Institutional investors and shareholder class actions: The law and economics of participation

This article examines the role of institutional investors in Australian shareholder class actions by drawing on US experience since the enactment of the Private Securities Litigation Reform Act of 1995 which sought to encourage institutional investors to take the lead in US class actions. The article argues that whether institutional investors will participate in a class action will depend upon the potential recovery and costs involved. The costs include direct costs such as legal fees, as well as indirect costs such as management time. However, those costs can be ameliorated through litigation funding or through the role taken in the class action, namely representative party, a group member or a free-rider (an absent member of the class who only comes forward to collect a recovery). The article concludes that, as in the US, it is economic incentives which will determine the role that institutional investors play in shareholder class actions.