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See you in court: Why Sirtex Medical Limited is coming out fighting

Shares in liver cancer treatment Sirtex Medical Limited (ASX: SRX) opened marginally higher at $14.73 this morning after the company said it would contest in court a statement of claim from Portfolio Law over allegations that it breached its legal obligations under the Corporations Act.

It seems that after taking its own legal advice Sirtex is calling the bluff of the Melbourne-based lawyers who so far have only disclosed they have a single claimant for a loss worth no more than a couple of thousand dollars.

To put this in context it’s important for investors to understand why class actions came to exist and how they are funded or unfunded.

What is a Class Action?

A class action on behalf of retail shareholders can normally only exist if it has a litigation funder who agrees to pay the fees of the litigant lawyers (irrespective of success) on behalf of a class of retail shareholders.

This is because a single retail shareholder (or anything other than a very large number) cannot afford to pay the fees of a legal team and are unlikely to have a sufficient claim quantum to make the work worth taking on for a team of highly-paid lawyers. Therefore a litigation funder will organise the class action and guarantee to pay the claimants’ court-room facing lawyers in return for a share of the (usually substantial) damages awarded assuming the class action is successful.

As I stated before this claim from Portfolio Law currently does not look to have a class action funder, so I suspect this means there are a few possible scenarios going on here.

One scenario is that sitting behind the claim is an aggrieved institutional investor that may want to remain anonymous for now. Any insto would likely have the financial firepower and claim quantum to meet Portfolio’s Law’s fees direct and they would likely be structured at a fixed amount plus costs.

For example an insto could commonly have a claim for a couple of million dollars in this type of scenario that would easily cover the lawyers’ fees and an insto has no need to lower itself into joining a higher fee retail action. Notably, Sirtex had several high-profile insto investors prior to its December 9 downgrade.

The second scenario is that this is a fishing expedition by Portfolio Law in an attempt to drum up interest in an agreement for funding from any potential litigation funders. This would result in a standard “funded” class action on behalf of retail shareholders as we’re now seeing with Bellamy’s Australia Ltd (ASX: BAL).

For example the Bellamy’s class action is being funded by IMF Bentham Limited (ASX: IMF) who will agree to meet all the fees of the class action members’ lawyers Slater & Gordon Limited (ASX: SGH) in return for a share of the total damages assuming the class action is successful. Note that Slaters would not take on this work directly on behalf of a single retail shareholder as the shareholder would have no financial incentive to pay their fees.

The third scenario is that Portfolio Law are prepared to take on the case themselves almost unfunded, with seemingly a single fee-paying client in an attempt to force a settlement that may give them the opportunity to take on greater claims after the verdict. Still this would be a high-risk strategy and highly unusual.

Outlook

The fact that Portfolio Law currently don’t appear to have a willing class action funder has probably emboldened Sirtex and its legal team then to dispute it as they’re likely to be aware Porfolio Law currently may have no one to effectively pay them in pursuing it.

Still, I don’t think Sirtex Medical is out of the woods yet and it’s important to note the company has already sacked its CEO on receipt of independent legal advice from a team of expert lawyers given full access to the internal operations of the company.

These lawyers would have been hired due to their expertise on interpreting legal obligations under the Corporations Act and their report therefore is likely to remain something of a ‘smoking gun’ capable of providing big problems for the company yet.

I expect Sirtex Medical may be facing more legal claims ahead therefore and that the potential for a funded class action or one funded privately by an institution is still a strong possibility.

Investors should be aware the company could still be facing a big compensation bill given the length of time that Sirtex was allegedly in breach of its obligations from August 24 to December 9 and the fact that shares were trading at elevated levels around $30 over the period in question.

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Motley Fool contributor Tom Richardson owns shares of Bellamy's Australia.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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