10 Jul 2014

Entrepreneurial class actions suffer a blow

by Ross McInnes, Alexandra Kennedy-Breit

If this decision is followed, the ramifications for Melbourne City Investments' business model are likely to be significant.

On 27 June 2014, Justice Ferguson in the Victorian Supreme Court found that Melbourne City Investments Pty Ltd (MCI) did not have standing to commence a representative action against Worley Parsons (Melbourne City Investments Pty Ltd v WorleyParsons Ltd [2014] VSC 303).

Given that MCI has commenced similar class actions against companies such as Leighton Holdings, Treasury Wine Estates and Banksia Financial Group, this decision may have wide-reaching ramifications. However, MCI has since announced that it will reformulate its claim to overcome the decision.

Who is MCI?

MCI is a corporation that reportedly holds shares to the value of around $700 to $800 in over 150 publicly listed companies. Some have suggested that MCI is merely an entrepreneurial class action vehicle, which owns a nominal amount of shares in a broad range of companies with the intention of commencing class actions against those companies (for example, for breach of continuous disclosure obligations) if and when the opportunity arises.

The claim against WorleyParsons

MCI holds 28 ordinary fully paid shares in WorleyParsons Limited, which it acquired for around $700 on 1 November 2012. The claim commenced by MCI relates to persons who purchased shares in WorleyParsons after 14 August 2013 and who, at the start of trading on 20 November 2013, were holders of those shares.

Broadly, MCI alleges that WorleyParsons published forecasts of increased earnings four times between August and October 2013 that it had no reasonable grounds to make and, as such, were misleading and deceptive. When that earnings forecast was corrected on 20 November 2013, there was a fall in the share price of WorleyParsons, which MCI alleges was a result of the company's misleading and deceptive conduct.

MCI seeks a declaration that group members are entitled to compensation and interest, but does not itself make a claim for compensation. It purchased its shares before any of the alleged misleading conduct occurred. Given the date of the purchase of its shares, MCI is not a group member despite the fact that it seeks to be the lead plaintiff in the claim.

Justice Ferguson's decision

MCI sought to file a further amended statement of claim in the class action. This application was opposed by WorleyParsons on a number of grounds, including that MCI did not have standing to bring the proceedings.

MCI argued that it had standing on a number of grounds, including that it had a real interest on the basis that the relief it sought had foreseeable consequences associated with:

  • a reduction in the value of its shares;
  • a desire to present WorleyParsons from engaging in further contravening conduct, which would cause further decrease in share value; and
  • a public interest in deterring WorleyParsons from engaging in further contravening conduct.

Justice Ferguson ultimately rejected these arguments, finding that MCI had no standing to bring the claim as it had no real interest in the prosecution of the proceedings, and there would be no foreseeable consequences for it in the event that the matter was heard.

Broader implications for MCI

If Justice Ferguson's decision is followed, the ramifications for MCI's business model are likely to be significant. Unless it is entitled to damages in the proceedings it has commenced, it is likely that the proceedings it has already commenced against other companies, as well as future planned proceedings, may not be able to proceed.

MCI has since announced that it will seek to amend its claim to enable it to proceed. The matter is next listed before the Court at the end of July.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.