The other week, I received a letter in the mail from the Federal Court of Australia advising me of the BHP Class Action. This was followed by several requests from Switzer Report subscribers seeking my advice as to how they should respond. So, I thought it was time to have a look at shareholder class actions, with particular reference to the current BHP action relating to the Samarco dam collapse in Brazil.
The important thing to realise about shareholder class actions is that it is effectively one group of shareholders seeking compensation from the remaining shareholders (i.e. the company). Any funds paid are either out of the company’s reserves or from an insurance recovery, and even if the company doesn’t have to fork out its own funds to settle (in the case of an insurance recovery), it will ultimately pay higher premiums.
The next thing to realise is that you are unlikely to get “rich” from a shareholder class action. Litigation is protracted and costs are high, and most class actions are “funded” on a “no win, no fee” basis by plaintiff lawyers and litigation funders. To cover their risk of losing and not being paid, the lawyers (and their funders) demand a share of any “winnings”. Typically, 30% to 40% of any payout proceeds will go to the lawyers and their funders.
But that is not the only reason that you are unlikely to get “rich”. The reality is that most shareholder class actions never make their way through the full court process and are settled before the Judge has the opportunity to rule. And whether it is coincidence or not, the settlement value tends to be close to the company’s level of insurance cover, which are in the millions or tens of millions range, not in the hundreds of millions.
Shareholder class actions are reasonably hard to prove, and then substantiate loss. Most relate to the listed company failing to meet its continuous disclosure obligations, that is, forgetting to tell the market something that is important. If it had, shareholders wouldn’t have purchased shares at the prices they did and so they are entitled to be compensated for loss as they paid more for the shares than they would have paid as a consequence of the company’s conduct.
For Directors and Senior Management, knowing what to disclose and when to disclose it is more “art” than “science”. The ASX, for example, publishes a ‘guidance note’ on continuous disclosure obligations rather than a rule book, so proving whether a company should have disclosed something is often quite arguable. Further, substantiating actual “loss” can be tricky because in some cases the share price goes back up.
Bottom line…you are unlikely to get rich if you take part in a successful shareholder class action.
Shareholder class actions are brought by one or more shareholders (the “applicants”) on behalf of a class of shareholders (“group members”) against the Company where the applicants and group members have similar claims. The applicants are solely responsible for the costs and don’t need to seek the consent of the group members to commence the action. However, the group members can opt out of the class action.
With an open class action, group member shareholders have three choices:
- Firstly, they can formally register as a group member. This means that they could be eligible to receive compensation as part of any settlement reached by the applicants before final judgement. However, they will also be bound by any resolution of the class action and won’t be permitted to bring any future claims against the company.
- They can opt out and cease to be a member of the group. In this case, they won’t be entitled to share in any settlement, but will be able to commence separate proceedings against the company.
- Or do nothing. If they do nothing, they are unlikely to share in any compensation as part of a settlement. They will also be bound by the terms of the settlement and won’t be able to bring a separate claim.
The ‘do nothing’ option is not much of an option, so unless you intend to bring your own action or join another class action, the best option (if you are eligible) is to register.
The BHP class action
The applicants allege that BHP contravened its continuous disclosure obligations between 8 August 2012 and 9 November 2015 by failing to properly inform the ASX that a tailings dam operated by Samarco (a joint venture of BHP and Brazilian miner Vale) was at risk of failure, and that if the dam failed, serious adverse human, environmental and financial consequences would result. Further, it engaged in misleading or deceptive conduct by representing to the ASX in its annual reports that its primary consideration in every aspect of its business was the safety of its people and sustainability of the environment and the communities in which it carries on business, and that it had effective systems and processes in place to effectively manage risks.
The applicants lodged their original claim on 7 September 2020, with BHP finalising its defence on 10 March 2023. The Court has now ordered that group members who wish to participate must register (or opt out) by 31 May 2024.
To be eligible and a group member, you must have bought BHP shares on the ASX between 8 August 2012 and 9 November 2015 (inclusive). If you acquired shares under a dividend re-investment plan during this period, you will also be eligible (although for the assessment of recoverable loss, they may be treated differently to other acquisitions).
If you are eligible, you would be mad not to register. To do this, go to www.bhpclassaction.com [1] and complete the details by 31 May 2024. You will need details of your BHP shareholding, plus details relating to your purchase(s) of BHP shares (date, price, number of shares acquired).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.