Dick Smith Holdings Limited’s sudden entry into voluntary administration on 4 January 2016 took many shareholders by surprise. Although frustrated investors won’t have answers about the company’s fate until the second creditors meeting, can they do anything in the meantime? Can they commence a class action against Dick Smith? Possibly. Below, we look at what constitutes a class action and what shareholders will need to demonstrate to succeed in their claim.
Key features of Class Actions
A class action is a legal proceeding brought in the name of one person on behalf of a group (or class) of people known as ‘class members’.
The claim brought under a class action must:
- Arise out of the class members’ common circumstances;
- Give rise to at least one substantial issue of common law or fact; and
- Have seven or more class members to the claim.
Before commencing any class action, it’s sensible for all class members and their lawyer to research the financial liquidity of the class action’s proposed defendant. Although success is an ideal outcome, it may only be a pyrrhic victory if the defendant is broke and cannot pay damages to all of the class members.
Finally, if the proposed defendant makes a settlement offer and all parties agree, the Court must first be satisfied that it is fair, reasonable and in the interests of all class members before approving the settlement.
Class Action Against Dick Smith
Returning to Dick Smith, if the Company’s shareholders wish to commence a shareholder class action, they must satisfy the above-mentioned threshold requirements as well as specific issues related to that case.
For Dick Smith’s shareholders to successfully mount a class action, shareholders would need to prove the following:
- Some or all of Dick Smith’s Directors breached their duties to the shareholders by failing to disclose market sensitive information to investors; and/or
- Some or all of the Directors made false and misleading statements to shareholders about the Company and/or its associated corporate entities.
Given Dick Smith is now in voluntary administration and receivership, these issues may be a theoretical exercise if there aren’t any funds to pay the shareholders, should any class action result in success.
Class Action Against Anchorage Capital Partners
Australian Entrepreneur Dick Smith said he would consider funding a class action lawsuit against Anchorage Capital Partners. Dick Smith, the founder of the electronics giant, offered a damning critique in The Australian about the private equity firm saying that they “knew things were going wrong” and that they “lacked morality and decency”. Anchorage Capital Partners purchased the retailer from Woolworths in 2012, before floating the business fifteen months later for more than five times the purchase price. Receivers, McGrathNicol were appointed to advise the retailer two days before Christmas.
Dick Smith, however, continued to sell gift cards for an additional fortnight before placed into administration. Anchorage Capital Partners restructured the business and marked down assets to post attractive earnings figures. With so many inconsistencies at play, ASIC is being urged to investigate a failure to comply with continuous disclosure obligations.
Only time will tell whether Dick Smith will have adequate funds to make a class action worthwhile. This is certainly a bitter pill for investors to swallow who bought shares at $3.20 at the time of the original float, only to see them plummet to 35.5 cents per share on the last day of trading before the company entered voluntary administration.
Investors will no doubt be watching carefully as the matter unfolds, and in the meantime, we will continue to bring you updates so watch this space!
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