According to King & Wood Mallesons 2024 annual report (opens a new window), Australia has experienced a notable shift in the landscape of class actions, with a reduction in their frequency and scope.
This trend has sparked significant interest among directors and officers as it carries both risks and opportunities related to corporate governance and insurance.
To understand the broader implications, it is important to explore the factors contributing to the reduction of class actions and the ensuing risks.
What's influencing this trend?
The following factors have contributed to a reduction in class actions:
1. Regulatory Changes
The Australian legal system has observed changes that have made it more difficult for plaintiffs to initiate class actions.
Notably, reforms to the rules governing the funding of class actions and the strict procedural requirements for certification have placed a higher burden on those looking to bring such actions.
2. Increased Scrutiny on Litigation Funding
According to an article by Practice Guides by Chambers and Partners (opens a new window), a growing concern over the practices of third-party litigation funders, who finance class actions in exchange for a share of the damages, has led to more regulatory oversight.
The Australian Government has taken steps to regulate litigation funding, and there are concerns about the potential for conflicts of interest or the excessive pursuit of financial gain at the expense of class members' best interests.
3. Alternative Dispute Resolution (ADR)
An article by Piper Alderman (opens a new window) noted there has been a rise in alternative dispute resolution (ADR) mechanisms, such as mediation and arbitration, which provide a more efficient and less costly way of resolving corporate disputes.
ADR offers an alternative to what can sometime be lengthy and expensive class action litigation, making it an attractive option for both defendant corporations and claimants.
Considerations for Directors and Officers
Whilst the reduction in the number of class actions may seem like a positive development for corporate executives, it is essential to consider the accompanying risks and challenges.
Directors and officers are still exposed to significant liability in the event of corporate wrongdoing, and the overall shift in litigation trends could alter the types of risks they face.
1. Increased focus on individual liability
With fewer class actions, regulators such as the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) may focus more on individual accountability.
This could lead to an increased risk of enforcement actions against directors and officers at an individual/personal level. Directors may be met with more scrutiny over their decision-making and face fines or disqualification.
2. Shareholder derivative actions
In the absence of large-scale class actions, shareholders may increasingly turn to derivative actions — where a shareholder brings a lawsuit on behalf of the company to recover losses caused by directors' misconduct.
Whilst this is less common than class actions, it can still expose individual directors to personal liability for corporate mismanagement.
3. Heightened reputational risks
Even as the number of class actions decline, companies and their directors are under intense scrutiny from the media, investors, and the public.
A single high-profile lawsuit or regulatory enforcement action could lead to significant reputational damage. This could harm shareholder value, tarnish the company’s public image, and even lead to the resignation of senior executives.
4. Corporate governance failures
The decline in the number of class actions does not mean the absence of corporate governance challenges.
Directors must still ensure their companies comply with regulatory frameworks and ethical standards.
Governance lapses could expose directors and officers to liability under various statutory and common law provisions, even if class actions are less frequent.
Insurers’ reaction
Given the evolving nature of class action litigation and the associated risks, directors and officers must ensure their risk management strategies are up-to-date, including ensuring their insurance coverage is adequate.
1. Directors and Officers (D&O) Insurance
D&O insurance remains a crucial tool for helping to protect individual directors and officers against personal liability resulting from claims of wrongful acts.
As the focus shifts away from class actions and toward individual accountability, directors should carefully assess whether their D&O policies provide sufficient coverage for regulatory investigations, enforcement actions, and derivative lawsuits.
2. Policy limits and coverage
With a decline in the number of class actions, insurers may adjust their pricing models, and D&O policy terms and limits.
Whilst the decrease in large-scale litigation could lower premiums for some companies, the increased exposure to regulatory action and shareholder claims could lead to higher premiums for firms with higher risk profiles.
Directors and officers should engage with their brokers to ensure their policies meet the potential risks of individual liability, especially in relation to financial mismanagement, compliance failures, and shareholder actions.
3. Recalibration
It is likely that plaintiff firms and litigation funders are contemplating new strategies and approaches across allegations of misleading and deceptive conduct pertaining to ASX listed entities.
This may further be dependent on the outcomes of several shareholder class actions currently on appeal.
Ever-evolving litigation landscape for executives
Whilst the frequency of large-scale, group-based lawsuits may be slowing, directors and officers must remain vigilant in managing their personal and corporate liabilities.
The focus on individual accountability, regulatory enforcement, and shareholder derivative actions highlights the need for effective risk management strategies and comprehensive D&O insurance coverage.
By understanding these evolving risks and ensuring proper protections are in place, directors and officers can better navigate the complexities of today’s corporate environment.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. © 2025 Lockton Companies Australia Pty Ltd.