Poor recoverability plagues Dick Smith shareholder class action settlement

Court finds that there are recoverability issues due to the defendant being in liquidation for the entirety of the proceeding, and that class members will end up worse off if the settlement isn’t approved.

These are three related class actions brought on behalf of shareholders in DSHE Holdings Ltd (in liq) (which formerly traded as Dick Smith) against Dick Smith, its former CEO and CFO, its auditor and certain of its insurers.

In this judgment, Stevenson J approved a settlement of the proceedings in the amount of $25 million, to be distributed as follows:

• $19,590,125 for the plaintiffs’ past and future legal costs (~78% of the settlement sum);
• $282,000 for settlement administration costs (~1% of the settlement sum);
• $40,000 for the plaintiffs’ reimbursement payments; and
• the remaining $5,087,875 for class members (~20% of the settlement sum).

"A disappointing result"

Justice Stevenson said that the settlement sum of $25 million was “a disappointing result” for class members, whose losses as a result of the respondents’ alleged misconduct are contended to be in the order of hundreds of millions of dollars (at [10]). However, his Honour said that the settlement was “the best that could reasonably be expected in the very difficult circumstances in which the representative plaintiffs found themselves” (at [33]). His Honour observed that, putting to one side issues regarding the plaintiffs’ prospects of success, there were serious recoverability issues because:

• Dick Smith had been in liquidation for the entirety of the proceeding; and
• although the company held responsive prospectus and directors and officers (D&O) insurance policies, the D&O policy was fully eroded before the commencement of the trial, which had subsequently run for 55 days before the settlement was agreed.

His Honour acknowledged that the legal costs sought under the settlement were “extremely high” (at [36]) and “a very high proportion of the settlement sum” (at [60]). However, his Honour observed that the actual legal costs paid by the funders were around $26 million, and the plaintiffs’ lawyers’ contractual entitlement to costs was around $29 million. His Honour also saw “no reason to doubt” the opinion of the Court-appointed costs referee (Liz Harris) that the claimed costs were reasonable (at [50]).

Furthermore, his Honour said that “proportionality in the context of the settlement achieved here must take into account the prospects of the representative plaintiffs achieving a better result were I to refuse to approve the settlement and, in effect, send them back to the Court to continue the battle” (at [61]).

His Honour’s view was that class members would likely end up worse off if he chose not to approve the settlement. His Honour also observed that the funders had agreed not to seek any funding commission, a decision which would result in them foregoing recovery of many millions of dollars to which they would otherwise have been entitled. In these circumstances, his Honour held that the proposed costs were not, in all the circumstances, disproportionate to the result achieved.

Finally, notwithstanding the New South Wales Court of Appeal’s decision in Haselhurst v Toyota Motor Corp Australia Ltd t/as Toyota Australia (2020) 101 NSWLR 890; [2020] NSWCA 66, his Honour made orders under ss 173 and 179 of the Civil Procedure Act 2005 (NSW) to, in effect, enforce class closure orders made earlier in the proceeding; although his Honour did allow a small number of late registrants to participate in the settlement.

Case details

Findlay v DSHE Holdings Ltd; Mastoris v DSHE Holdings Ltd; Mastoris v Allianz Australia Insurance Ltd [2021] NSWSC 249

Supreme Court of New South Wales, Stevenson J;
17 March 2021;
Plaintiffs’ Solicitors: Corrs Chambers Westgarth (Findlay Proceeding), Johnson Winter & Slattery (Mastoris Proceeding);
Defendants’ Solicitors: Colin Biggers & Paisley, Clayton Utz, Clifford Change;
Plantiffs’ Funder: Vannin (Findlay Proceeding), ICP (Mastoris Proceeding)
Austlii link: Accessible here