39; and Legg, above n 5, at 701.
282 Miller, above n 40, at 638.
283 Coffee, above n 203, at 1534.
proceedings.284 The continuous disclosure breach itself has already resulted in a transfer of wealth from the shareholders who purchased shares any time after the company should have disclosed the information, up until the time it was disclosed, to the shareholders who sold at the distorted price. Unfortunately there are always going to be shareholders who lose by buying, and shareholders who win by selling. However, when a shareholder class action arises, the targets are also roped into suffering the consequences of the breach, resulting in inherently problematic ‘innocent-shareholder-to-innocent-shareholder transfers’.285 The targets’ investments are funding the costly litigation and reducing in value, as the compensation from the settlement or judgment is paid using the company’s assets.286
Although it is common for the sum to be paid by the company’s insurer287, the insurance does not typically cover the total amount.288 Regardless, the shareholders have still funded those premiums289, and will continue to fund the increased premiums for D&O insurance following the class action.290 If class members have not sold their shares in the company upon entering into the class action, they have effectively funded the opposition’s case and paid for their own settlement.291 This circularity problem results in a gross misallocation of resources, particularly considering the shareholders who sold at the inflated price are able to retain their financial gains from the breach, not the issuer.292 Pocket-shifting reduces investor confidence and undermines the integrity of the secondary market. If investors increasingly believe their investment will merely fund others’ compensation and lose value, they may lose a great deal of faith in the market. These transfers of wealth may benefit at least some of the individual class members in the immediate term, but they certainly have negative implications on a broader scale.
284 Miller, above n 40, at 636.
285 Miller, above n 40, at 639-639.
286 Miller, above n 40, at 636.
287 Legg, above n 201, at 9.
288 Allens, above n 56, at 15.
289 Alexander, above n 267, at 1506; and Coffee, above n 203, at 1553.
290 Coffee, above n 203, at 1553 and 1558.
291 Alexander, above n 267, at 1503-1504; and Frank Easterbrook and Daniel Fischel “Optimal Damages in Securities Cases” (1985) 52 U Chi L Rev 611 at 638-639.
292 Alexander, above n 267, at 1498.
The circularity problem is complicated by the distinction between diversified and undiversified investors.293 Diversified investors buy and sell shares so frequently that it is likely they not only purchased shares during the period in which material information had not been disclosed, but also before that.294 Being positioned on either side of the class period leads to a circular payment of compensation that ends up back in their own pockets, but not without leakages from the many litigation costs.295 Nevertheless, diversified investors are the lowest concern for the purposes of the compensatory rationale, because they are typically experienced, institutional investors who can easily absorb a loss from a continuous disclosure breach.296 Diversification could be a form of self-protection for investors from the circularity problem, because buying and selling increases the probability that the investor is equally likely to lose from buying at the artificially inflated price, and to win by selling at that price, to the extent that they have balanced out and compensation becomes obsolete.297 It is therefore less economically advantageous for diversified investors to participate in a shareholder class action due to the multiplicity of costs, compared to self-insuring losses through active trading.298
Evans pointed out that when a breach comes to light, the share price drops further than it would have had the material information been disclosed appropriately.299 Thus investors would have to sell shares at the artificially inflated price in more instances than buying300, otherwise there is actually no ‘zero-sum game’ at all.301 Although this argument suggests diversified investors have still suffered harm and would benefit from a class action just like undiversified investors, many of these actively trading investors will not have completely sold out of the company. In fact, experienced or institutional investors may even see the fraud as an ample opportunity to purchase more shares in that company, knowing that the price
293 Coffee, above n 203, at 1557.
294 James Park “Shareholder Compensation as Dividend” [2009] MichLawRw 24; (2009) 108 Mich L Rev 323 at 328.
295 Coffee, above n 203, at 1558.
296 Alexander, above n 267, at 1502.
297 Richard Booth “The Future of Securities Litigation” (2009) 4 JBTL 129 at 139-149; and Easterbrook and Fischel, above n 291, at 640-641.
298 Alexander, above n 267, at 1504-1505; and John Coffee “Law and the Market: The Impact of Enforcement” (2007) 156 U Pa L Rev 229 at 304.
299 Alicia Evans “The Investor Compensation Fund” (2007) 33 J Corp L 223 at 229; and Miller, above n 40, at 641.
300 Evans, above n 299, at 229.
301 Burch, above n 182, at 374.
drop is likely an overreaction that will be corrected eventually.302 The possibility of circular transfers of wealth remains.
It is the undiversified, ‘mum and dad’ investors who buy and hold their shares long-term that are the concern. These investors will always suffer and never benefit from the consequences of a breach, as they will often have purchased shares outside the class period, and will not have sold when proceedings are commenced.303 The fairness of compensation comes into question when this divide leads to money from the pockets of small retail investors being transferred into the pockets of large institutional investors.304 This seems to be at odds with the consumer protection model, when ‘buy and hold’ investors are the most vulnerable group and would benefit the most from compensation.305
Commentators dispute the extent of the circularity issue, due to the lack of knowledge of the type of investors, diversified or undiversified, that get involved in class actions.306 The OECD reported in 2021 that institutional investors owned 20% of the New Zealand market.307 Further research is required into the diversification split in New Zealand. These issues with compensation have the most support in relation to the United States securities class action market308, which raises the question as to whether New Zealand would ever have a big enough class action market for these problems to eventuate. Certainly strict liability continuous disclosure would make it easier for shareholder class actions to be filed, but even in the Australian market there are concerns that there is not enough shareholder class actions to crystallise these circularity problems in the aggregate.309 While the relevance of the circularity argument is still unclear without a statutory class action regime in New Zealand, class members would still obtain incomplete recovery and ‘mum and dad’ shareholders would be adversely affected.
302 Evans, above n 299, at 229; and Maurice Blackburn, above n 54, at 10.
303 Miller, above n 40, at 639; and Coffee, above n 203, at 1560.
304 Coffee, above n 203, at 1560; Booth, above n 55, at 147; and Gelter, above n 203, at 504.
305 Legg, above n 201, at 71.
306 Miller, above n 40, at 640; and Legg, above n 201, at 159.
307 OECD Corporate Governance Factbook 2021 (2021) at 28. 308 Te Aka Matua o te Ture | Law Commission, above n 75, at 99. 309 Legg, above n 201, at 159-60.
The existence of a class action proceeding has a negative impact on the company’s share price and consequently the value of the shareholders’ investments.310 ‘In a noisy world’311, regardless of the plaintiffs’ chances of success, the fact that a continuous disclosure breach has been alleged would be enough for at least a portion of the public to believe it is true.312 The business model of litigation funders and plaintiff law firms can often lead to a predatory response to a share price drop, sending a signal to the market that the harm was more catastrophic than what is eventually ascertained on completion of the discovery phase.313 Damage to reputation leads to a loss of public confidence in the issuer and drags the share price down.314 The value of the investments of continuing shareholders during a class action was a key factor raised by the ALRC in deciding whether to review the continuous disclosure provisions.315 Maurice Blackburn submitted that although proceedings may slightly impact the company’s share price, the most significant effect is when the breach becomes evident.316 However, there are various indirect costs of shareholder class actions. Less focus on strategy317, deteriorating business relationships, withdrawal of interested parties for mergers or acquisitions318, ‘chilling effects’ regarding attracting investments and qualified individuals for future directorships319, all fall on the existing shareholders.
The overriding goal of continuous disclosure class actions is to secure compensation for the loss caused by the breach.320 Of course, where the public regulator obtains compensation for aggrieved shareholders the pocket-shifting issues remain, but litigation funding fees do not.321 The FMA has the option of seeking a compensatory order under s 494 of the FMCA,
310 Legg, above n 5, at 701; and Charles Silver “”We're Scared to Death": Class Certification and Blackmail” (2003) 78 NYU L Rev 1357 at 1406.
311 Samuel Buell “The Blaming Function of Entity Criminal Liability” (2006) 81 Ind L J 473 at 511.
312 Gold, above n 203, at 2014; and A Mitchell Polinsky and Steven Shavell “The Uneasy Case for Product Liability” [2010] HarvLawRw 2; (2010) 123 Harv L Rev 1437 at 1445.
313 King Wood Mallesons “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)” at 2.
314 Gold, above n 203, at 2013; and Gelter, above n 203, at 502.
315 Australian Law Reform Commission, above n 53, at 29.
316 Maurice Blackburn, above n 54, at 10.
317 Coffee, above n 203, at 1559.
318 Alexander, above n 267, at 1504.
319 Australian Institute of Company Directors “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)” at 3-4.
320 Legg, above n 201, at 8.
321 William Bratton and Michael Wachter “The Political Economy of Fraud on the Market” (2011) 160 U Pa L Rev 69 at 139-40; and Slater and Gordon, above n 54, at 19.
provided the individual ‘suffered, or is likely to suffer, loss or damage because of the contravention’.322 This provision has never been exercised by the FMA.323 A significant regulatory power of the FMA is s 34 of the Financial Markets Authority Act 2011, whereby the FMA may take action against a third party on behalf of another person. This would allow an action against a listed issuer for breaching its obligations on behalf of its shareholders.Section 34 is saved for severe breaches resulting in significant harm or risk to the market or a large class of investors, and has only ever been used once.324 This is the full extent of the regulator’s ability to obtain compensation for shareholders.
Seeking compensation for victims is risky for a regulator who has to consider public criticism and other negative implications of being unsuccessful.325 The public regulator is not fuelled by prospects of personal financial gain like litigation funders and law firms.326 Rather, the FMA is fuelled by its statutory purpose and the public interest when deciding what enforcement remedy is most appropriate, and large compensatory orders are often not ideal for eliciting cooperation, education or deterrence.327 With other goals and responsibilities, it is unlikely that public enforcement will achieve compensation over and above what private enforcement can achieve.
In light of the issues of circularity, diversification and erosion of compensation due to numerous costs, the genuine success of the compensatory rationale is still unclear. This begs the question, are shareholder class actions worth it? The merits of the arguments against the dual rationales for shareholder class actions will help to determine what the next steps are for New Zealand’s continuous disclosure regime.
322 Financial Markets Conduct Act, s 494.
323 Te Aka Matua o te Ture | Law Commission, above n 75, at 74.
324 Financial Markets Authority, above n 33; and Financial Markets Authority v Prince & Partners Trustee Co Ltd [2017] NZHC 2059.
325 Legg, above n 201, at 65.
326 Legg, above n 201, at 65.
327 Michael Legg “Public and Private Enforcement – ASIC and the Shareholder Class Action” in Michael Legg (ed) Regulation, Litigation and Enforcement (Thomson Reuters, Sydney, 2011) 151 at 155; and Legg, above n 5, at 708.
Chapter Four: What is the Solution?
New Zealand’s continuous disclosure regime ought to be reviewed in light of the adverse consequences of the provisions on the market.328 Three options should be considered – namely, removing the right for shareholders to bring a class action for continuous disclosure contraventions, introducing a fault element modelled on the recent Australian amendments, or retaining strict liability regardless of whether or not a statutory class action regime is introduced.
I Option 1: Eliminate Continuous Disclosure Class Actions
Carving out continuous disclosure from a class action regime would have the effect of taking away shareholders’ rights to private collective action for continuous disclosure breaches.329 The United Kingdom government has said, ‘it is not obvious that such a right of action is good policy; it is obvious, however, that it is not the only reasonable policy’.330 It appears they have taken their own advice in permitting a class action regime solely for competition law claims.331
Taking this option would leave enforcement of continuous disclosure with RegCo and the FMA. Empowering the FMA through increased funding to provide better enforcement, such as through ordering compensation for shareholders, may help to counteract the loss of shareholders’ rights to collective action. It is necessary to assess the proportionality of introducing continuous disclosure class actions to their broader market impacts to evaluate a removal of these rights.
328 See Capital Markets 2029, above n 37, at 37.
329 This was suggested by a number of submitters to the 2020 Australian Parliamentary Joint Committee review: Australian Institute of Company Directors “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry” at 10; and Business Council of Australia “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry” at 8. Also see ASX, above n 240, at 3.
330 Brief of the United Kingdom of Great Britain and Northern Ireland as Amicus Curiae in Morrison v National Australia Bank Ltd 561 US 247 (2010) at 18.
331 See Competition Act 1998 (UK); and Competition Appeal Tribunal Rules 2015 (UK).
When publicly listed issuers compensate class members for a breach of the continuous disclosure provisions, it is their insurer that bears the brunt of it. The cost of D&O premiums is a key concern of a rising frequency of securities class actions. In 2017, 9 out of 10 securities class actions in Australia have proceeded to settlement332, and the median amount defendants pay in settlements is reportedly around $37 million.333 Marsh reported average premium increases of 225% in the first quarter of 2020.334 Consequently, insurance companies must charge high premiums to offset the risk of fronting such diabolical sums.
A problematic correlation between numbers of class actions and the cost and availability of D&O insurance is suspected, but has not been empirically tested and is disputed by stakeholders.335 However, there are a number of insurance companies who no longer offer D&O coverage to ASX-listed companies or have significantly dialed back their offerings in this space.336 The cost of D&O insurance could not sustainably continue to rise upon greater numbers of shareholder class actions in New Zealand. 337 More companies may start opting out of Side C coverage due to the extremely high premiums, which could lead to more directors and senior managers with Side A and B coverage being targeted in shareholder class actions. Although this may lead to a greater deterrent effect, experienced professionals may start to think twice about taking up directorships and senior executive roles.338
Considering the lack of consensus on the effect of class actions on the D&O insurance market, these concerns cannot be definitive of New Zealand’s decision regarding continuous
332 XL Catlin and Wotton + Kearney How did we get here? The history and development of securities class actions in Australia (May 2017) at 15.
333 Aon Risk Services Australia Limited Directors & Officers Insurance Market Insights (March 2020).
334 Marsh “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry” at 3.
335 Australian Law Reform Commission, above n 46, at 281. For more discussion on this, see the submissions to the ALRC review: Australian Law Reform Commission, above n 46, at 283; Norton Rose Fulbright, above n 54; and Insurance Council of Australia “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)” at 2.
336 Marsh, above n 334, at 2; and Institute of Directors, MinterEllisonRuddWatts and Marsh Under pressure – D&O insurance in a hard market (September 2020) at 3.
337 For more discussion on the concerns with D&O insurance in NZ: Institute of Directors “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 6; Simpson Grierson “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 4; Chapman Tripp “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 5; and NZX “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 4.
338 See Tom Baker and Sean Griffith Ensuring Corporate Misconduct (University of Chicago Press, Chicago, 2010) at 221.
disclosure.339 These potential negative implications could also be justified if class actions were addressing the social harm of continuous disclosure breaches.
Enforcement should reduce the societal costs of failures to disclose timely information to the market.340 Timely disclosures indicate the merits of company’s governance practices and overall management strategy.341 Selective disclosures and artificially enhanced prices hide the realities of a struggling company.342 Mispriced shares thus results in an inefficient allocation of resources, because the money used to purchase shares at an inflated price would be better allocated to an accurately priced company.343 According to Kahan, companies who receive less funding due to another company’s breach ‘may find it costly or impracticable to obtain sufficient capital from alternative sources, and thus underinvest’.344 Continuous disclosure breaches also raise the cost of capital, as investors lose confidence in the market and refrain from investing.345 In light of these social harms, removing civil liability for inadequate disclosures may be ‘an overly risky step’.346
Rose believes that loss suffered by investors who purchased during the breach period does not come under the social costs of securities fraud.347 This is because where there is a loser, there is a winner – thus the losses suffered by individual class members ‘represent a mere distribution of societal wealth’, rather than a reduction.348 It follows then that shareholder class actions do not address the social harms of continuous disclosure contraventions.349 Regulators can seek to target the social harms through choosing a regulatory response that is in the public interest. Regardless, the true social harms of a breach cannot be measured due to their systemic nature, thus whether or not the compensation recovered by class members is equal to the net harms is unknown.350
339 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 60.
340 Rose, above n 136, at 2180.
341 Merritt Fox “Civil Liability and Mandatory Disclosure” (2009) 109 Colum L Rev 237 at 253.
342 Rose, above n 136, at 2180.
343 Rose, above n 136, at 2179; and Easterbrook and Fischel, above n 291, at 623.
344 Marcel Kahan “Securities Laws and the Social Costs of "Inaccurate" Stock Prices” (1992) 41 Duke LJ 977 at 1010.
345 Coffee, above n 203, at 1565; and Rose, above n 136, at 2179.
346 Coffee, above n 203, at 1566.
347 Rose, above n 136, at 2180.
348 Rose, above n 136, at 2180; Fox, above n 341, at 280; and Alexander, above n 267, at 1496.
349 Gelter, above n 203, at 505; and Alexander, above n 267, at 1507.
350 Alexander, above n 267, at 1497.
The extent to which shareholder class actions track the social costs of continuous disclosure breaches is unclear, making it a shaky ground on which to argue a carve-out. Considering rights should typically be protected in the interests of access to justice, one would have to be absolutely certain before opting for this solution.
Targeting the procedural mechanism by introducing a carve-out is at odds with a popular view that taking away the rights of aggrieved parties to hold wrongdoers to account is unjustified, because any identified issues lie with the laws themselves.351 The removal of the right to be duly compensated for loss from a disclosure breach could damage the reputation of New Zealand capital markets.352 It would be undesirable to adopt a ‘kill-the-messenger opposition’, as seen in the United States.353 This option is the least desirable out of the three.
II Option 2: Introduce a Fault Element
There are many possible variations of a fault element, but the changes made in Australia will be evaluated here. This would mean changing the civil liability provisions of the FMCA to require all plaintiffs, including class members of shareholder class actions, to prove an issuer’s ‘knowledge, recklessness or negligence’ as to whether the information was material. The criminal liability provisions would retain a strict liability standard to support the FMA’s broad discretionary powers of enforcement.
Raising the bar to commence proceedings for continuous disclosure contraventions would be expected to result in a lower number of judgments.354 This may not always serve defendants due to the minimal case law as to how to comply with the obligations. In 2021, two class actions were commenced against a2 Milk in Australia, alleging a continuous disclosure contravention for failing to amend or withdraw its earnings guidance when it became aware of matters affecting the ability to achieve that guidance.355 The court could provide helpful
351 Capital Strategic Advisors The economics of class actions and litigation funding (6 November 2020) at 45. The Australian Parliamentary Joint Committee on Corporations and Financial Services shared this view: Parliamentary Joint Committee on Corporations and Financial Services, above n 47, at 43.
352 See Paul Davies Davies Report on Issuer Liability: Final Report (HM Treasury, June 2007), at 8.
353 Brian Fitzpatrick “Can the Class Action Be Made Business Friendly?” (2018) 24 NZBLQ 169 at 170.
354 Legg, above n 201, at 217.
355 Shine Lawyers “A2 Milk Class Action” <www.shine.com.au >; and Slater and Gordon “a2 Milk Shareholder Class Action” <www.slatergordon.com.au>. A funded representative action has also been filed in New Zealand
guidance for meeting the new test, but it is hard to ignore the likelihood that the parties will opt to settle instead. This tendency to settle questions the usefulness of adding a fault element, because settlement rarely involves an admission of guilt.356 Though it is too early to ascertain the effectiveness of Australia’s new amendments, the Australian government has clearly seen the benefits in making such a significant change – perhaps this is a reason for New Zealand to follow suit.
Before the Securities Markets Amendment Act 2002, the continuous disclosure regime was only found in the NZX Listing Rules. Parliament welcomed the introduction of a co- regulatory model for better alignment with Australian financial regulation.357 ‘Being different’ was costly, and increased coordination with the international landscape indicated to investors ‘that the New Zealand market is a market of integrity’.358 Parliament considered it desirable for investors to receive consistent disclosure of financial products across New Zealand and Australian markets.359 The mutual recognition provisions scheme, which allows issuers from New Zealand and Australia to extend an offer of financial products to the neighbouring market, reflects the value placed on a successful trans-Tasman market.360 There are definite advantages to aligning with Australia, particularly for dual-listed companies on the NZX and ASX. A constructive knowledge test was added to the continuous disclosure obligations in 2018.361 The purpose of this is thought to have been to bring the Listing Rules in line with the ASX Listing Rules.362 The FMA taking the view that a change to the continuous disclosure regime was not necessary despite Australia’s change is a new development signaling disparity between the two markets.
New Zealand may be becoming more economically and politically independent from Australia. The Australian Government was very vocal about the amendments, possibly
for the same conduct: Philip Skelton, Thorn Law & Gilligan Rowe “a2 Milk Class action”
356 Legg, above n 201, at 156.
357 (19 November 2002) 604 NZPD.
358 (19 November 2002) 604 NZPD.
359 (7 March 2012) 678 NZPD 872.
360 See Financial Markets Conduct Act, sub-pt 6 of pt 9; and Financial Markets Conduct Regulations 2014, pt 9 and sch 25.
361 NZX Listing Rules, r 3.1
362 NZX Listing Rule Review – Consultation Paper (11 April 2018) at 9; Bell Gully “Submission to the NZX for the NZX Listing Rule Review – Consultation Paper” (2018) at 7; and ASX Listing Rules, r 3.1.
indicating greater integration of politics with the business world and financial regulation than New Zealand. 363 The FMA appears to operate with great independence considering Parliament has not commented substantively on continuous disclosure since it was first enacted into law. The Australian integration is supported by the fact that the new Labor government has already indicated its disagreement with the added fault element in 2022.364 Section 1683B of the Corporations Act requires a review of the amendments after 2 years and Parliament’s public response to any recommendations, so Australia could soon be seeing more changes yet again. At the end of the day, both investors and issuers want certainty, and choosing to align with Australia risks frequent, undesirable change.
In the United Kingdom, to establish liability for misleading information, dishonest omissions and dishonest delays, plaintiffs must prove the relevant party’s conduct was reckless or dishonest.365 In 2007, Paul Davies reviewed the liability for misstatements to the market in the United Kingdom including the appropriate level of fault, which provides useful considerations for the strict liability debate in New Zealand.366 Davies rejected both strict liability and a negligence standard, and held fraud, namely dishonesty or recklessness, should continue to form the basis of liability.367 The regulator was deemed to be the appropriate mechanism to sanction contraventions resulting from less culpable behaviour, such as negligent misstatements, indicating support for proportionate regulatory responses over excessively harsh private sanctions.368 A higher bar for private litigation was chosen in consideration of the negative aspects of shareholder group actions, including the circularity issue and overly cautious disclosure decisions.369
363 See Frydenberg, above n 3; Frydenberg, above n 38; and Josh Frydenberg “Restoring balance in disclosure”
Australian Financial Review (Australia, 12 August 2021) at 38.
364 Michael Pelly “Labor win ‘good news’ for class actions” (25 May 2022) Australian Financial Review
365 Financial Services and Markets Act 2000 (UK), s 90A; and Harry Edwards and Simon Clarke “Securities class actions in England and Wales: A gathering storm?” in Damian Grave & Helen Mould (eds) 25 Years of Class Actions in Australia (Ross Parsons Centre of Commercial, Corporate and Taxation Law, Sydney, 2017) 329 at 331.
366 Davies, above n 352.
367 Davies, above n 352, at 4.
368 Davies, above n 352, at 14; and Edwards and Clarke, above n 365, at 331.
369 Davies, above n 352, at 8, 10-11 and 15-16.
Interestingly, England and Wales does not have a general class actions regime, rather class actions are only available for competition law claims.370 The government took the view that class actions were only justified in specific areas of need and did not wish to ‘impose a one- size-fits-all policy’ in pursuit of increased flexibility across sectors.371 This jurisdiction is closer to New Zealand, compared to Australia and the United States, in the way that it relies heavily on the regulator to ensure compliance with disclosure obligations. Despite this deferral to public enforcement, the United Kingdom has still left private actions for the most culpable offences, indicating how serious they consider the concerns of shareholder class actions to be.
III Option 3: Maintain the Status Quo
Retaining strict liability for the continuous disclosure laws signals that the concerns surrounding shareholder class actions either do not apply to the New Zealand landscape, or do not warrant legislative change. In determining the most viable option for facilitating collective redress, New Zealand’s litigation culture must be considered.372 The New Zealand economy, including its secondary market, is much smaller and less developed than markets like the United States, the United Kingdom and Australia, to the extent that it is more similar to emerging markets.373 Despite this distinction, New Zealand has chosen to largely align its securities regulation with these countries.374 Furthermore, New Zealand’s group litigation environment is said to be equally as entrepreneurial as Australia’s environment.375 Therefore although the number of shareholder class actions will not equal the number in Australia, proportionate to the size of the New Zealand market a statutory regime could still lead to an influx – but is this problematic considering New Zealand arguably has a less stringent securities regulation approach compared to Australia?376 Peake said ‘there is a practical
370 Te Aka Matua o te Ture | Law Commission, above n 75, at 45. See Competition Act 1998 (UK); Competition Appeal Tribunal Rules 2015 (UK).
371 (20 July 2009) 712 GBPD HL 155WS; Ministry of Justice The Government's Response to the Civil Justice Council's Report: ‘Improving Access to Justice through Collective Actions’ (July 2009); and Rachael Mulheron The Class Action in Common Law Legal Systems: A Comparative Perspective (Hart Publishing, Oxford, 2004) at 68-69.
372 Vicki Waye “Advantages and Disadvantages of Class Action Litigation (And Its Alternatives)” (2018) 24 NZBLQ 109 at 109.
373 Allan Chang “Analysis on corporate governance compliance standards in New Zealand – a qualitative study on disclosures using content analysis and interviews” (2018) 26(4) JFR&C 505 at 506-7.
374 Chang, above n 373, at 507-8.
375 Waye, above n 372, at 112.
376 Larelle Chapple and Thu Puong Truong “Continuous disclosure compliance: does corporate governance matter?” (2015) 55 Accounting and Finance 965 at 967; and Keitha Dunstan, Gerry Gallery and Thu Phuong
harmony between ‘softer’ regulatory engagement with industry and ‘harder’ enforcement action’.377 New Zealand might be able to achieve a balanced unitary regime without having to change the law.
The need for shareholder class actions is reduced if the current enforcement of continuous disclosure by RegCo and the FMA are sufficient. Empirical research has shown that the continuous disclosure regime is having positive effects, such as timely earnings-related disclosures and decreases in the bid-ask spread378, which theoretically leads to higher liquidity.379 The number of investigations regarding potential continuous disclosure breaches conducted by RegCo continues to decrease every year, with 34 investigations in 2018 down to 14 in 2021.380 RegCo partly attributes this to its ‘ongoing engagement work with Issuers and the increasing awareness among Issuers of their continuous disclosure obligations’.381 This data does not indicate any systemic issues with enforcement nor a desperate need for shareholder class actions, but the FMA’s non-existent use of its compensatory powers remains. As long as the FMA prioritises other objectives over compensation, it is unlikely public enforcement can satisfy aggrieved shareholders to the same extent as a funded class action. Strict liability would help to provide access to justice to shareholders in this way due to the increased ease with which actions can proceed.
A key argument for retaining strict liability is that Australia’s new fault element has the same, or at least a very similar, substantive effect as the current test due to the inclusion of the negligence limb. Australians must now prove the issuer knew, or was reckless or negligent with respect to whether the information would, if it were generally available, have a material effect on price.382 Negligence equates to a failure to take reasonable care.383 Therefore to
Trong The Impact of New Zealand’s Statutory-Backed Continuous Disclosure Regime on Corporate Disclosure Behaviour (September, 2008) at 3.
377 Peake, above n 235, at 310.
378 Dunstan, Gallery and Trong, above n 376; Chapple and Truon, above n 376; Meng Huang, Alastair Marsden and Russell Poskitt “The impact of disclosure reform on the NZX’s financial information environment” (2009) 14 Pacific-Basin Finance Journal 460.
379 Fox, above n 341, at 266-67.
380 NZX Oversight & Engagement Report (2020) at 16; and NZX Oversight & Engagement Report (2021) at 14.
381 NZX, above n 380, at 16.
382 Corporations Act, s 674A(2)(d).
383 Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (Cth) (explanatory memorandum) at 2.1.
reach the negligence threshold, it is assumed one must prove the issuer did not take reasonable care as to whether the information would have a material price effect. The court will have to establish a standard of care of a reasonable person in the issuer’s circumstances, and then determine whether that standard was met. In New Zealand, the test for material information involves what a ‘reasonable person would expect’ to have a material effect on the share price.384 The notion of a ‘reasonable person’ thus spans across both regimes. What the issuer believed or intended is irrelevant either way.385
There are differences between the two tests. The new test appears to involve greater subjectivity, with regard to an assessment of the company’s specific circumstances surrounding the information, such as what was and what should have been known to the issuer, and whether it acted unreasonably in withholding that information.386 The adequacy of the company’s escalation and disclosure processes will help to determine whether the issuer has discharged its duty of care. Comparatively, a ‘reasonable person’ under the New Zealand provisions is someone who commonly invests and is to be assessed objectively.387 Duffy was not convinced that the substantive effect was the same but did raise concerns with the similiarities.388 The conduct alleged in continuous disclosure class actions prior to the amendments often equated to negligent behaviour, rather than recklessness or genuine dishonesty.389 Although it is not yet known how the negligence standard will be applied in practice, the lack of clarity could disincentivise going to judgment, resulting in lower compensation for shareholders.
The United Kingdom declined to adopt a negligence limb to avoid unmeritorious class actions and poor disclosure practices due to the uncertainty of the objective negligence test.390 Canada’s continuous disclosure provisions also do not include a negligence element, instead adopting a ‘gross misconduct’ limb alongside knowledge and wilful blindness for non-core
384 Financial Markets Conduct Act, s 231.
385 MinterEllison “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry” at 11.
386 Ian Beaumont, Marika Eastwick-Field, Emily Joubert, Shannon Closey and Ryan Howlett “Australia is looking to ease its continuous disclosure laws – should we do the same?” Russell McVeagh (7 April 2021)
387 NZX, above n 1, at 7.
388 Michael Duffy “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry” at 5.
389 Christine Tran and Tim Stutt (2021) “Class actions: The evolution of continuous disclosure in Australia” (2021) 81 LSJ 71 at 73.
390 Davies, above n 352.
documents.391 For core documents including financial statements392, the obligation has a strict liability standard.393 These exclusions are consistent with the doubts surrounding negligence.
At this point in time, in the absence of a more litigious environment and limited evidence of the success of New Zealand’s continuous disclosure regime, the debate between fault and no- fault will continue. There is something to be said for both approaches, though New Zealand would be wise to follow the United Kingdom and Canada and shy away from the ambiguous negligence limb if it introduces a fault standard. The NZLC said that many of the disadvantages of class actions ‘can be mitigated by good design’.394 There are various procedural requirements that can be adopted for either investor or issuer protection.
391 Securities Act RSO 1990, c S-5, ss 138.3 and 138.4(1).
392 s 138.1
393 s 138.1, 138.3(1) and 138.4(1).
394 Te Aka Matua o te Ture | Law Commission, above n 75, at 140.
Chapter Five: Designing a Class Action Regime for Fair and Efficient Markets
Though it is beneficial to retain a shareholder’s right of collective action for continuous disclosure contraventions, sector-specific concerns should be addressed when creating a statutory class action regime in New Zealand. Adopting certain procedural mechanisms will have positive implications for both publicly listed issuers and shareholders, and consequently the market as a whole. There is an opportunity to cherry-pick from comparable jurisdictions and tailor an appropriate set of class action processes for New Zealand’s litigation environment.
I Certification
A statutory class action regime ought to ward off frivolous or meritless class actions, referring to those that involve weak claims or evidence, lack potential benefits to class members or deterrent effects, or are otherwise unsuitable cases for class actions.395 Protecting defendants from these is important for facilitating access to justice, as these cases have no benefit, only negative implications of over-enforcement. A crucial preventative mechanism is a certification requirement, whereby the court, acting as ‘diligent gatekeeper’, must be satisfied a set of criteria is met before the class action can proceed. 396 Should New Zealand maintain strict liability for its continuous disclosure provisions, a screening device becomes even more important as there are less hurdles for plaintiffs once the proceeding commences. Certification is a proactive approach to concerns of vexatious litigation such as pressuring issuers into settlement – a low bar for commencement of a class action risks a regime ‘susceptible to exploitation for financial gain’ or ‘blackmail litigation’.397
Australia does not have a certification requirement like the United States or Canada. Class actions can proceed provided the numerosity, connectivity and commonality requirements are
395 Law Commission of Ontario Class Actions: Objectives, Experiences and Reforms – Final Report (July 2019) at 41. See also Tom Baker and Sean Griffith “How the Merits Matter: Directors’ and Officers’ Insurance and Securities Settlements” (2009) 157 U Pa L Rev 755 at 779.
396 Civil Justice Council “Improving Access to Justice through Collective Actions”: Developing a More Efficient and Effective Procedure for Collective Action (November 2008) at 153.
397 Parliamentary Joint Committee on Corporations and Financial Services, above n 47, at xvi; and Australian Law Reform Commission Grouped Proceedings in the Federal Court (ALRC R46, 1988) at [144].
satisfied.398 Defendants are burdened with the onus of arguing why the preliminary requirements are not satisfied through strike out applications.399 The ALRC decided against certification because it would be excessively costly and time inefficient.400 Although Australia’s approach affords the ability to challenge the class action during the proceeding rather than before its commencement401, this creates uncertainty and risks numerous interlocutory applications.402 Legg believes this exclusion has played a role in the prevalence of securities class actions in Australia.403 It is a particularly plaintiff-friendly element, and requires defendants to expend more time and resources to fight meritless claims undertaken by entrepreneurial litigators, ultimately raising D&O premiums.404 Fortunately, the NZLC has reflected on these concerns and decided to recommend a certification test instead.405
A fair level of stringency for the certification criteria is important for balancing both plaintiffs’ and defendants’ interests. The NZLC set out a draft legislative provision for certification, including the criterion, ‘1 or more reasonably arguable causes of action’.406 This requires there to be truth to the cause of action and that it is not ‘so clearly untenable’ that it ‘cannot possibly succeed’.407 It was suggested as an alternative to requiring a merits assessment of the case, which involves the court determining the plaintiffs’ chances of success.408 A merits test at the certification stage has its critics. Such an objective test may create a large evidentiary burden, running the risk of a ‘mini-trial’ taking place before a lengthy class action can begin, which would be onerous for both parties.409 On the other hand,
398 Vince Morabito “Lessons from Australia on Class Action Reform in New Zealand” (2018) 24 NZBLQ 178 at 185; and P Dawson Nominees Pty Ltd v Multiplex Ltd [2007] FCA 1061 at [14] per Finkelstein J.
399 Federal Court of Australia Act, s 33N.
400 Australian Law Reform Commission, above n 397, at [146].
401 Michael Lee, Federal Court of Australia Justice “Certification of Class Actions: A ‘Solution’ In Search of a Problem?” (paper presented to the Commercial Law Association Seminar on Class Actions – Different Perspectives, 20 October 2017) at 10.
402 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 151.
403 Legg, above n 5, at 691.
404 S Stuart Clark and Christina Harris “Multi-Plaintiff Litigation in Australia: A Comparative Perspective” (2001) 11 Duke J Comp & Intl L 289 at 296-7; NZX, above n 337, at 4.
405 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 11. 406 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 152. 407 Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA) at 267.
408 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 155; and Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding: Supplementary Issues Paper, above n 88, at 40.
409 Theratechnologies Inc v 121851 Canada Inc 2015 SCC 18 at [39].
an express requirement to assess the reasonableness of one’s arguments would incentivise plaintiffs, funders and lawyers to critically examine the value in bringing the claim.
Although the Law Commission of Ontario (LCO) declined to adopt a merits element to certification under the Class Proceedings Act 1992410, one can be found in the leave test for securities law breaches in the Ontario Securities Act 1990. To obtain leave, the court has to be satisfied the action has been brought in good faith and has a reasonable chance of success.411 This was introduced as a way to balance the interests of plaintiffs, defendants and also their shareholders in light of the detrimental effects of a class action on the company.412 The test is ‘one element of a larger regulatory mechanism’.413
The concerns with a merits test are valid. The LCO thought the burdens to the general class action regime outweighed any benefit,414 and the NZLC appears to agree.415 However, for the purposes of continuous disclosure, New Zealand should consider Ontario’s securities law approach. It is a credible way of targeting the sector-specific concerns with shareholder class actions.
II Adverse Costs Rule
Another important safeguard to prevent meritless shareholder class actions is the adverse costs rule, which requires the losing party to pay for the successful party’s legal costs.416 The rule is particularly helpful for mitigating the problematic effects of entrepreneurial litigation in the continuous disclosure context.417 Litigation funders are disincentivised to commence unmeritorious proceedings due to the risk that the litigation would end in a large payout to the defendant.418 This is unlikely to occur where there is merit in bringing the proceeding. The rule goes hand in hand with certification – they both tip the balance back towards defendants
410 Law Commission of Ontario, above n 395, at 44-45; and Class Proceedings Act 1992 SO.
411 Securities Act RSO 1990, c S-5, s 138.8(1).
412 Canadian Imperial Bank of Commerce v Green 2015 SCC 60 at [67]-[69].
413 Law Commission of Ontario, above n 395, at 44.
414 Law Commission of Ontario, above n 395, at 36.
415 See Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 154- 155; and Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding: Supplementary Issues Paper, above n 88, at 40-41.
416 High Court Rules 2016, r 14.2.
417 Legg, above n 5, at 698.
418 Murphy and Cameron, above n 174, at 410.
in a plaintiff-friendly sphere.419 The rule simply encourages greater care in investigating a share price movement before a funder alerts shareholders of a potential action. The ‘loser pays’ approach is used in Australia and some Canadian provinces including Ontario.420 The NZLC has recommended the retention of the adverse costs rule for a statutory class action regime.421
A concern with the adverse costs rule is that the prospect of paying such high costs perpetuates the tendency to settle before lengthy litigation inflates the total end amount.422 Ironically, the rule may also operate to reduce the risk of unfair settlement amounts.
Defendants’ litigation costs are much higher than the plaintiffs’, largely due to the documents that plaintiffs request during the discovery phase, as lawyers ask for a great deal of them in order to drive up the defendants’ costs.423 Easterbrook considers this exercise to indicate a weaker case.424 An adverse costs rule would therefore prevent plaintiffs and their lawyers hiding trivial claims by piling costs onto the defendant. High costs also lead to settlements higher than the quantum of harm done. In a settlement, the company is prepared to pay for not only the harm caused, but also the amount it would have cost to litigate.425 Therefore the greater the expected costs, the greater the amount the defendant will be prepared to settle for, risking over-deterrence if the settlement is disproportionately higher than the harm.426 With the adverse costs rule, lawyers are less inclined to drown defendants in discovery requests, resulting in fairer settlements. It would be unwise to remove the adverse costs rule under the class action regime, as it is an important element for protecting defendants’ interests.
419 See Capital Strategic Advisors, above n 351, at 21.
420 Legg, above n 5, at 696; Te Aka Matua o te Ture | Law Commission, above n 75, at 233.
421 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 345. There was wide support for an adverse costs rule: Simpson Grierson, above n 337, at 8; Jasminka Kalajdzic “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”; Bell Gully, above n 92, at 11; Nikki Chamberlain “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”; Michael Duffy, above n 211, at 14; and Chapman Tripp, above n 337, at 10.
422 Legg, above n 5, at 700; Te Aka Matua o te Ture | Law Commission, above n 75, at 235; and Janet Alexander “Do the Merits Matter? A Study of Settlements in Securities Class Actions” (1991) 43 Stan L Rev 497 at 549.
423 Fitzpatrick, above n 353, at 176; and Alexander, above n 422, at 548.
424 Frank Easterbrook “Discovery As Abuse” (1989) 69 B U L Rev 635 at 636.
425 Steven Shavell Foundations of Economic Analysis of Law (Harvard University Press, Cambridge, 2004) at 402-3.
426 Fitzpatrick, above n 353, at 175-6.
III The Opt-In versus Opt-Out Debate
An important consideration for a statutory class action regime is the process by which the class should be determined – in other words, whether to allow claims to be brought on an opt- out or opt-in basis. An opt-out approach binds all individuals who are eligible by way of the common issue, and those who do not wish to be bound by the judgment or settlement must expressly opt out of the proceeding.427 For continuous disclosure class actions, this means all shareholders who purchased shares during the breach period would have to take active steps to be excluded. An opt-in approach means that potential class members must expressly opt into the proceeding in order to be bound.428 Both Australia and all Canadian provinces use an opt-out class action regime, which is controversial in securities class actions. 429
The opt-in approach risks limiting plaintiffs’ access to justice due to its affirmative requirement for individuals to understand the procedure in order to come forward.430 On the other hand, opt-out class actions arguably limit defendants’ access to justice as they have greater exposure with a much larger class from the outset, which is also a significant incentive for litigation funders and lawyers.431 Shareholders do not have to contemplate whether they have suffered loss before they are bound by the outcome. Considering the rising consumerist narrative and tendency to settle, it is unlikely a class member would consider it to be too risky to stay in the proceedings despite doubts of their involvement.
Opt-out actions are beneficial for vulnerable plaintiffs who lack understanding of their legal rights.432 This was the rationale behind Australia’s choice to adopt such a regime, in spite of the acknowledgement that this approach involves great uncertainty for defendants as to the quantum of damages.433 Indeed, small retail investors may lack the vigilance required to know when they have suffered a loss from a continuous disclosure breach and thus would
427 Te Aka Matua o te Ture | Law Commission, above n 75, at 7.
428 Te Aka Matua o te Ture | Law Commission, above n 75, at 6.
429 Federal Court of Australia Act 1976 (Cth), s 33J, s 33ZB; Federal Courts Rules SOR/98-106, r 334.21(1); and Te Aka Matua o te Ture | Law Commission, above n 75, at 215-6.
430 See Legg, above n 201, at 67.
431 Christine Gordon and Ben Stewart “Class Actions – are we in or out?” (31 March 2021) MinterEllisonRuddWatts <www.minterellison.co.nz>.
432 Michael Legg “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”.
433 Money Max Int Pty Ltd v QBE Insurance Group Ltd [2016] FCAFC 148 at [179]; and Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd [2017] FCAFC 98 at [77].
benefit from the opt-out approach. However, litigation funders and lawyers ensure that every potential class member is aware of their opportunity to be bound by this proceeding, as the more class members, the greater the return. Notifying potential class members is also a less arduous task due to New Zealand’s small population size compared to other jurisdictions that view notification as an opt-in disadvantage.434 For example, over 90% of investors opted into the funded representative action Scott v ANZ Bank.435 Australia’s rationale aligns with the consumer protection model in the sense that the inherent power imbalance warrants easier access to justice for shareholders by not having to take active steps to assess their own position and loss. The opt-in approach tends to advocate for ‘individualised litigant autonomy’ instead436 – a value that is arguably more applicable in the continuous disclosure context to avoid undermining the purpose through over-deterrence. Therefore, the opt-in approach may not carry the same concerns for protecting plaintiffs’ interests as in other types of class actions or other jurisdictions.
The New Zealand courts have not shown definitive preference for either approach to class membership, but the Supreme Court held that an opt-out approach should be utilised where suitable.437 This is consistent with the NZLC recommending that both opt-in and opt-out class actions be available to parties, with the court deciding what is appropriate in the circumstances.438 Letting the court decide does not have to negatively affect public issuers, provided the court acknowledges these clear detriments of an opt-out class action for defendants in shareholder class actions.
434 Te Aka Matua o te Ture | Law Commission, above n 75, at 218.
435 Scott v ANZ Bank New Zealand Ltd [2020] NZHC 906; and Rob Stock “Victims of David Ross seek $80 million in damages from ANZ” (26 February 2020) Stuff <www.stuff.co.nz>.
436 Scott Dodson “An Opt-In Option for Class Actions” (2016) 115 Mich L Rev 171 at 187.
437 Southern Response Earthquake Services Ltd v Ross [2020] NZSC 126 at [89].
438 Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding, above n 88, at 172. A number of stakeholders have shown support for an opt-in regime: Bell Gully, above n 92, at 10; NZX, above n 337, at 4-5; Weston, above n 211, at 9; and Capital Markets 2029, above n 37, at 38. Others supported a default but rebuttable opt-in approach: Duffy, above n 211, at 14; Barry Allan “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 8; and Buddle Finlay “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)” at 7.
IV Market-Based Causation
To claim compensation for a continuous disclosure contravention, a person must prove that he or she ‘suffered, or is likely to suffer, loss or damage because of the contravention’, meaning causation must be established.439 There are two ways for shareholders to prove their loss was caused by the breach.440 The ‘direct reliance’ approach requires shareholders to individually prove that they would not have purchased the shares had the material information been disclosed at the necessary time.441 The indirect approach is based on the ‘fraud-on-the-market theory’, which is founded in the EMH.442 As prices in an efficient market reflect all available information, loss can be presumed upon failures to disclose material information, because had the breach not occurred, the shareholder would have paid a different price for the share.443 As this ‘market-based causation’ test is comparatively easier to meet, its position in securities regulation is hotly debated. Whether or not this test is available in New Zealand has significant implications for issuers upon the introduction of a statutory class action regime.
Market-based causation was first endorsed by the United States Supreme Court in Basic Inc v Levinson, to alleviate ‘an unnecessarily unrealistic evidentiary burden’ on class members.444It is consistent with the consumer protection model due to an assumption of loss to vulnerable investors upon a company’s withholding of information. The minority view in Basic v Levinson is consistent with the doubts of this model, contending ‘those who have ‘lost’ have not necessarily been defrauded’. 445 Black shared this criticism and was concerned the purpose of disclosure would be undermined should investors be able to invest recklessly, making uninformed decisions with the knowledge that market-based causation could act as a safety net.446 The difficulty in proving reliance on an omission of information, compared to misleading disclosure documents for misleading or deceptive conduct claims, might mean
439 Financial Markets Conduct Act, s 494.
440 Miller, above n 40, at 636.
441 Miller, above n 40, at 636.
442 Michael Duffy “Developments in United States Securities Class Actions: The status of ‘fraud on the market’ causation and implications for Australia” (2011) 40 CLWR 345 at 346.
443 Fama, above n 10, at 383; and Duffy, above n 442, at 346-7.
444 Basic Inc v Levinson [1988] USSC 36; 485 US 224 (1988) at 225.
445 At 251. Also see discussion at 256-7.
446 Barbara Black “Fraud on the Market: A Criticism of Dispensing with Reliance Requirements in Certain Open Market Transactions” (1984) 62 N C L Rev 435 at 457-8. See also Duffy, above n 43, at 852.
continuous disclosure class actions carry a particularly onerous causation burden.447 There are benefits for retail investors who do not have the means to gather extensive evidence of reliance448 – but in shareholder class actions, those costs are typically covered by a funder.Furthermore, in an opt-out class action, through market-based causation, class members who did not in fact rely on the breach are less likely to opt out, if they know they can be compensated without having to risk being unsuccessful in proving individual reliance and loss.
Market-based causation has not yet been addressed by the New Zealand courts, therefore the position is unknown. In Australia, TPT Patrol Pty Ltd v Myer Holdings Ltd, the first Federal Court judgment for a shareholder class action, accepted market-based causation as the basis for proving reliance and loss.449 Until the High Court has ruled on causation, Australia’s approach remains uncertain.450
Although the theory has been endorsed in the United States and Australia, their disclosure regimes have a higher standard of fault than New Zealand. Therefore, New Zealand courts should not be too quick to assume this approach’s greater convenience and access to justice for shareholders outweighs the disadvantage for issuers. The complexities and critiques of market-based causation are outside the scope of this dissertation. Nevertheless, should this causation approach be adopted, there must be additional safeguards for a statutory class action regime, such as certification to prevent frivolous claims using this ‘short-cut for causation’, to counteract the detriment to defendants.451
447 Jonathan Beach “Class Actions: Some Causation Questions” (2011) 85 ALJ 579 at 584.
448 Duffy, above n 43, at 852.
449 TPT Patrol Pty Ltd v Myer Holdings Ltd [2019] FCA 1747 at 1671. The Supreme Court of New South Wales also accepted the availability of indirect causation in Re HIH Insurance Ltd (in liq) [2016] NSWSC 482 at [73]. 450 Michael Legg and Madeleine Harkin “Judicial Recognition of Indirect Causation and Shareholder Class Actions” (2016) 44 ABLR 429 at 434; Allens, above n 56, at 10.
451 Australian Law Reform Commission, above n 46, at 279.
Conclusion
The fundamental nature of continuous disclosure for fair and efficient capital markets is illustrated by its volatility – there is immense pressure to get it ‘right’, but there is no one right answer. There are advantages to strict liability, primarily in the form of greater access to justice for aggrieved shareholders, but the flip side is the dangerous implications of over- deterrence which subvert the purpose of continuous disclosure. This dissertation cannot definitively conclude whether New Zealand’s continuous disclosure provisions should have a strict liability or fault standard, there are broader policy questions to be answered with regard to the extent of investor protection the law should afford.
Observing the experience of comparable jurisdictions allows New Zealand to ‘gain ideas which might not occur to us’, learn from others’ mistakes, and ‘measure our own ideas against other experience’.452 New Zealand can and should look to Australia to understand how a statutory class action regime would operate here, considering the historic business and political relationship between the two jurisdictions. In comparing public and private enforcement in Australia, it is evident that an enforcement regime purely based on guidance and encouragement of compliance would be ineffective, in the same way that hard enforcement alone would be ineffective.453 There must be both types of enforcement to successfully regulate both the law-abiding corporations and those abusing their power.454 The unitary regime approach is consistent with this dissertation’s view that the substantive law of continuous disclosure should be targeted, rather than precariously taking away shareholders’ rights.
The four mechanisms of certification, opt-in and opt-out class actions, the adverse costs rule and market-based causation do not exist within a vacuum. It is important to calibrate them to achieve an optimal balance in protecting defendants’ and class members’ interests, even if a perfect equilibrium will likely never be achieved. The public regulator can also act as a buffer against any dangers of over- or under-enforcement. The continuous disclosure class action does have a place in New Zealand society, but Parliament must tread carefully.
452 Securities Commission, above n 96, at 11.
453 Welsh, above n 151, at 4.
454 Welsh, above n 151, at 4; and Ayres and Braithwaite, above n 151, at 26.
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Amanda Rose “Reforming Securities Litigation Reform: Restructuring the Relationship between Public and Private Enforcement of Rule 10b-5” (2008) 108 Colum L Rev 1301 Amanda Rose “The Multienforcer Approach to Securities Fraud Deterrence: A Critical Analysis” (2010) 158(7) U Pa L Rev 2173
Janis Sarra and Adam Pritchard “Securities Class Actions Move North: A Doctrinal and Empirical Analysis of Securities Class Actions in Canada” (2010) 47 Alta L Rev 881
Charles Silver “”We're Scared to Death": Class Certification and Blackmail” (2003) 78 NYU L Rev 1357
Peta Spender “Securities Class Actions: A View from The Land of the Great White Shareholder” (2002) 31 CLWR 123
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S Stuart Clark and Christina Harris “Multi-Plaintiff Litigation in Australia: A Comparative Perspective” (2001) 11 Duke J Comp & Intl L 289
S Stuart Clark and Christina Harris “Class Actions in Australia: (Still) a Work in Progress” (2008) 31 Aus Bar Rev 63
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Christine Tran and Tim Stutt (2021) “Class actions: The evolution of continuous disclosure in Australia” (2021) 81 LSJ 71
Jan-Willem Van Prooijen “Retributive versus Compensatory Justice: Observers’ Preference for Punishing in Response to Criminal Offences” (2010) 40(1) European Journal of Social Psychology 72
Jenifer Varzaly “The effectiveness of disclosure law enforcement in Australia” (2021) 21(1) JCLS 135
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Michelle Welsh and Vince Morabito “Public V Private Enforcement of Securities Laws: An Australian Empirical Study” (2015) 14(1) JCLS 39
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Linda Willett “Litigation as an Alternative to Regulation: Problems Created by Follow-On Lawsuits with Multiple Outcomes” (2005) 18 Geo J Legal Ethics 1477
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E Parliamentary and Government Materials
(14 December 1977) 416 NZPD 5339(19 November 2002) 604 NZPD
(7 March 2012) 678 NZPD 872
(25 October 2012) 685 NZPD 6255
(27 August 2013) 693 NZPD 12999
Memorandum of Understanding Between the Financial Markets Authority and NZX Limited (January 2015)
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Officer of the Minister of Commerce “Cabinet Paper to the Chair of the Economic Growth and Infrastructure Committee: Securities Law Reform” (February 2011)
Securities Commission Proposals for the Enactment of Regulations under the Securities Act 1978 (31 March 1980)
Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding (NZLC R147, 2022)
Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding | Ko ngā Hunga Take Whaipānga me ngā Pūtea Tautiringa (NZLC IP45, 2020)
Te Aka Matua o te Ture | Law Commission Class Actions and Litigation Funding: Supplementary Issues Paper (NZLC IP48, 2021)
Australian Law Reform Commission Grouped Proceedings in the Federal Court (ALRC R46, 1988)
Australian Law Reform Commission Integrity, Fairness and Efficiency - An inquiry into Class Action Proceedings and Third-Party Litigation Funders (ALRC R134, 2018) Australian Law Reform Commission Inquiry into class action proceedings and third-party litigation funders (DP85, 30 July 2018)
Parliamentary Joint Committee on Corporations and Financial Services Litigation funding and the regulation of the class action industry (December 2020)
Treasury Financial System Inquiry: Final Report (March 1997)
Law Commission of Ontario Class Actions: Objectives, Experiences and Reforms – Final Report (July 2019)
Toronto Stock Exchange Committee on Corporation Disclosure Responsible Corporate Disclosure: A Search for Balance (March 1997)
(20 July 2009) 712 GBPD HL 155WSBrief of the United Kingdom of Great Britain and Northern Ireland as Amicus Curiae in
Morrison v National Australia Bank Ltd 561 US 247 (2010)
Civil Justice Council “Improving Access to Justice through Collective Actions”: Developing a More Efficient and Effective Procedure for Collective Action (November 2008)
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F Select Committee Submissions
Barry Allan “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”Bell Gully “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Bell Gully “Submission to the NZX for the NZX Listing Rule Review – Consultation Paper” (2018)
Buddle Finlay “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Nikki Chamberlain “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Chapman Tripp “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Michael Duffy “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Institute of Directors “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Institute of Directors “Submission to the New Zealand Law Commission on the Supplementary Issues Paper on Class Actions and Litigation Funding”
Jasminka Kalajdzic “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Michael Legg “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Meredith Connell “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
NZX “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Simpson Grierson “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Tom Weston “Submission to the New Zealand Law Commission on the Issues Paper on Class Actions and Litigation Funding (IP45)”
Allens “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”Ashurst “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
ASX “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
Australian Institute of Company Directors “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”
Australian Institute of Company Directors “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
Business Council of Australia “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
Louise Cantrill “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”
Michael Duffy “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
Insurance Council of Australia “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)” King Wood Mallesons “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”
Marsh “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
Maurice Blackburn “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”
Maurice Blackburn “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
MinterEllison “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”
MinterEllison “Submission to the Parliamentary Joint Committee on Corporations and Financial Services on the Inquiry into Litigation Funding and the Regulation of the Class Action Industry”
Norton Rose Fullbright “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”
Slater and Gordon “Submission to the Australian Law Reform Commission on the Inquiry into Class Action Proceedings and Third-Party Litigation Funders (DP85)”
G Reports
Aon Risk Services Australia Limited Directors & Officers Insurance Market Insights (March 2020)
Australian Securities and Investments Commission Information Sheet 151: ASIC’s Approach to Enforcement (September 2013)
Capital Markets 2029 Growing New Zealand’s Capital Markets 2029 - A vision and growth agenda to promote stronger capital markets for all New Zealanders (September 2019) Capital Strategic Advisors The economics of class actions and litigation funding (6 November 2020)
Olivia Dixon and Jennifer Hill The Protection of Investors and the Compensation for their Losses: Australia (The University of Sydney Law School, Research Paper No 18/64, October 2018)
Keitha Dunstan, Gerry Gallery and Thu Phuong Trong The Impact of New Zealand’s Statutory-Backed Continuous Disclosure Regime on Corporate Disclosure Behaviour (September, 2008)
Financial Markets Authority Co-operation policy (August 2016)
Financial Markets Authority Market Operator Obligations Review – NZX (June 2021) Financial Markets Authority Regulatory response guidelines (August 2016)
Financial Markets Authority Strategic Risk Outlook 2019 (2019) Institute of Directors Directors Sentiment Survey (2020) Institute of Directors Directors Sentiment Survey (2021)
Institute of Directors, MinterEllisonRuddWatts and Marsh Under pressure – D&O insurance in a hard market (September 2020)
David Kistenbroker, Joni Jacobson and Angela Liu Global Securities Trends: December 2020 Update (Dechert LLP, December 2020)
Vince Morabito An Empirical Study of Australia's Class Action Regimes, Fourth Report: Facts and Figures on Twenty-Four Years of Class Actions in Australia (Monash University, 2016)
Vince Morabito An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (Monash University, 2017)
NZ RegCo Approach to Enforcement (March 2022)
NZX Guidance Note – Continuous Disclosure (10 December 2020) NZX Listing Rule Review – Consultation Paper (11 April 2018) NZX Oversight & Engagement Report (2020)
NZX Oversight & Engagement Report (2021)
OECD Corporate Governance Factbook 2021 (2021)
Philip Strahan Securities Class Actions, Corporate Governance and Managerial Agency Problems (June 1998)
Michelle Welsh Continuous Disclosure: Testing the Correspondence between state enforcement and compliance (Monash University, Working Paper No 14, May 2009) XL Catlin and Wotton + Kearney How did we get here? The history and development of securities class actions in Australia (May 2017)
H Dissertations
Antonia Post “Continuous Disclosure and Class Action Lawsuits – What Does the Future Hold for New Zealand? Assessing the appropriate balance between issuers’ and investors’ interests” (LLB Hons) Dissertation, University of Otago, 2020)Jeremy Stewart “Robbing Peter to pay Paul? Shareholder compensation for violations of continuous disclosure obligations in New Zealand securities law” (LLB (Hons) Dissertation, University of Otago, 2011)
I Internet Resources
Ian Beaumont, Marika Eastwick-Field, Emily Joubert, Shannon Closey and Ryan Howlett “Australia is looking to ease its continuous disclosure laws – should we do the same?” Russell McVeagh (7 April 2021) <www.russellmcveagh.com>.“Class actions in Australia: An overview” (1 December 2021) Allens <www.allens.com.au>. Financial Markets Authority “Enforcement” (23 April 2019) <www.fma.govt.nz>.
Christine Gordon and Ben Stewart “Class Actions – are we in or out?” (31 March 2021) MinterEllisonRuddWatts <www.minterellison.co.nz>.
Institute of Directors “The top five issues for directors in 2021” (16 December 2020)
Institute of Directors “The top five issues for directors in 2022” (17 December 2021)
NZ RegCo “About NZ RegCo” < www.nzx.com>.
Nicole Pedler, Lauren Selby and Samuel Slattery “You’re under attack...now what? Continuous disclosure in the context of cyber incidents and data breaches” Herbert Smith Freehills <www.herbertsmithfreehills.com>.
Michael Pelly “Labor win ‘good news’ for class actions” (25 May 2022) Australian Financial Review <www.afr.com>.
Brendan Read “Cyber-security class actions a ‘ticking time’ bomb for directors” Governance Institute of Australia <www.governanceinstitute.com.au>.
Shine Lawyers “A2 Milk Class Action” <www.shine.com.au>. Philip Skelton, Thorn Law and Gilligan Rowe “a2 Milk Class action”
Slater and Gordon “a2 Milk Shareholder Class Action” <www.slatergordon.com.au>. Rob Stock “Victims of David Ross seek $80 million in damages from ANZ” (26 February 2020) Stuff <www.stuff.co.nz>.
“Useful reminders on continuous disclosure from across the ditch” (11 November 2019) Chapman Tripp <www.chapmantripp.com>.
J Other Resources
Samantha Barass, Financial Markets Authority Chief Executive “Speech to Financial Services Council Connect” (online, 16 March 2022)
Alex Boxsell “Regulators Praise Private Court Actions” The Australian Financial Review
(Sydney, 5 April 2012)Karen Chang, Financial Markets Authority acting General Counsel “Speech to MinterEllisonRuddWatts clients” (online, 4 November 2021)
Jeremy Cooper “Corporate Wrongdoing: ASIC’s Enforcement Role” (keynote address to International Class Actions Conference, Melbourne, 2 December 2005)
Financial Markets Authority “FMA files civil proceedings against CBL Corporation, its directors and chief financial officer” (press release, 17 December 2019)
Financial Markets Authority “FMA statement on director liability and continuous disclosure” (press release, MR No 2020 – 17, 17 June 2020)
Josh Frydenberg “Temporary changes to continuous disclosure provisions for companies and officers” (press release, 25 May 2020).
Josh Frydenberg “Permanent changes to Australia's continuous disclosure laws” (press release, 17 February 2021)
Josh Frydenberg “Restoring balance in disclosure” Australian Financial Review (Australia, 12 August 2021).
John Price, Commissioner of Australian Securities and Investments Commission “Continuous Disclosure” (speech to Chartered Securities Australia 2012 Annual Conference, Melbourne, 3 December 2012)Michael Lee, Federal Court of Australia Justice “Certification of Class Actions: A ‘Solution’ In Search of a Problem?” (paper presented to the Commercial Law Association Seminar on Class Actions – Different Perspectives, 20 October 2017)
Michael Legg “ASIC’s Nod to Class Actions May Backfire” The Australian (Sydney, 12 April 2012)
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