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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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Discovery Application Filed by Russian Billionaire Over Litigation Funding

By Harry Moran and 4 others |

The sanctioning of Russian business owners since 2022 has led to a plethora of litigation, as one ongoing case in Florida sees two Russian nationals in a dispute over the funding of litigation between them.

Reporting by Bloomberg Law covers ongoing proceedings in a Florida court, where sanctioned Russian billionaire Andrey Guriev is seeking discovery on the funding of claims brought against him by Alexander Gorbachev. The discovery application relates to a series of cases brought against Guriev by Gorbachev over his claimed partial ownership of Guriev’s company, with Gorbachev’s legal costs, insurance and additional expenses having been paid by Sphinx Funding LLC, a subsidiary of 777 Partners. 

Gorbachev failed in his claim brought against Guriev in the UK, but has since claimed that he does not have the £12 million that he has been ordered to pay to Guriev in court costs. Mr Guriev’s counsel from Boies Schiller Flexner, explained the reasoning behind the discovery application in a memorandum of law, stating:

“Mr. Guriev hopes to discover information relevant to the identities and ultimate sources of the funds provided by the third-party funders who financed Mr. Gorbachev’s failed, frivolous, and potentially fraudulent claims, as well as the true motives and objectives in bringing those claims.”

In response to a prior application by Guriev to have the two funders added as parties to the case, Joshua Wander, managing partner and co-founder of 777 Partners, stated that even though the company had covered some of Gorbachev’s legal costs, it had no stake in the result of the litigation. Furthermore, Wander had claimed that his companies had no paid any of Gorbachev’s legal costs after May 2023, following a “breakdown in the relationship between Alexander and the funders”.

£16m Settlement Reached in Dispute Between Funder and Investor’s Estate

By Harry Moran and 4 others |

The funding of arbitration claims brought against nation states represent challenging opportunities for legal funders, with the potential of a large return balanced against the complicated nature and prolonged timelines of these disputes. A new settlement in the High Court demonstrates that these issues can even extend to disputes between the claimant and funder, even when a valuable settlement is secured.

Reporting by the USA Herald covers the move by the High Court of Justice of England and Wales to finalise the settlement in a dispute between litigation funder Buttonwood Legal Capital, and the estate of late Finnish mining investor Mohamed Abdel Raouf Bahgat. The £16.74 million settlement which was approved by the court on Tuesday ended the legal action that Buttonwood began in 2022 to recover a share of the award won in Bahgat’s arbitration case against Egypt.

As Mr Bahgat died on 8 October 2022, the settlement was reached with his estate. The arbitration claim dated back to 2000 when Bahgat was arrested by the new government and had his assets frozen and his mining operations project seized. The arbitration ended in 2019 at a tribunal in The Hague where Bahgat was awarded $43.8 million, which following two years of interest and an enforcement dispute, finished as a $99.5 million payout in November 2021. Buttonwood brought a claim to the High Court in the following year to retrieve its share of the amount, further complicated by a prior renegotiation of terms between Buttonwood and Bahgat in 2017.

Neither Buttonwood Legal nor the Estate of Mr Bahgat have publicly commented on the settlement.

LSB Director Argues Funding Should Move to a “Mandatory Model” of Regulation

By Harry Moran and 4 others |

With next Monday set as the deadline for the Civil Justice Council’s (CJC) Interim Report and Consultation on litigation funding, we are beginning to hear more vocal arguments about the approach the government should take towards regulating the litigation funding industry.

An article in Legal Futures provides an overview of remarks given by Richard Orpin, Director, Regulation & Policy at Legal Services Board, at a consultation event for the CJC review in Oxford. In his speech, Orpin advocated for “moving away from the voluntary model of regulation to a mandatory model” for litigation funding, suggesting that it should be brought “into the remit of the FCA (Financial Conduct Authority).

Orpin argued that the rise in the use of litigation funding had “coincided with an increase in poor practice by some law firms in receipt of that funding,” and that “this pattern of behaviour undermines trust confidence in the ‘no win, no fee’ sector.” Orpin put forward the view that regulators needed to take a “more proactive” stance, highlighting his organisation’s concerns over “poor standards of client care, short-term financial gain being put above the interests of client and duty to the court.”

Other speakers at the event varied in their perspectives, with Richard Blann, head of litigation and conduct investigations at Lloyds Banking Group, similarly arguing that the current model of self-regulation was “ineffective and inadequate” and that the Association of Litigation Funders (ALF) “has no teeth”. 

Adrian Chopin, managing director and founder of Bench Walk Advisers, offered a dissenting view and questioned some of the preconceptions about funding, saying that the suggestion there are “waterfalls where the funders take everything and the client gets nothing” demonstrated a “gross level of ignorance”.