Snapshot
- In Australia, as at the end of 2020, more than 80 shareholder class actions had been filed against individual companies and settled out of court. Figures publicly available indicate an average settlement of $44M and as high as $200M.
- Sophisticated modelling is key to addressing and exposing the level of risk of a shareholder class action, and the resulting impact on availability and coverage of D&O insurance in the local market.
- Aon has developed a D&O Side C exposure modelling solution, the D&O Decoder, to address these issues.
Shareholder class actions have been a significant factor in the explosion of the cost of Directors and Officers (D&O) insurance and the availability of coverage.
Market capacity has long been stretched and listed companies are under increasing pressure to find alternative insurance options.
While the (now permanent) changes during COVID-19 where companies and their officers would only be liable for civil penalty proceedings where they have acted with ‘knowledge, recklessness or negligence’ in relation to their continuous disclosure obligations, shareholder class action remains a concern across the board for listed companies.
In Australia, as at the end of 2020, more than 80 shareholder class actions had been filed against individual companies and settled out of court. Figures publicly available indicate an average settlement of $44M [1] and as high as $200M.
The settlement values are wide ranging and depend on a number of factors which include the shareholders participating in the class action, the extent to which the share price drops after the market adjusts for the alleged breach in continuous disclosure obligations, and the period of time the alleged disclosure breach remained uncorrected.
Companies such as Westpac, Lend Lease, Crown and Boral have all been the subject of shareholder class actions in the past two years, and there are a number of companies in the ASX200 that are currently subject to a class action.
While the action to more closely align Australia’s continuous disclosure regime with the approach taken in the United States and the United Kingdom, the threat of D&O shareholder class action activity remains high in Australia when compared with these markets due in part to the rise in litigation funder involvement.
Litigation funding in class actions has increased significantly in Australia since 2008, rising from 40 per cent of finalised Federal Court class actions between 2008 and 2012 to 77 per cent in 2017 and 2018 [2].
For these companies potentially subjected to class actions, the rapid increase of insurers’ premium expectations coupled with capacity restrictions has meant increased scrutiny with reduced overall Side C limits being purchased in the direct insurance market.
This additional scrutiny in the D&O market over limit decisions has therefore created a surge in demand for analytics beyond what is typically available.
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Modelling the risk and impact
Sophisticated modelling is key to addressing and exposing the level of risk of a shareholder class action, and the resulting impact on availability and coverage of D&O insurance in the local market.
Aon has developed a D&O Side C exposure modelling solution, the D&O Decoder, to address these issues.
Aon’s D&O Decoder goes much further than the traditional benchmarking or modelling currently available in the Australian market. The model simulates 250,000 scenarios of class actions based on data sourced from Australian historical class actions and traces the impact to a company’s share price and resulting claims. The outputs provide organisations with valuable information including, but not limited to, the organisation’s exposure and the probability of the event occurring, the nature of their exposure and how their position compares to peers.
Organisations are using the outputs of the D&O Decoder to set their limits, build a case for proposed limit reductions or dropping the limit completely. The analysis has brought insights to the C-suite and illuminated aspects of exposure and coverage they would not have otherwise have been aware of.
For example, an organisation advised by a third-party consultancy to have no exposure was surprised to learn how significant legal defence costs can be in a shareholder class action regardless of the final settlement.
Another organisation was able to confidently recommend to their board to reduce their current limit referencing their position to benchmarked peers, and others are using the modelling as the basis to consider incorporating alternative solutions into the D&O Side C programme.
Data, analytics and modelling are more important than ever to help the market navigate through these uncertain times and provide greater context and surety on the risk exposure of shareholder class actions and financial impact.