G8 Class Action

In 2020, a shareholder class action was commenced on behalf of persons who acquired shares in G8 Education (G8) during the period 23 May 2017 and 23 February 2018 (G8 Class Action). The class action alleged that G8 engaged in misleading or deceptive conduct and breached its continuous disclosure obligations based on earnings guidance it provided to the market throughout 2017.

In 2022, the Victorian Supreme Court granted the plaintiffs a GCO which allowed the solicitors for the plaintiffs, Slater & Gordon Lawyers, to be paid 27.5% of any settlement or judgment award in the proceeding. When awarding the GCO, Nichols J emphasised the percentage was subject to later review and that the plaintiffs' solicitors would need to facilitate any future assessment of the appropriateness of the reward compared to the assumption of risk.

In March 2024, the parties to the G8 Class Action agreed to settle the proceeding on a no-admissions basis, subject to Court approval. The settlement approval was heard in July 2024 and Justice Watson's judgment was delivered on 28 August 2024.

Relevantly, Watson J approved the:

• settlement of $46.5 million under s 33V(1) of the Supreme Court Act 1986 (Vic) (Act);
• settlement distribution scheme, with Slater & Gordon appointed as Administrator of the scheme; and
• GCO (without amendment pursuant to s 33ZDA(3) of the Act).

Background and development of GCOs

GCOs are a relatively recent development, introduced in 2020 under s 33ZDA of the Act. Victoria is the only jurisdiction to have introduced GCOs into its class action regime.

A GCO permits law firms acting for plaintiffs and group members in class actions to be paid their legal costs as a percentage of the amount of any award or settlement in the proceeding. GCOs are granted by the Court on application, and the Court may make a GCO if it is satisfied that it is appropriate or necessary to ensure justice is done in the proceeding. Research from the May 2024 McKell Institute report by Max Douglas titled A Model for the Nation? Four Years of Victoria's Section 33ZDA (McKell Institute 2024 Paper) found that between 1 July 2020 and April 2024, 19 GCOs were granted.

The key features of a GCO are:

• The law firm's legal costs are calculated as a percentage of any settlement or award amount.
• Liability for the law firm's legal costs is shared among the representative plaintiff and group members.
• The law firm is liable to pay any costs payable to the defendant in the proceeding.
• The law firm must give any security for the defendant's costs that the Court may order the plaintiff to give.
• The Court may amend a GCO, including the percentage ordered, during the course of the proceeding.

Whether to amend the GCO

The power of the Court to amend a GCO at the settlement approval stage was the subject of key discourse in Watson J's 28 August 2024 judgment. His Honour summarised the principles relevant to a Court's consideration of whether to exercise the power under s 33ZDA(3) to amend the GCO, as follows:

• The power only arises when the Court is satisfied that it was 'appropriate or necessary to ensure that justice is done in the proceeding’ to make the original order.
• The consideration under s 33ZDA(3) is not an occasion for a hearing de novo regarding the appropriateness of the GCO.
• The power to amend should only be exercised if the Court is satisfied that circumstances now mean that an amendment is appropriate or necessary to ensure that justice is done in the proceeding.
• Close attention should be paid to the reasons for the original GCO.
• Costs payable to the lawyer under the GCO should remain proportionate – meaning those costs continue to represent an appropriate reward in the context of the effort and investment of the legal practice, the duration of the proceedings and the risks which were undertaken under the GCO.

The Court recognised that GCOs are often made at an early stage in the proceeding, based on imperfect information where there is considerable uncertainty about the course of the proceedings and the time and expense involved for the lawyers representing the plaintiff and group members. That being said, Watson J recognised the Court must avoid hindsight bias in this context, and refrain from approaching the crystallisation of a favourable outcome for the law practice as an occasion of itself to amend a GCO.

In determining that the GCO should not be amended, Watson J suggested that the Court should only amend a GCO if there are particular reasons for doing so, highlighting the need for certainty and transparency for group members from the time the GCO is made until the end of the proceeding. Specifically, it would not be "appropriate or necessary" to ensure that justice is done for group members to have had the "benefit of transparency and certainty, merely to discard it at the end of a proceeding only because the lawyers would like more or because the plaintiffs and group members would prefer to pay their lawyers less."

Watson J also determined that Slater & Gordon's (S&G) return on investment and internal rate of return were metrics that would assist the Court in determining whether the GCO is fair and reasonable in the circumstances, and considered the appropriateness of the S&G's costs of running the proceedings. Pursuant to the GCO, S&G was to receive approximately $12.8 million (27.5% of a $46.5 million settlement), meaning (once the firm's costs of running the matter were deducted) that approximately $3.7 million (or 7.9%) of the settlement sum was a "reward" to the plaintiff law firm for undertaking the risks of funding the proceeding. The Court compared this 7.9% return with the litigation funding model (which has average commissions in the 23-24% range), with Watson J remarking that group members have had the benefit of litigation funding from S&G at about one third of the rate of a third party litigation funder.

The Court also noted other factors it would take into account included: the hours worked by the legal practice on the proceeding; the actual costs incurred by the firm (including overheads, disbursements, financing, insurance etc.); the costs which would have been charged on an hourly basis; comparisons with other funded proceedings; and how the settlement or judgment sum compares to any realistic settlement range estimated at the time of making the GCO.

Our analysis of GCOs

Unsurprisingly, there has been a substantial increase in the number of class action filings in Victoria since the introduction of GCOs, which has coincided with a decline in class action filings in other jurisdictions. A major reason for this is no doubt the favourable funding arrangements created by the GCO regime in Victoria, which had the potential to remunerate plaintiff law firms over and above the legal fees generated in prosecuting class actions. This favourable environment will be further supported by the recent decision in the G8 Class Action to approve the GCO without amendment. However, the Full Federal Court in R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89 recently endorsed the permissibility of solicitors seeking common fund orders at the settlement stage of class actions filed in the Federal Court. However, the true impact of this decision remains to be seen.

Advantages of GCOs

It has long been reported that allowing a contingency fee arrangement in class actions would assist with improving access to justice. Outside of a third party funding arrangement, where the funder agrees to prosecute the case, the representative plaintiff would otherwise carry the risk of having to pay an adverse costs order or paying security for the defendant's costs. GCOs relieve this burden on representative plaintiffs, providing another possible funding option outside of engaging a litigation funder.

It has also been argued that GCOs increase returns to group members through the competition it creates between law firms and litigation funders. The McKell Institute 2024 Paper states that since their introduction GCOs offer claimants a 'vastly superior return' compared to litigation funding arrangements. This argued advantage was also noted by his Honour in the recent judgment, comparing S&G's return against those commonly obtained by litigation funders.

Finally, GCOs have been said to 'engender simplicity and transparency from the outset which is in the interests of group members' (see Allen v G8 Education Ltd [2022] VSC 32 at [41]). A fee is set early on (although subject to change), whereas in litigation funding arrangements, legal fees are time-based which can lead to uncertainty about group members' final returns.

Disadvantages of GCOs

The main disadvantage of GCOs is the argument against contingency fees generally, being it creates a conflict of interest between the plaintiff law firm's duty to act in their clients’ best interests and their own interest in receiving the benefit from any settlement. This arguably had the potential to incentivise plaintiff law firms to quickly (and perhaps cheaply) settle cases to receive their fees. Professor Vince Morabito of Monash University in his January 2024 paper titled 'Group Costs Orders and Funding Commissions' noted that law firms may '"raise the white flag" when they realise that the costs that they have already incurred will equal or exceed their share of any monetary compensation they are likely to secure for class members'.

Conversely, this conflict may also disincentivise plaintiff law firms to accept certain settlement offers (which may be reasonable) where the expected return under the GCO arrangement does not cover the legal fees expended on the matter or does not achieve the plaintiff law firm’s internally set 'anticipated return on investment' for taking on the matter.

Key trends in GCOs

The McKell Institute 2024 Paper sets out key trends following the implementation of GCO arrangements in Victoria:

• As at April 2024, the median GCO rate was 24.5%.
• This 24.5% figure is marginally higher than the median litigation funding rate that exists following introduction of GCOs, however is considerably less than the total deduction from settlement (including legal fees) of 39.7% in funded class actions.
• When considering the 16 GCOs made between 1 July 2020 and 31 December 2023, the presence of competing class actions is associated with a slightly lower GCO rate. However, this competition had a greater effect in reducing the GCO rate in the four cases which involved a carriage motion.
• Litigation funders may still be involved in class actions where GCOs are made. Where both are involved, the average GCO rate is 26.6% compared to 24.0% when no litigation funder is involved.

In shareholder class actions specifically, the median GCO rate was 24.5%.

The highest GCO rate awarded to date is 40%, awarded in the case of Bogan v The Estate of Peter John Smedley [2022] VSC 201. Dixon J considered the GCO appropriate to do justice in the proceeding. His Honour noted that the 40% rate was lower than the existing agreed funding commission rate and would facilitate a 'certain and stable funding base', which would be more beneficial to any other reasonably available alternative.

On the other end of the spectrum, in DA Lynch v Star Entertainment Group [2023] VSC 561, a GCO of 14% was awarded (the lowest to date) as a result of several plaintiff law firms and funders competing to have carriage of the class action.

Implications of the decision in the G8 Class Action

Justice Watson's GCO approval in the G8 class action is the first of its kind, and appears to pave the way for "mid-range" GCOs to be approved without amendment in circumstances where proportionality, certainty and transparency has been maintained.