More from Australia on continuous disclosure

More from Australia on continuous disclosure

Introduction

Hard on the heels of the discussion last week about the latest revision by ASX of its extensive Guidance Note 8: Continuous Disclosure, I have stumbled on a recent Australian case on allegations of market non-disclosure as the basis for a claim for damages by shareholders alleging misleading conduct by a listed issuer.

In March 2015, the Federal Court of Australia dismissed a claim by 77 shareholders of Babcock & Brown Limited (“BBL”) alleging a failure by BBL to disclose material information to the market in breach of its continuous disclosure obligations.

Notwithstanding the outcome of the claim, the Court made some interesting observations about the requirements for proof of loss and damage, and concluded that shareholders do not need to prove direct reliance to recover damages to compensate for losses arising from a failure to comply with continuous disclosure obligations.

Background

The case stemmed from the collapse of BBL during the GFC. The claimants bought shares in BBL in February 2008 and 2009 after their absolute peak but still at high prices – before the share price collapsed and trading was suspending on 7 January 2009. In this period, it was alleged that BBL failed to disclose that (amongst other things):

• dividends had been paid out of capital / asset revaluations – not trading profits;
• BBL’s financial statements did not disclose a true and fair view of its results and financial position; and
• (ultimately) BBL’s insolvency.

It was not alleged that this non-disclosure was material to the decision to buy BBL shares. Instead, they claimed that the disclosure failures caused them to buy their shares at an overvalue – with the result that they were entitled to recover the difference between the price they paid for the shares and what the shares were worth when acquired.

BBL argued that the claimants must prove reliance on the allegedly misleading conduct before recovering any loss.

The claim failed because the Court found that the information that was the subject of the allegations did not satisfy the standard of materiality required to engage BBL’s continuous disclosure obligations.

Observations

What is interesting is that, in dismissing the claim, the Federal Court briefly considered the claim for damages, and determining that, had they successfully demonstrated a breach of continuous disclosure obligations, that would have been sufficient to trigger an entitlement to recovery of the value of the inflation of the share price caused by the failure to disclose. While not essential to the discussion (and therefore obiter), Perram J noted that reliance is not a necessary condition for proving causation in misleading conduct cases, particularly because the terms of the relevant provisions of the Corporations Act (Australia) assume that the information the subject of the claim is price sensitive. (And the relevant provisions of the Financial Markets Conduct Act bear a close resemblance to those Australian provisions).

Materiality

Justice Perram considered the scope of the continuous disclosure obligations – focusing on the test for materiality, which provides that information is material if it:

“…would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the … securities.”

Here, the judge made findings, which guided his consideration of the allegations of breach:

• “persons who commonly invest in securities” – was to be taken to refer to a hypothetical investor buying securities in the company in question, or securities in general – referred to investors in listed securities generally.
• “’commonly invest” – did not refer to professional investors, but that it did denote a degree of sophistication which might be expected from those who have more than a passing interest in the activities of securities exchanges.
• ‘materiality’ – highlighted an objective test – requiring the need to identify the information that should have been disclosed, involving a survey of all of the available material including, because they are part of the factual matrix, the views of the company and individual investors whilst accepting, of course, that those views cannot by themselves be determinative. (The judge also noted that, he considered it is permissible to examine how the market subsequently behaved when the information was disclosed as a device for confirming the correctness of a conclusion already reached).

I also note that the judge stated that there is authority to support the proposition that, if A misleads B, and as a consequence B misleads C, C is not precluded from recovering from A – and that the situation in this case, where A is alleged to have misled the market (or many Bs), which led to the price changing which caused loss to C, is not relevantly different.

Conclusion

Observers in Australia regard the comments as another step in the road (particularly for shareholder class actions) towards the Courts accepting ‘market-based’ causation in Australia. If that shoe falls, then, for because of relevance of Australian decisions and practice in the area of continuous disclosure obligations – it is likely to be a short hop across the Tasman.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.