Short sellers’ participation in class actions can lead to injustice to both companies being sued and class members
MinterEllison is suggesting that short sellers should be barred from participating in shareholder class actions, arguing that they are essentially “double dipping” if the status quo continues.
The proposal was made by the top-tier firm in further submissions to the Australian Law Reform Commission (ALRC)’s Inquiry into Class Action Proceedings and Third-Party Litigation Funders.
“No Australian court has examined the issue of short selling in a class action context,” said David Taylor, MinterEllison partner and class actions specialist.
“Short sellers regularly profit from share price declines, and then make claims for compensation as participants in a class action.”
“Certain courts in the US have therefore denied short sellers the right to participate in class actions. Short sellers, here and in the US, contend that they should be able to participate as class members.”
“Our view is that short sellers’ attempts to, effectively, ‘double-dip,’ have the potential to cause an injustice to the companies being sued, but also to traditional investors participating in class actions.”
In an earlier submission, MinterEllison proposed a reform of the current regime on class actions, which is enabling a steep increase in shareholder class actions. It supported the ALRC’s proposal that Australia should commission a review on the impact of continuous disclosure obligations of public companies, including because of the increase of shareholder class actions.
MinterEllison said in its latest submission that the proposed review of continuous disclosure requirements, with a focus on class actions, must also include scrutiny of short sellers’ participation in those actions, considering the “unique investment strategies” employed by short sellers. Short seller participation is likely to have an ongoing impact on settlement sums ultimately received by class members, in circumstances where the short seller may have already profited from any decline in the share price, the firm said.
“As well as the appropriateness of short sellers potentially benefitting twice from the share price decline, from MinterEllison's perspective, there is a key question as to whether short sellers should be allowed to rely on the class action mechanism of market-based reliance to claim loss,” Taylor said.
“Short sellers may in fact be betting on the market getting it wrong, rather than relying on the market to accurately price the security. They should not be entitled to rely on an assumption therefore that a company's share price has been accurately set by a market which possesses all material information about the company,” he said.
Beverley Newbold, who heads the firm’s national class action practice, said litigation funders and law firms that practice in the area are know well that short sellers are participating in class actions.
“The entitlement of short sellers to participate will often be canvassed in confidential settlement discussions between litigation funders and law firms. However, there has been no public discussion of short sellers' alleged entitlement to participate, nor of how consistent their participation is with the objectives of Australia's continuous disclosure and shareholder class action regimes. Close scrutiny should be given to this issue in any proposed continuous disclosure review,” she said.