Continuous Disclosure Shareholder Class Actions in Australia

Articles Written by Jan Hards (Director of Legal Innovation), Andreas Piesiewicz, Annabelle Quist

Key takeaways

Shareholder class actions for alleged breaches of a listed company’s continuous disclosure obligations are an established part of the Australian legal landscape with more than 50 shareholder class actions being commenced since 1999.

The prevalence of shareholder class actions over the past decade has been driven, in part, by increased volatility in equity markets, together with growth in the third party litigation funding market, including entry into the market by a number of recognised foreign funders, and by the rise in institutional participation.

However, there is still some uncertainty in the Australian market as to the viability of such actions, particularly where they are funded. This is due to a lack of judicial guidance on two key areas which have the ability to impact on the commercial justification for pursuing these claims: the approach Courts will take to the issue of causation and the apparent willingness of the Courts to re-write funding agreements. 

Current high profile claims

Recent high-profile class actions in relation to continuous disclosure include the claims brought by shareholders against Bellamy’s Australia Ltd and Slater & Gordon Limited.

Two separate class actions have recently been filed in February 2017 and March 2017 in the Federal Court against listed Australian infant formula company, Bellamy’s Australia Ltd (ASX:BAL). Both claims involve alleged contraventions of the misleading or deceptive conduct and the continuous disclosure provisions of the Corporations Act 2001 (Cth) (Act). Among other things, it is alleged that Bellamy’s knew, or ought to have known, about its lower than expected financial performance and proposed regulatory changes in China, and that it failed to provide timely, adequate disclosure to the market.

Another high-profile class action was launched by shareholders of Slater & Gordon Limited (ASX:SGH) in October 2016 alleging that the company engaged in misleading or deceptive conduct and/or breached its continuous disclosure obligations in relation to its acquisition of the professional services division of Quindell PLC, a UK company. 

Further claims are presently being considered against Woolworths by its investors who suffered losses due to alleged breaches of disclosure obligations. The proposed claim alleges that Woolworths provided guidance that its FY15 Net Profit After Tax (NPAT) was expected to increase from 4% to 7% in circumstances where it was aware of significant risks to forecast profit being achieved. In February 2015, Woolworths announced that it was downgrading its previously issued guidance of growth in its NPAT of 4% to 7% for Financial Year 2015.

Other current class actions:

Crown Resorts Ltd class action

A class action has been filed to recover money allegedly lost after Crown Resorts Ltd’s share price slumped on the back of revelations late last year that several Crown employees were detained in China on suspicion of engaging in illegal marketing of its gambling services. Crown shares fell nearly 14% on 17 October 2016 following confirmation of the detention of Crown staff in China, reportedly for activities designed to court the high-end VIP market.

It is claimed that the detentions and later arrests significantly impacted on Crown’s future revenue from VIP gaming, in particular due to an expected decline in VIP patronage at Crown’s casinos. There is alleged to be a set of events suggesting that the company knew or should have known of the risks the Chinese environment posed to the company’s revenue streams, and that shareholders should therefore have been apprised of those risks which would have been factored into the share price.

QBE class action

In December 2013, QBE announced that it was not going to meet earlier profit and financial performance guidance and that, in fact, it was expecting to incur significant write-downs and post a loss of around A$250 million for FY13. When confirmed in February 2014, the reported loss of A$254 million was the first for the company since 2001. The major contributor to QBE’s poor results and its shock announcement on 9 December 2013 was bad news from QBE’s North American operations.

The revelation on 9 December 2013 of the poor results arguably surprised investors. Only four months earlier, QBE’s half year report in August 2013 fed market expectations of a profit in excess of A$1 billion for FY13 and a turn-around of its problematic North American operations.

The market reacted swiftly and on 9 December 2013 QBE’s share price plummeted by more than 20%, closing down A$3.45 on the prior close, the biggest single day fall for QBE shares in 12 years. The share price continued to fall the following day, shedding another A$1.18. In total, QBE shares fell 30% over two days.

Key factors supporting shareholder claims

It can be seem from these examples that the key drivers for shareholder claims revolve around both alleged breaches of section 674 of the Act and ASX Listing Rule 3.1. Further, claims are often raised off the back of these issues around accounting treatment and financial projections (which can often result in the company’s auditors and other advisors being joined to the claim). Key examples:

  • Prospectus, information memoranda or capital raising statements – allegations focus on failures to disclose likely impacts under ‘foreseeable’ scenarios – e.g. the loss of a significant contract, a change in government conditions, break-down or non-availability of key equipment / resources.
  • Misleading revenue, profit and/or production forecasts – often a claim will allege new disclosable information came to light suggesting changes to current forecasts should be made and the company did not immediately disclose the information claiming the information was insufficiently definite to warrant disclosure such that it fell within the carve out under ASX Listing Rule 3.1A.1.
  • Financial / covenant / metrics – claims may arise if review events or events of default under a company’s finance facilities are triggered or likely to be triggered and disclosure is not made.
  • Accounting treatments – claims can focus on the use of particular accounting treatments around revenue or profit if the market was expecting gains from underlying operations and/or underlying cash-flow, rather than gains from mere accounting adjustments.

Future growth of shareholder class actions

The steady increase in shareholder class actions since the first shareholder class action was commenced in 1999 can, in part, be attributed to the growing role of third party litigation funding in Australia. A large number of recent shareholder class actions are pursued with third party funding given the current market perception that these claims represent meaningful investment opportunities when all shareholders’ claims are aggregated, but are otherwise commercially unviable if pursued by a single litigant.

Over the past few years, Australia has seen the emergence of a number of new key players in the litigation funding market including overseas funders, such as the UK-based Harbour Litigation Funding and Singapore-based funder International Litigation Funding Partners. More recently, new competitive funding vehicles have been established by leading Australian class-action law firms such as Maurice Blackburn and John Walker, former CEO of IMF Bentham.

The increase in shareholder class actions also appears to coincide with the growing acceptance of actions of this kind by institutional investors which is important for the viability of these claims given they are often substantial shareholders in the defendant company. The absence of any direct costs exposure, the prospects of settlement, and the ability to maintain some anonymity – given institutional investors rarely take on a representative role – are some of the drivers of increased institutional participation in funder-backed litigation.

Limits on further claims

While it is anticipated that shareholder class actions will continue to account for a significant number of class action filings in Australia in the future, there is presently a lack of judicial guidance on two key areas that have the ability to impact on the commercial justification for pursuing these claims (particularly for third party funders):

  • the approach Courts take to the issue of causation, in particular, whether the indirect ‘market-based’ theory of causation is sufficient to satisfy the causation requirement in shareholder class actions; and
  • the willingness of the Courts to re-write funding agreements, including in respect of the commission rate to be received by third party funders.    

A. Uncertain status of causation 

Continuous disclosure shareholder class actions typically relate to the circumstances in which shares are acquired by shareholders. It is commonly alleged that, as a consequence of the alleged contravention of a listed company’s continuous disclosure obligations, claimants either acquired shares when they would not have done so absent the contravening conduct, or they acquired shares at a higher price than they would have paid absent the contravening conduct.

Causation is an essential element in a claim for damages arising from an alleged breach of a listed company’s continuous disclosure obligations – i.e. what would the trading position have been – either in terms of the decision to purchase or in terms of the amount paid – had the contravening conduct not occurred. An important issue in these claims concerns what a claimant must do to establish that the contravening conduct caused their loss which is, relevantly, the increased amount paid for the shares.

There is no Australian appellate authority on whether it is necessary for each class member to individually prove that, absent the contravening conduct, they would have in fact paid a lower price for the shares (direct causation) or, instead, whether it is sufficient to demonstrate the general proposition that the contravening conduct caused the overall market on which the shares traded to be distorted, which in turn caused loss to investors who acquired the shares in the market at the distorted price (indirect causation). Appellate resolution of this issue is of significance as it will provide greater certainty as to whether the causation element of such claims can be established without individual shareholders being required to give direct evidence as to what they would have done absent the contravening conduct (which would significantly add to the time, cost and complexity of such claims).

A number of recent cases have accepted the indirect causation theory:

  • In Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149, Justice Perram of the Federal Court, whilst not needing to decide the question because the claim was dismissed on liability grounds, said that had it been necessary to reach a view “it is likely I would have agreed with the plaintiffs’ submissions [that they were entitled to pursue a case based on a theory of indirect causation]”. On appeal, the Full Federal Court of Australia dismissed the appeal and declined to consider “the important issue of causation” as it was unnecessary to resolve the issue on appeal (Grant-Taylor v Babcock & Brown Ltd (in liq) [2016] FCAFC 60).
  • In Caason Investments Pty Ltd v Cao [2015] FCAFC 94, the Full Federal Court considered indirect causation in a strike-out context in which it held that indirect causation can be pleaded in shareholder actions. In that case, Justice Edelman who was recently appointed to the High Court and may therefore be a Judge who ultimately decides the matter at the highest appellate level, concluded that the legal argument of market-based causation had reasonable prospects of success and should be allowed to proceed to trial (although noting that whether market-based causation is established as a matter of fact is a different question which would require expert evidence).  
  • Also in the Full Federal Court decision above, Gilmour and Foster JJ concluded that none of the authorities relied upon by the respondents supported a submission that the applicants’ market causation case was not arguable, and pointed to a number of previous first instance strike-out decisions which held that indirect causation was arguable, being Bolitho v Banksia Securities Ltd[2014] VSC 8 at [51] and Camping Warehouse Australia Pty Ltd (formerly Mountain BuggyAustralia Pty Ltd) v Downer EDI Ltd [2014] VSC 357 at [60].

The landmark decision of the Supreme Court of New South Wales in HIH Insurance Limited (In Liquidation) and others [2016] NSWSC 482 (HIH Matter) is the first decision to directly determine the question. Although the HIH Matter was not for breaches of continuous disclosure obligations, it involved allegations by shareholders that the defendant company engaged in misleading or deceptive conduct by overstating its operating profit and financial results such that shareholders paid a higher price for the shares (meaning that similar causation issues were engaged). Significantly, Justice Brereton endorsed the indirect market-based theory of causation, finding: 

“While the contravening conduct did not directly mislead the plaintiffs, it deceived the market (constituted by investors, informed by analysts and advisors) in which the shares traded and in which the plaintiffs acquired their shares. Investors who acquire shares on the share market do so at the market price. In that way, they are induced to enter the transaction…on the terms on which they do by the state of the market. Investors who acquire shares on the ASX may reasonably assume that the market reflects an informed appreciation of a company’s position and prospects, based on proper disclosure.”

and

“I do not see how the absence of direct reliance by the plaintiffs on the overstated accounts denies that the publication of those accounts caused them loss, if they purchased shares at a price set by a market which was inflated by the contravening conduct: the contravening conduct caused the market on which the shares traded to be distorted, which in turn caused loss to investors who acquired the shares in the market at the distorted price. In the absence of any suggestion that any of the plaintiffs knew the truth about, or were indifferent to, the contravening conduct, but proceeded to buy the shares nevertheless, I conclude that “indirect causation” is available and direct reliance need not be established.”

While indirect causation was accepted, it is noteworthy that Brereton J’s statements allude to the possibility of individual evidence from shareholders being required where there is evidence suggesting that they knew the truth about, or were indifferent to, the contravening conduct – which could, in a de facto sense, operate to defeat the indirect causation path.  

Nevertheless, Brereton’s J endorsement of indirect causation is a significant and ultimately less than favourable decision for defendant companies. However, until the issue is tested at an appellate level, it will remain an open question and it can be expected that defendant companies will challenge the applicability of indirect causation and seek to require each shareholder claimant to give direct evidence on the matter of causation via their own position (thereby increasing the time, costs and risks of shareholder class actions).

B. The Court’s willingness to re-write funding agreements

Two recent decisions made in the context of a ‘common fund’ application have demonstrated the Court’s willingness to review and, if necessary, re-write funding agreements, including the funding commission rate to be received by third party funders.

In October 2016, the Full Court of the Federal Court delivered its decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148 (Money Max), which was the first time an Australian Court had approved an application for a “common fund” type order – being an order to the effect that the litigation funding terms apply to all the group members of the class (rather than just those who have signed funding agreements with the funder). The case is viewed as a significant development in increasing the viability of funded class action litigation in Australia and comes after previous attempts at obtaining such an order in other class actions failed.

Prior to the Money Max decision, rather than making common fund orders, the accepted practice in Australian class actions (where the Court has deemed appropriate) has been the making of ‘equalisation’ orders.  The effect of these orders is that the funding commission payable by the funded class members is spread across all class members. It does not result in the funder receiving any more than it otherwise would have from the funded class members – but it means the funded class members share the burden of paying their commission with all class members

Whilst the Full Court in Money Max held that it was within the Court’s power to make a common fund order, there were two significant safeguards that the Court imposed on the proposed orders sought by the applicant:

  • First, the Court would only set the funding commission rate to be applied across the class members at a later stage in the proceedings – probably at the stage of settlement approval –“when more probative and more complete information will be available to the Court”. This information would include matters such as the commission rate agreed to by sophisticated funded class members, a comparison of commission rates applied in comparable actions, the risks assumed by the funder and the timing/size of any settlement or damages award. The Court indicated that the rate set at the later stage was likely to be less than the rate already agreed to with funded class members (and those funded class members would only have to pay the amount set by the Court).
  • Second, it was a requirement of the proposed orders that no class members could be worse off under the orders than they would have been if the proposed orders were not made. The effect of this requirement was to put a notional cap on the funding commission payable to the funder. That is to say, the unfunded class members were to be no worse off than they otherwise would be pursuant to an equalisation order.

Whilst the Money Max decision has the potential to be favourable for third party funders, this is dependent on how it is applied by the Courts. The safeguards imposed by the Full Court have led some to question whether the orders are in a funder’s interest given they have to proceed on the basis of uncertain commission rates, which are to be determined by the Courts at a later stage of the proceedings, and may potentially result in a reduction of agreed commission rates. 

In a different (but related) context, the recent settlement approval in Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No 3) [2017] FCA 330 provided the Federal Court with the opportunity to exercise the power and determine an appropriate return to be received by a litigation funder – albeit in the context of approving a settlement, rather than in respect of a common fund order application. In approving the settlement, the Court accepted the reasonableness of a funding commission rate of 30% of the net settlement sum after deducting the applicants’ legal costs. This resulted in the funder receiving approximately 22% of the gross settlement sum of A$40 million.

In determining the appropriateness of the funding commission rate, Justice Beach applied a range of factors including:

  • the funding agreement acceptance rate of group members and the proportionate acceptance by sophisticated investors;
  • a comparison of the funding commission rate as against other rates in both Australian and foreign markets;
  • how the rate under the common fund order compared to the rate recoverable under the funding agreement;
  • the litigation risks of providing funding in the proceeding and the stage of the proceedings at which those risks were assumed;
  • the legal costs expended by the funder;
  • the proportionality of the commission to be received by the litigation funder as against the amount received by the group members; and
  • whether group members had ample and fair opportunity to opt-out of the proceeding, or to notify their objections to the common fund application and proposed funding arrangements.

Given the breadth of factors taken into account by the Court, the decision serves to highlight the complexity involved in determining an appropriate funding rate and implies that the rate approved will vary on a case-by-case basis. Funders will be required to convince the Court that the proposed return represents a fair and reasonable return given the risks assumed by the funder.

It remains uncertain as to how funders will respond to these decisions. The significant uncertainty that arises from the funder’s commission being determined by the Court late in, or at the end of, the proceedings may impact on the commercial justification for pursuing claims.However, as the case law in this area progresses over the next few years, it is expected that the Courts will become more settled as to what they consider to be ‘reasonable’ ranges of funding commissions for various types of class actions. Funders will therefore be able to use this information to estimate the likely range of commission recovery to be approved by the Court on a common fund basis.

Looking forward

Litigation funding and class actions are an accepted part of corporate Australia. A listed company should do all it can to address and protect itself from class action claims. Doubts around the disclosure or non-disclosure of price sensitive information for listed companies should be resolved carefully and quickly, with appropriate advice taken at the earliest opportunity to not only seek to ensure compliance with the relevant law and therefore avoid the prospect of shareholder class actions, but also to ensure that appropriate measures are put in place to enable the defence of such proceedings in the event they are filed.  

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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