Reports this week suggest shopping centre giant Centro has settled its long-running litigation with disgruntled shareholders for $200 million.
If true, the Centro settlement will easily eclipse the Aristocrat class action, settled for $136 million in 2008, and the Multiplex class action, settled for $110 million in 2010.
It could also create more incentive for institutional investors and superannuation funds to join other class actions, and more pressure on the federal government to regulate litigation funders that bankroll class actions.
Much has been written about class actions in recent years after a spate of corporate failures during the global financial crisis and because of more corporate breaches of continuous disclosure or other Australian Stock Exchange listing rules in recent years.
Less considered is the growing role of institutional investors worldwide in backing shareholder class actions to recover part of their investment losses.
Research cited in law firm King & Wood Mallesons' "2011 Class Actions in Australia" report showed 62 per cent of lead plaintiffs in securities cases filed last year in the United States were institutions, including pension funds.
As larger shareholders, institutional investors gain more from class actions and their participation can make it easier for litigation funders to secure a significant shareholding to the class action.
Some class actions could not go ahead without the participation of key institutional investors.
Also, the 'opt-out' feature of class actions, which allows class members not to have a visible role in the litigation and sit silently behind the representative applicants, can appeal to fund managers and superannuation funds that may have a commercial relationship with the company, such as providing corporate investment services.
It seems likely Australian fund managers and superannuation funds will participate in a growing number of class actions this decade.
But the size of the Centro settlement could intensify pressure on the government to regulate litigation funders that back shareholder class actions, which often cost millions of dollars to run over several years.
Litigation funders, such as IMF Australia, typically receive about 30 per cent of a settlement, and the losing side reimburses their legal bills.
If the litigation funders back a losing case, they have to reimburse the other side's legal costs, which is a significant funding risk.
There is a view litigation funders earn supernormal profits and the Federal Court should have the power to review the percentage of a settlement that litigation funders receive, depending on case risk.
The fear is high potential profits from litigation funding will encourage other funders to set up in Australia, back more shareholder class actions, and inevitably pursue cases with less merit, to try to achieve quick settlements from companies that prefer class actions to go away quickly.
That could mean more litigation funders approaching fund managers to participate in class actions.
Institutional investors should watch these developments closely.
Although class actions provide a potential avenue to recoup some investment losses, they can disrupt listed companies, their management and boards, damage brands, and affect shareholders that are not part of the class actions.
In a submission to Treasury, the Australian Institute of Company Directors (AICD) in January called for litigation funders to be regulated.
The AICD said: "If litigation funders (which are commercial enterprises) are allowed to be involved in extensive, time-consuming and costly litigation against corporations and directors, for the purposes of obtaining profits ... they should be appropriately regulated.
"AICD remains of the view that class actions brought against corporations are highly complex pieces of litigation that have potential to impose significant burdens on the companies and directors involved.
"This type of litigation, due to its scale and size, can impose costs on the public in the form of higher consumer prices, the diminution of share value, and decreased tax revenue ... Little attention has been paid to the impact of such actions on Australian productivity and the economy as a whole."
Tony Featherstone is a columnist for the AICD's Company Director magazine.
