Do class actions benefit shareholders?

There have been some high profile class actions on behalf of shareholders against ASX companies recently including; Commonwealth Bank of Australia, Dick Smith and Quintis Ltd and most recently AMP. But is this practice beneficial for share investors?

Under a class action, a small “class” of shareholders seek to extract money from the company – at the expense of all current shareholders.

These class actions are bankrolled by litigation funders (legal funding) such as listed companies like IMF Bentham Ltd.

While there may be some wrongdoing by the company, this type of class action, in the long run, will only work against the interests of current share investors.

More than likely the class action will simply run up large legal costs for both sides. For the Quintis Ltd class action (Bannister Law and legal funding from JustKapital), the fees are approximately 40% of any return.

The lawyers will get richer and the shareholders will get poorer. Even if the claim is successful, the shareholders named in the class action will likely see little or no proceeds after legal fees and compensation to the litigation funder.

Whatever the rights or wrongs of the company you can choose to accept your losses rather than encourage a litigation industry that can only enrich lawyers and illegal founders at the expense of shareholders, with additional compliance and other legal costs that threaten the value of all your other current and future share investments.

In my opinion the job of ensuring a fair playing field for shareholders by setting listing standards and other regulatory rules is for the ASX and ASIC, not for class actions and other expensive legal actions where the primary motive is to extract money from companies (i.e. shareholders) to earn legal fees and profits for litigation funders.