Christopher Niesche: Tighter rules see law firm's stock take hit

More than a few business leaders will be quietly enjoying the troubles of the world's first publicly-listed law firm.

Shares in Slater + Gordon have fallen by 60 per cent over the past few days after investors became concerned about reforms in the UK aimed at curbing that country's "compensation culture".

Slater + Gordon stock started last week at A$2.68 each but fell as low as A59.5c. Its market capitalisation fell from a peak of A$2.7 billion in June to less than a tenth of that last week.

The firm, which is also active in New Zealand, has expanded beyond its Melbourne origins to around Australia and into the UK. It earns its money from running class actions and making compensation claims on behalf of clients.

Its latest share plunge gathered steam as analysts considered the effect of the recently announced UK law change, which limits law suits for car crashes.

British Treasurer George Osborne intends to remove the right to obtain general damages for minor injuries such as bruising. He also plans to increase the threshold for small claims from 1000 ($2300) to 5000 to cover a greater volume of injuries in small claims court.

Slater + Gordon responded by saying the proposed law change "would impact on the rights of people injured in road traffic accidents".

Investors, however, were more concerned about how the change would impact the rights of Slater + Gordon to benefit from a steady stream of fees from chasing ambulances in the UK.

Slater + Gordon also undertakes class action cases against corporations they allege have overcharged or mistreated customers, or whose leaders they say caused shareholders to lose money.

In New Zealand, it has teamed with lawyer Andrew Hooker to sue major banks over what it says are about $1 billion in excess fees charged by banks over the past six years.

"There is nothing to lose, and no upfront cost," it says on the website touting people to sign up.

The firm has an extensive list of current class actions - against most of the banks or their financial planning arms and against surfwear manufacturer Billabong on behalf of shareholders who lost money when the share price fell by half in 2011.

Most shareholder class actions centre around the continuous disclosure regime - which aims to keep investors fully informed by requiring companies to immediately release information that could have a material effect on the share price.

Firms such as Slater + Gordon often take directors to court if investors believe they have made a loss after buying shares they might not otherwise have purchased if they had had all the information available.

On the face of it, this sounds fair enough, but company directors argue disclosure is not always clear cut and they shouldn't be pinged for making a business judgment.

More significantly, there are concerns the prospect of being sued for a perceived breach in continuous disclosure or another decision made around the board table is making directors nervous about taking risks.

Growing a business is about taking risks. Sometimes they pay off, sometimes they don't and the job of a company director is to weigh these risks, taking into account the potential pay-off and cost.

Directors increasingly have to ask themselves, "how would this look in court if it doesn't pay off?" Australian companies handed A$480 million ($528 million) to shareholders in class action settlements in 2012 - the highest year on record - and Australia is now second only to the US in terms of the likelihood that a company will face a class action.

There are also questions about whether class actions are an efficient way to fund shareholders after lawyers and litigation funders (who lend money to fund the legal action in exchange for some of the damages) have taken their cut.

In 2012, for instance, companies associated with failed property developer Centro and its auditor PwC settled a class action over alleged negligent auditing for A$200 million. By some measures, shareholders received just 20c in the dollar.

Slater + Gordon said in its statement to the stock exchange that the UK Government's announcement was "unexpected".

In fact, at its annual meeting only a few days before the announcement, managing director Andrew Grech told shareholders he didn't see any negative regulatory impacts on the horizon likely to hit next year's profits. It's true next year's profits probably won't be hit by the planned change.

But some in the market saw the change coming.

"Following the UK election in May, conversations with our industry contacts have suggested the possibility of future regulatory change that may impact the UK personal injury sector," CLSA analyst Oscar Oberg is reported as writing in a note to clients in September.