Multiple shareholder class actions against the one defendant company about the same conduct are becoming more common. We've already explored whether a court will allow multiple shareholder class actions to continue in a previous Insights article. Depending on the circumstances, a court may allow only one of the shareholder class actions to continue; alternatively, it may allow two or more to continue. If two or more continue, will the defendant company be required to pay the costs of all of them if it is unsuccessful? At the time of our previous article, this was uncertain, but because of a recent decision of the Federal Court, we now have a little more clarity. That decisions is McKay Super Solutions Pty Ltd (Trustee) v Bellamy's Australia Ltd (No 2) [2019] FCA 215 (McKay).
The dilemma of duplication
If a defendant company fails in defending a shareholder class action, it is likely to be ordered to pay the reasonably incurred costs of the lead plaintiff due to the rule that "costs follow the event". If two shareholder class actions are permitted to proceed which relate to the same subject matter and which have two lead plaintiffs represented by separate legal teams, some work and attendant costs may be performed by each lead plaintiff. This is the dilemma of duplicative costs. A defendant company could fairly ask why it should pay for two sets of proceeding which are alleging the same thing. Against this, the lead plaintiffs could say that the class action legislation in Australia contemplates multiple proceedings, since it allows group members to "opt out" and run their own individual proceedings, and each lead plaintiff should be allowed to choose its own legal team rather than having another's legal team forced on it by the prospect of not recovering some of its costs. Since costs are high in complex litigation, this is an important issue. Matters came to the fore in the recent decision of McKay.
McKay's super solution or Bellamy's formula?
In McKay, the defendant company was Bellamy's, which is known for producing infant formula, among other things. It was defending two shareholder class actions "advancing identical claims and seeking identical relief". The two lead plaintiffs were McKay Super Solutions and Mr Basil. In an earlier decision, Justice Beach allowed both shareholder class actions to continue with each lead plaintiff having separate legal representation.
Bellamy's sought orders that:
- the costs that may be recovered by McKay Super Solutions and Mr Basil from Bellamy's be assessed as though McKay Super Solutions and Mr Basil were represented by the same legal team in one proceeding rather than separate legal teams in separate proceedings; and
- the total costs that may be recovered by Bellamy's from McKay Super Solutions and Mr Basil be capped at approximately $4.4 million.[1]
In short, Bellamy's asked that its potential costs liability be capped as if it were defending one proceeding instead of two. To be balanced, Bellamy's also sought an order that the total costs it could recover from McKay Super Solutions and Mr Basil, if it were successful, be capped at $4.4 million.[2]
McKay Super Solutions and Mr Basil had already entered into a "co-operation protocol" to reduce unnecessary duplication of work. This was intended to reduce the costs exposure of Bellamy's and had been ordered by Justice Beach. His Honour ordered that the protocol require the lead plaintiffs:
- to use reasonable endeavours to agree on areas of expert evidence and the briefing of experts;
- to consult with each other before preparing, filing and serving any evidence;
- to use reasonable endeavours to progress the two proceedings in a similar manner;
- to co-operate in the conduct of interlocutory applications; and
- to confer about key dates.
Bellamy's considered this protocol to be insufficient, particularly since it thought it would be exposed to $1.5 million of additional costs if there were no capping of costs.
Justice Beach concluded that he had the power to grant the orders sought by Bellamy's but declined to do so. His Honour accepted that the total costs that will be incurred by McKay Super Solutions, Mr Basil and Bellamy's were likely to exceed the costs that would be incurred if there were only one lead plaintiff and one class action. His Honour also accepted that some work and its attendant costs would be duplicated as a result of their being two shareholder class actions. In fact, the co-operation protocol indicated this; for example, it required the solicitors for each of McKay Super Solutions and Mr Basil to attend interviews with potential expert witnesses as well as some other conferences. Still, his Honour declined to make the orders sought by Bellamy's for the following reasons.
First, his Honour thought that the correct "prism" to look through was not whether it is reasonable for Bellamy's to bear more than one set of costs, but whether the two plaintiffs had unnecessarily or unreasonably duplicated costs. Once this was accepted, the fact there would be some duplication of costs was not enough to justify the orders sought by Bellamy's. There needed to be unnecessary duplication. His Honour said there were several "applicant specific tasks" that would result in duplicated, but unobjectionable, costs.
Second, the co-operation protocol was working well to reduce any duplication of costs, so much so that his Honour was unable to conclude that there was likely to be any unnecessary duplication in the future.
Third, if there were any unjustified duplication of costs, it would be better to deal with them retrospectively at a later date. His Honour would then be making a decision in the "known world" rather than trying to make a prediction about the future.
Fourth, Bellamy's could not demonstrate any need to make the orders now. Among other things, Bellamy's argued that making the orders now would facilitate the cost-effective conduct of the matter, which in turn would assist a settlement since a large costs liability is an impediment to settlement. This is certainly a relevant consideration since all shareholder class actions in Australia to date have settled rather than proceeded to judgment. However, if this argument justified a cap on costs in McKay, it would also justify a cap on costs in all shareholder class actions and in fact, in all court proceeding since settlement should be encouraged for all disputes. Justice Beach was not persuaded by Bellamy's argument because the co-operation protocol was working effectively and if it ceased to work effectively, it could be modified.
Fifth, his Honour thought he was not currently in a position to adequately assess the cap of $4.4 million.
The upshot for costs if you're facing multiple shareholder class actions
The outcome in McKay is mixed news for companies that might find themselves defending multiple shareholder class actions making the same allegations. The good news is that a court is willing to impose a protocol on lead plaintiffs to avoid the unnecessary duplication of costs. It is also open to addressing unnecessarily duplicated costs at a later date when more information is available.
The not-so-good news is that a defendant company is likely to be liable for duplicative costs where those costs were necessary. Justice Beach gave some examples of such costs. His Honour also said that an order treating the case as if there were only one shareholder class action would only operate from the date that he decided that the two shareholder class actions should be permitted to continue. That means that the duplicative costs of each lead plaintiff researching and preparing their own statement of claim plus the costs of other early steps would all be costs that each lead plaintiff could seek to recover from the defendant.
The outcome in McKay is perhaps unsurprising. The class action legislation in Australia contemplates multiple proceedings; Justice Beach had already decided that the two class actions should be permitted to continue with each lead plaintiff having separate legal representation; and the general position for all proceedings in the Federal Court is that a successful party is permitted to recover its "fairly and reasonably incurred" costs. In those circumstances, it is difficult to object to a lead plaintiff recovering duplicated costs provided they are not unreasonable or unnecessary.
[1] The precise amount was $4,456,550. Back to article
[2] His Honour indicated that if the first order sought by Bellamy's were made, it should be mutual so that Bellamy's is treated as though it is defending only one class action. Back to article
RELATED KNOWLEDGE