Australia's largest shareholder class action payout - Aristocrat shareholder class action settles

By Michael Legg, Nicholas Mavrakis and Stuart Clark.

Key Points:
The payout makes the future class actions more likely, so corporations should get ready.

The settlement hearing in Dorajay Pty Ltd v Aristocrat Leisure Limited, also known as the Aristocrat class action, was held on 28 August. The proposed settlement was approved, resulting in the shareholders receiving $136 million, the end of five years of litigation and the largest shareholder class action payout in Australian history.

Background

The Aristocrat Class Action was commenced in November 2003 and the hearing of stage 1 (liability and the damages claim of the lead plaintiff) by Justice Stone of the Federal Court of Australia concluded on 30 October 2007.

The class action was on behalf of all shareholders who acquired an interest in shares in Aristocrat Leisure Ltd ("Aristocrat") between 19 February 2002 and 27 May 2003 and who suffered loss as a result of Aristocrat allegedly overstating its profits and failing to disclose that it would not meet earnings forecasts. The Aristocrat class action had originally been commenced only on behalf of shareholders who had agreed to instruct Maurice Blackburn but the class was subsequently "opened" to all shareholders.

The class action alleges contravention of the prohibitions on misleading and deceptive conduct in section 1041H of the Corporations Act 2001 (Cth), section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and section 52 of the Trade Practices Act 1974 (Cth), and that Aristocrat failed to disclose material information to the market in a timely way in contravention of the continuous disclosure requirements in section 674 of the Corporations Act 2001 (Cth).

Settlement

The details of the Aristocrat class action settlement that have been made public are:

• the group was comprised of 556 shareholders represented by Maurice Blackburn and with funding from an IMF (Australia) Ltd subsidiary (the Funded Group) and some 2300 shareholders who only came forward to participate in the settlement (the Unfunded Group).
• the Funded Group, which was likely to contain a high number of institutional investors, would share in a fund of $109 million.
• the Unfunded Group would share in a fund of $27 million.
• the recovery rate for group members in the Funded Group and Unfunded Group is designed to be the same.
• if group members claims do not result in the funds being completely utilised then any remaining monies in (a) the Unfunded Group fund are returned to Aristocrat; and (b) the Funded Group fund are shared by the Funded Group.
• the lawyers who ran the proceedings would receive $8.5 million for their fees and disbursements.
• IMF expects to receive about $37 million from the settlement proceeds.

During the course of the hearing Maurice Blackburn, had estimated a total damages bill as high as $396 million, IMF had estimated a maximum claim of $240 million while Aristocrat had estimated the damages as being between $10 million and $20 million. The reason for that large discrepancy which one would expect to have been taken into account in agreeing the final settlement was uncertainty over causation and the calculation of damages. If the applicant's preferred approach to causation and damages had been accepted by the Court then a larger judgment would have followed.

Aristocrat announced to the market in May that it would fund $40 million of the settlement with the remainder presumably being covered by insurance.

Prior to Aristocrat the largest shareholder class action payout in Australia was in King v GIO where the settlement was $97 million for a final group of 23,099 claimants and the plaintiffs' lawyers received fees of about $17 million (including a 25% uplift of their hourly fee and disbursements).

Ramifications

The Aristocrat class action settlement will:

• fortify plaintiffs' lawyers and litigation funders who can point to the Aristocrat class action as proof that they can deliver substantial payouts to shareholders. After the Telstra class action settlement where a $300m claim was settled for $5m the credibility of some class action promoters had taken a battering.
• encourage shareholders, particularly institutional shareholders, to be part of shareholder class actions as a payout is likely.
• raises for consideration whether the class action exerts undue pressure on a respondent to settle because they face a large but uncertain liability that may linger for a number of years.
• reinforce the need for corporations to revisit their compliance plans for continuous disclosure in an effort to prevent a contravention.
• cause corporations to revisit their insurance arrangements to ensure they have adequate coverage.
• raises the issue of the respective roles of the Australian Securities and Investments Commission and private litigation in relation to enforcement of continuous disclosure requirements and prohibitions on misleading and deceptive conduct.

The main legal issue in the proceedings was causation and whether indirect or third party reliance (also referred to as fraud on the market) would be sufficient to satisfy the statutory causes of action. The settlement means that this important legal issue will await determination in a later class action. It should also be noted that a statutory version of fraud on the market was raised in CAMAC's September 2007 discussion paper. CAMAC has not issued any recommendations to date.

Clayton Utz seminar

Clayton Utz has plans to host a seminar on Securities Regulation and Shareholder Class Actions in late October 2008. If you are interested in receiving an invitation to the seminar please email hpage@claytonutz.com.

For further information, please contact Stuart Clark, Nicholas Mavrakis and Michael Legg.