As is becoming almost the rule following a corporate collapse or downfall, the class action crows are circling the squirming body of Centro Properties Group, hoping for a quick kill. Just last week, it was reported that incoming Centro boss, Glenn Rufrano, is facing problems not only from disgruntled note holders and banks, but also several large plaintiff law firms who are preparing to launch class actions.
The media love class actions for a few reasons. First, there is a hero (the “investors”, represented by a plaintiff firm) and a villain (the “company”). Second, class actions seek to hold corporate wrongdoers responsible in cases where regulators have grossly failed to impose any meaningful sanctions (or see the fall coming). Also, class actions create a quantitative monetary loss – regardless of the factual basis for the loss. This was evident by the class action against Visy for price-fixing, with the media reporting a $700 million damages figure as lore – notwithstanding the fact that the claim is ambit and hasn’t been even remotely proved.
As a result, the media and business commentators rarely conduct any analysis of the merits of class actions. In recent weeks, it has been reported that both Slater & Gordon and Maurice Blackburn are considering a class action against Centro over its failure to disclose more than $1billion of debt. In typical fashion, Maurice Blackburn lawyer Martin Hyde noted that “the human cost of [the Centro collapse]… is devastating to some…it’s a pretty awful Christmas present.”
There may very well be an arguable case that various public reports issues by Centro were misleading, particularly in relation to classification and quantum of debt, however, with any class action, the ultimate losers are Centro shareholders themselves.
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For example, if Centro ultimately agrees to a monetary settlement with plaintiffs, that money will be paid out by current Centro shareholders – not the perpetrators of the wrongdoing (it is often the case that by the time any settlement or judgment is reached, the executives and directors at fault are long gone). Therefore, any settlement will involve one group of Centro shareholders paying another group of Centro shareholders.
In some cases, the shareholders will effectively be suing (and paying) themselves – less of course, a heavy dose of legal fees. As a US university study noted, “causing the defendant corporation to pay a settlement to its plaintiff stockholders is essentially to force the company to pay a dividend to those stockholders – a dividend accompanied by extremely high transaction cost.” Not only that, but the looming spectre of legal action may tip a teetering company over the edge and prevent it from raising fresh debt or equity.
Interestingly, while Australia is becoming more accustomed to shareholder litigation, the US Supreme Court took steps to narrow the range of actions which are able to be taken by shareholders, holding that “shareholders cannot sue third parties such as suppliers and banks in securities fraud cases unless investors directly relied on the parties’ statements or representations when making investment decisions.”
In relation to Centro, early comments by plaintiff lawyers indicate that investors who bought Centro shares between 9 August 2007 (when Centro released its 2007 financial results) and early December, may be eligible to join the class action. Shareholders who owned Centro shares prior to 9 August 2007 would by implication be excluded from joining the action.
The problem is that investors who were Centro shareholders before 9 August 2007 (and remain shareholders now) are not personally at fault. They are merely passive investors (who themselves have seen the value of their equity holdings slump). However, in any class action, it is those investors who also continue to hold shares (plus investors who bought shares after Centro announced the write-downs) who will be paying the tab.
In any class action, Centro CEO, Andrew Scott, the man who many blame for Centro’s woes, would not be paying a dime (if he is named in an action, his legal costs and settlement contribution would probably be paid by insurance or the company itself).
You won’t hear any of this from class action lawyers, much of whose success relies upon public sympathy and moral outrage against corporations. Ultimately, lawyers (both plaintiff and defendant) are the only winners out of the class action merry-go-round which is, in effect, one group of innocent shareholders suing another group of innocent shareholders over mistakes made by a bunch of overpaid executives.