Share ownership in Australia is widespread and democratic. Online trading platforms make it easy for everyday Australians to buy and sell shares at a low cost. Compulsory superannuation ties our retirement savings and standard of living to the fortunes of ASX-listed companies.
Accordingly, there is no question that the integrity of the Australian share market is of fundamental importance to the individual fortunes of Australians and our economy as a whole.
Laws designed to protect market integrity
The Corporations Act contains broad prohibitions on companies engaging in misleading or deceptive conduct. In particular, it is against the law for companies to publish information that is false or incorrect, or to make representations about future cases that lack a reasonable basis.
In a similar vein, listed companies are required to comply with continuous disclosure obligations that require the immediate disclosure of any information (positive or negative) that could reasonably be expected to have a material effect on the price or value of its shares.
It is common sense that the disclosure of negative material information about a company will cause its share price to fall. This is because the market of buyers and sellers assesses new information and absorbs it into the share price.
It is also common sense that failing to disclose negative material information (or disclosing incorrect positive information) would result in the company of buyers and sellers assesses new information and absorbs it in.
Shareholder class actions
In shareholder class actions, it is alleged that persons that purchase shares during the period between the point where a company ought to have disclosed negative information and the time when the eventually did disclose that information have suffered loss or damage (in the form of artificial inflation) as a result of paying more for their shares than they should have.
While the purpose of a shareholder class action is to compensate the victims of corporate wrongdoing, they have had a far more fundamental effect.
A stream of newspaper opinion pieces have complained about how company directors are worried about being confronted by a shareholder class action. This is a good thing.
There is no suggestion that there are shareholder class actions being brought that lack merit. In each case, there is a serious allegation of wrongdoing - namely, that a listed company has misled the market.
It is vital that the Courts play an active role in monitoring this area and, where possible, strike out any unmeritorious claims that are brought in the future.
However, the best way of assessing the merits of claims brought to date is to consider the fact that every shareholder class action has settled before trial - usually for a significant sum of money paid by an insurance company who would only pay such a sum if there was a serious risk that they would lose at trial and be required to pay a lot more.
Being sued by current and former shareholders is embarrassing for a company and forexecutives and, as a result, awareness around disclosure obligations has never been higher. This is a good thing.
Examples of current and recent Slater and Gordon cases.