Australia has seen a proliferation of shareholder class actions in recent years. There are a number of drivers of this trend, but probably the most distinctive one is the disclosure regime that has Boards of listed companies running scared and plaintiff lawyers rubbing their hands with glee. With a largely buoyant background macroeconomic context and plenty of capital swishing around looking for an appetising rate of return, global litigation funding players and local start-ups have rushed into the market and created a snowball effect. With a quadrupling of plaintiff firms in the past decade, the trajectory is tracking unstoppably upwards. Or is it?
The high profile case of TPT Patrol v Myer took the unprecedented step of running to the end of trial without settling. Judgment from the Federal Court is pending. Since no other shareholder claim has proceeded this far, this will be a landmark decision which will set the tone for the foreseeable future for shareholder claimants, funders and defendant companies. Why so dramatic?
In more established jurisdictions like the US, the pivot on which shareholder actions turn is a theory of causation known as Fraud on the Market theory or FOM as some call it Stateside. The US Supreme Court has upheld FOM as a presumption in shareholder claims that can be rebutted by the defendant company. With the certification process in the US, which involves a two-step procedure to run a class action, a defendant can in principle stop a shareholder action at the first stage of certification by leading evidence to rebut the presumption.
According to FOM, shareholders’ losses flow from the inflation in the share price caused by the fraud on the market by the Company. In FOM speak this means the Company misrepresented material information about the business or failed to disclose material information which caused the share price to be artificially inflated. The claimant shareholder then purchased the share at an artificially high price and has a claim for the difference between that price and the real value of the share (but for the misrepresentation or omission). The result is a highly efficient and effective way to run a shareholder class action, where each shareholder can avoid the burden of having to individually show how the Company caused their loss, for example by way of their direct reliance on the misrepresentation or non-disclosure.
Without FOM, shareholders fight their class action case effectively as individual claimants who must each show the offending misrepresentation or non-disclosure by the Company directly caused their loss. In a process that may end up more FOMO than FOM, in this scenario shareholders have the difficult task of proving the wrongful conduct directly caused their loss, when in reality many shareholders may not pay close attention to the Company’s public statements or lack thereof.
No Australian Full Court or Appeal Court has yet pronounced on this issue. However, the New South Wales Supreme Court in a single judge decision held that ‘indirect causation’ is available in Australia (In the Matter of HIH Insurance Limited (In Liquidation)  NSWSC 482). His Honour Justice Brereton focused on the question of causation of loss rather than reliance on misconduct, noting that causation would be proved if ‘(1) the contravening conduct misled the market into attributing an inflated value to [the] shares, (2) the plaintiffs acquired their shares in that inflated market, and (3) the plaintiffs thus paid more than they would otherwise have paid for the same shares.’
Back to the Myer case. When it hands down its judgment, the Federal Court will provide guidance on how shareholder claims can proceed in future. If indirect causation is not embraced by the Court, this will be a major setback for current and future shareholder claims. On the other hand, if the Court upholds fraud on the market causation, there will likely be even further growth in shareholder claims against listed companies. Shareholders will have a more certain mechanism for holding to account companies they have invested in and will not have to clear the bar of a first-stage certification process before running their claims. Board and executives on the other hand will need to be even more vigilant about potential claims and how to proactively deal with material information that may require disclosure.
For further information please contact Ross on the details below, or visit our Class Actions web page.