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SHAREHOLDER CLASS ACTIONS IN AUSTRALIA: UNCERTAINTY FOR THE FUTURE OF MARKET-BASED CAUSATION

The following article was contributed by Nikki Stever and Madison Smith of Australia-based commercial law firm, Piper Alderman.

In the third decision delivered in a shareholder class action in Australia,[1] Iluka Resources Limited (ASX: ILU), (Iluka) succeeded in its defence of a lawsuit[2] which failed to prove that the shareholders’ direct reliance on Iluka’s conduct caused their losses. However, the decision in favour of Iluka notably lacked any significant consideration of the second causation argument typically pleaded in shareholder class actions – market-based causation.

Background of the matter

Iluka is a large mining company and global supplier of mineral sand products. On 9 July 2012, Iluka revised its sales guidance for its products, resulting in a 25% drop in share price. The shareholders alleged that Iluka’s sales guidance leading up to its announcement:

  1. was misleading or deceptive; and
  2. breached their continuous disclosure obligations.

The lead applicant purported that reliance on the sales guidance impacted their decision to purchase shares in the company (direct reliance).  It is not clear to the authors if the lead applicant or shareholders pleaded that the market as a whole was impacted by the sales guidance (market-based causation).

The Federal Court of Australia (FCA) rejected both claims on the basis that the representations alleged were not actually made, and were merely statements/guidance about Iluka’s expectations and were not guarantees or predictions/forecasts of future performance.

The FCA also found that the lead applicant relied on various external stock reports rather than statements made by Iluka, causing the direct reliance case to fail.

Direct reliance and market-based causation

Direct reliance in a shareholder class action requires the claimant to prove they actually relied on the contravening conduct (i.e. statements) when deciding to acquire shares in the defendant company, and that the subsequent decrease in share price was directly related to the contravening conduct, resulting in loss to the shareholder.

Market-based causation is based on establishing that the price that the defendant’s shares traded on the market was inflated by the contravening conduct, such that the claimant prima facie suffered loss by paying an increased price for the shares.

The Court has accepted this proposition,[3] however, also suggested that it may still be necessary for individual shareholders to give evidence that, but for the contravention by an entity, they would not have purchased the shares (or not at the price paid) in order to establish loss.[4]

Causation and loss in Iluka

Because the Court found that no representations were made (and therefore they were not capable of being relied upon, either directly or by the market), the judgment was relatively quiet in relation to causation. While there is reference to the failed direct reliance case, in so far as it was held that the lead applicant did not rely on the sales guidance issued by Iluka when deciding to purchase the shares, unusually the judgment is completely silent on market-based causation. In previous cases where market-based causation has been alleged by the plaintiff, the but for test has been discussed by the FCA in the context of considering misleading or deceptive conduct claims.  For example, the alleged contraventions in Myer and Re HIH were assessed by considering whether the alleged loss would not have occurred but for the contraventions.[5]

The High Court in Australia has offered an alternative approach in cases of proving factual causation of misleading and deceptive conduct generally – the ‘a factor’ test.[6] The a factor test is satisfied if the misleading or deceptive conduct was a factor in the occurrence of the plaintiff’s loss, or in other words materially contributed to the plaintiff’s loss.

In Iluka, this test for market-based causation would be satisfied if the alleged contraventions materially contributed to the shareholders’ loss, rather than the more stringent test of whether the contraventions were necessary for the loss.

The a factor test, if adopted, arguably offers a more appropriate test for market-based causation in cases of misleading or deceptive conduct. Firstly, it is more reliable and intuitive.[7] For example, the but for test requires counterfactual speculation as to how a market would have responded but for a particular event. This can be a difficult exercise for a plaintiff to speculate and quantify the loss. The a factor test shifts the requirements from necessity to contribution and is not as easily defeated by a claim that it was not the only factor relevant to the plaintiff’s loss.

Secondly, the test also avoids duplicative causation, as market-based causation often involves multiple factors that could have affected share prices.[8] The court does not need to assess each separate factor and consider its relative relevance to the causal loss overall, as is required when assessing the causal conduct following the but for test.

Finally, the a factor test promotes the deterrence of all misleading or deceptive conduct by providing a broad opportunity for the conduct to be considered misleading or deceptive, regardless of whether it was necessary for the loss.[9]

Conclusion

By failing to address market-based causation, the Iluka decision has created uncertainty around what causal test the court would be willing to accept for shareholders to succeed with a market-based causation claim. It is only a matter of time before there is a substantial decision on this point, however, until this occurs, the law on market-based causation remains unsettled.

About the Authors

Nikki Stever, Special Counsel  — Nikki specialises in complex litigation and disputes, with an emphasis on class actions and disputes involving corporations, competition and consumer legislation and disputes concerning breaches of trust and fiduciary duties. Nikki frequently works with litigation funders and is experienced in the structuring and conduct of funded litigation, across all Australian jurisdictions.

Madison Smith, Lawyer  — Madison is a litigation and dispute resolution lawyer at Piper Alderman with a primary focus on corporate and commercial disputes. Madison is involved in a number of large, complex matters in jurisdictions across Australia.

For queries or comments in relation to this article please contact Kat Gieras, Litigation Group Project Coordinator | T: +61 7 3220 7765 | E:  kgieras@piperalderman.com.au

—

[1] Following Crowley v Worley Limited [2020] FCA 1522 and TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747.

[2] Bonham v Iluka Resources Ltd [2022] FCA 71.

[3] In the matter of HIH Insurance Limited (In Liquidation) [2016] NSWSC 482; TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747.

[4] TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747, [1671].

[5] In the matter of HIH Insurance Limited (In Liquidation) [2016] NSWSC 482; TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747.

[6] Henville v Walker [2001] HCA 52, [61] and [106].

[7] Henry Cooney, Factual causation in cases of market-based causation (2021) 27 Torts Law Journal 51.

[8] Ibid.

[9] Ibid.

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Announcements Commercial Regulatory Issues

More Than 100 Companies Sign Letter Urging Third-Party Litigation Funding Disclosure Rule for Federal Courts Ahead of October Judicial Rules Meeting

By Harry Moran |

In the most significant demonstration of concern for secretive third-party litigation funding (TPLF) to date, 124 companies, including industry leaders in healthcare, technology, financial services, insurance, energy, transportation, automotive and other sectors today sent a letter to the Advisory Committee on Civil Rules urging creation of a new rule that would require a uniform process for the disclosure of TPLF in federal cases nationwide. The Advisory Committee on Civil Rules will meet on October 10 and plans to discuss whether to move ahead with the development of a new rule addressing TPLF.

The letter, organized by Lawyers for Civil Justice (LCJ), comes at a time when TPLF has grown into a 15 billion dollar industry and invests funding in an increasing number of cases which, in turn, has triggered a growing number of requests from litigants asking courts to order the disclosure of funding agreements in their cases. The letter contends that courts are responding to these requests with a “variety of approaches and inconsistent practices [that] is creating a fragmented and incoherent procedural landscape in the federal courts.” It states that a rule is “particularly needed to supersede the misplaced reliance on ex parte conversations; ex parte communications are strongly disfavored by the Code of Conduct for U.S. Judges because they are both ineffective in educating courts and highly unfair to the parties who are excluded.”

Reflecting the growing concern with undisclosed TPLF and its impact on the justice system, LCJ and the Institute for Legal Reform (ILR) submitted a separate detailed comment letter to the Advisory Committee that also advocates for a “simple and predictable rule for TPLF disclosure.”

Alex Dahl, LCJ’s General Counsel said: “The Advisory Committee should propose a straightforward, uniform rule for TPLF disclosure. Absent such a rule, the continued uncertainty and court-endorsed secrecy of non-party funding will further unfairly skew federal civil litigation. The support from 124 companies reflects both the importance of a uniform disclosure rule and the urgent need for action.”

The corporate letter advances a number of additional reasons why TPLF disclosure is needed in federal courts:

Control: The letter argues that parties “cannot make informed decisions without knowing the stakeholders who control the litigation… and cannot understand the control features of a TPLF agreement without reading the agreement.” While many funding agreements state that the funder does not control the litigation strategy, companies are increasingly concerned that they use their growing financial leverage to exercise improper influence.

Procedural safeguards: The companies maintain that the safeguards embodied in the Federal Rules of Civil Procedure (FRCP) cannot work without disclosure of TPLF.  One example is that courts and parties today are largely unaware of and unable to address conflicts between witnesses, the court, and parties on the one hand, and non-parties on the other, when these funding agreements and the financial interests behind them remain largely secret.

Appraisal of the case: Finally, the letter reasons that the FRCP already require the disclosure of corporate insurance policies which the Advisory Committee explained in 1970 “will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.” The companies maintain that this very same logic should also require the disclosure of TPLF given its growing role and impact on federal civil litigation.

Besides the corporate letter and joint comment, LCJ is intensifying its efforts to rally companies and practitioners to Ask About TPLF in their cases, and to press for a uniform federal rule to require disclosure. LCJ will be launching a new Ask About TPLF website that will serve as a hub for its new campaign later this month.

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Commercial People Moves

Mesh Capital Hires Augusto Delarco to Bolster Litigation Finance Practice

By Harry Moran |

In a post on LinkedIn, Mesh Capital announced the hiring of Augusto Delarco who has joined the Brazilian firm as a Senior Associate, bringing a “solid and distinguished track record in complex litigation and innovative financial solutions” to help develop Mesh Capital’s Litigation Finance and Special Situations practices. 

The announcement highlighted the experience Delarco would bring to the team, noting that throughout his career “he has advised clients, investors, and asset managers on strategic cases and the structuring of investments involving judicial assets.”

Delarco joins Mesh Capital from Padis Mattars Lawyers where he served as an associate lawyer, having previously spent six years at Tepedino, Migliore, Berezowski and Poppa Laywers.

Mesh Capital is based out of São Paulo and specialises in special situations, legal claims and distressed assets. Within litigation finance, Mesh Capital focuses on “the acquisition, sale and structuring of legal claims, covering private, public and court-ordered credit rights.”

Case Developments Commercial

Delaware Court Denies Target’s Discovery Request for Funding Documents in Copyright Infringement Case

By Harry Moran |

A recent court opinion in a copyright infringement cases has once again demonstrated that judges are hesitant to force plaintiffs and their funders to hand over information that is not relevant to the claim at hand, as the judge denied the defendant’s discovery request for documents sent by the plaintiff to its litigation funder.

In an article on E-Discovery LLC, Michael Berman analyses a ruling handed down by Judge Stephanos Bibas in the United States District Court for the District of Delaware, in the case of Design With Friends, Inc. v. Target Corporation. Design has brought a claim of copyright infringement and breach of contract, and received funding to pursue the case from Validity Finance. As part of its defense, Target had sought documents from the funder relating to its involvement in the case, but Judge Bibas ruled that Target’s request was both “too burdensome to disclose” and was seeking “information that is attorney work product”.

Target’s broad subpoena contained five requests for information including Validity’s valuations of the lawsuit, communications between the funder and plaintiff prior to the funding agreement being signed, and information about the relationship between the two parties.

With regards to the valuations, Judge Bibas wrote that “while those documents informed an investment decision, they did so by evaluating whether a lawsuit had merit and what damages it might recover,” which in the court’s opinion constitutes “legal analysis done for a legal purpose”. He went on to say that “if the work-product doctrine did not protect these records,” then the forced disclosure of these documents “would chill lawyers from discussing a pending case frankly.”

Regarding the requests for information about the relationship between Design and Validity, Judge Bibas was clear in his opinion that these requests were disproportionately burdensome. The opinion lays out clear the clear reasoning that “Target already knows that Validity is funding the suit and that it does not need to approve a settlement”, and with this information already available “Further minutiae about Validity are hardly relevant to whether Target infringed a copyright or breached a contract years before Validity entered the picture.”The full opinion from Judge Bibas can be read here.