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Focus: Latest decision on shareholder causation

22 March 2012

In brief: The Full Federal Court has handed down judgment in the latest Australian appellate court decision to consider the standard of causation evidence necessary to establish a shareholder claim against a company – in this case, HIH – for misleading or deceptive conduct. Partner Duncan Travis (view CV) and Senior Associate Jonathan Joseph report.

How does it affect you?

  • It remains unclear whether it is appropriate to begin with a rebuttable inference of reliance in favour of a shareholder for the purpose of a claim against a company.
  • In any case, any inference of reliance in favour of a shareholder is rebuttable and does not relieve a shareholder claimant of the burden of adducing evidence to prove reliance.
  • The weight to be attached (if any) to indirect causation evidence in support of shareholder claims is the subject of the current Centro securities class actions trial. If that trial proceeds to judgment, it can be expected that long-overdue judicial guidance on this point will be forthcoming.

Introduction

The Full Court of the Federal Court has handed down judgment in the most recent decision by an Australian appellate court to consider the standard of causation evidence necessary to establish a shareholder claim against a company for misleading or deceptive conduct.

The Full Court's reasons for judgment offer no definitive guidance on whether a rebuttable inference of reliance applies to shareholder claims in these circumstances. They do, however, suggest that, regardless of whether a rebuttable inference of reliance may apply, a shareholder claimant still must prove actual reliance.

Background

On 9 February 2009, De Bortoli Wines Pty Limited (DBW) submitted a proof of debt to the liquidators of HIH Insurance Limited (HIH) in relation to shares purchased by DBW (and related parties) as a result of misleading and deceptive conduct by HIH in breach of section 52 of the Trade Practices Act 1974 (Cth) (the TPA). DBW claimed loss in the order of $9,213,510.19. On 4 February 2010, following an investigation into the evidence that DBW submitted in support of its claim, the liquidators rejected DBW's claim on two grounds:

  • the cost of shares purchased by related parties (valued at $2,073,331) was not a loss to DBW; and
  • there was insufficient evidence to establish that the balance of the claim ($7,140,179.01) was purchased in reliance on HIH's misleading and deceptive conduct.

On 17 February 2010, DBW commenced proceedings in the Federal Court, seeking to have the liquidators' decision reversed.

DBW alleged that Mr De Bortoli, a director of DBW, relied on misleading and deceptive conduct by HIH throughout the period during which he purchased HIH shares on behalf of DBW. In particular, DBW claimed to have relied on misrepresentations made in:

  • financial statements, reports and media releases published directly by HIH;
  • advice given by third-party analysts based on information provided by HIH; and
  • oral representations made by certain officers of HIH.

DBW alleged that, as a result of these misrepresentations, it was induced to buy shares in HIH that it would not have purchased had the misrepresentations not been made.

The misrepresentations that were alleged by DBW were not in dispute. The key issue was whether DBW could establish that HIH caused its loss.

The decision at first instance

At first instance1 , Justice Stone recognised that it was possible for a court to infer that DBW relied on HIH's misrepresentations in circumstances where:

  • HIH engaged in misleading or deceptive conduct; and
  • DBW invested in HIH shares.

Her Honour was, however, careful to point out that any such inference did not necessarily stand alone as establishing causation. Further, according to her Honour, the weight to be given to the inference depended on the facts of the case and it was possible for the inference, if applicable, to be rebutted by evidence to the contrary.

In this context, her Honour held that, because the inference is one of fact and not of logic, it will almost invariably be necessary for the plaintiff to provide additional evidence in support of the inference to demonstrate that the misrepresentations were a cause of the plaintiff's loss. Thus, if it can be shown that the plaintiff did not rely on the misrepresentations – or was not even aware of them – when making its purchasing decisions, causation will not be established.

Justice Stone dismissed DBW's application, on the basis that Mr De Bortoli had not in fact relied on HIH's misrepresentations in making his share-purchasing decisions on behalf of DBW, but on his own judgments and opinions. In rebutting the inference of reliance, her Honour found relevantly that:

  • little weight could be given to Mr De Bortoli's evidence that he had in fact read the various announcements and reports that he purported to rely upon;
  • even if Mr De Bortoli had been aware of these reports and announcements, he had relied on his own assessment and judgment in making his purchasing decisions, and ignored the negative sentiment in the market surrounding HIH at the time;
  • Mr De Bortoli relied on the fact that Rodney Adler (a high-profile director of HIH) was buying large numbers of HIH shares at the relevant time when making his purchasing decisions, rather than on any of the misrepresentations made by HIH; and
  • DBW's indirect causation claim, to the effect that HIH shares would have ceased to trade if HIH had not engaged in misleading and deceptive conduct, should be rejected. No evidence in support of that proposition had been adduced and, on the evidence that was adduced, it was clear that Mr De Bortoli was betting against the market rather than relying on it.

The decision on appeal

DBW appealed to the Full Federal Court 2. Justices Jacobson, Siopis and Nicholas dismissed the appeal.

It was unnecessary for the Full Court to determine whether the proper approach to the matter was to proceed on the basis of the rebuttable inference of reliance: neither party contended on appeal that the inference did not arise.

Instead, the key question in the appeal was whether Justice Stone erred in finding that 'any inference' of reliance was rebutted on the basis that Mr De Bortoli did not rely on HIH's misrepresentations in deciding to purchase the shares.

The Full Court concluded that Justice Stone did not err in finding that Mr De Bortoli failed to prove reliance on the misleading statements made by HIH. The court identified five key reasons for reaching this conclusion:

  • Mr De Bortoli conceded that the 'catalyst' for his initial purchase of HIH shares was his knowledge that Mr Adler was purchasing large numbers of HIH shares, not the documents Mr De Bortoli claimed to have read;
  • inconsistent with his claim that he relied on the misleading statements made by HIH, Mr De Bortoli continued to purchase HIH shares despite the share price at the relevant time dropping significantly. He also insisted that he 'knew better than the market'. This conclusion was supported by the absence of evidence that demonstrated Mr De Bortoli undertook any detailed analysis of the financial accounts of HIH;
  • Mr De Bortoli maintained that he read the Australian Financial Review 'specifically', yet he said that he was unaware of the considerable negative press concerning HIH. In these circumstances, it was open to Justice Stone to find that the credibility of Mr De Bortoli's evidence had been undermined;
  • in the absence of any specific evidence of Mr De Bortoli's reliance on HIH's relevant statements, the 'entire thrust' of his evidence was that the share purchases were made on the basis of his own strategy; and
  • Mr De Bortoli asserted that he relied on the statements of Mr Clarke, an officer of HIH. Mr Clarke's statements were, however, bland and general in nature and, as was ultimately conceded by Mr De Bortoli, not statements to which much weight could be attached.

Comment – causation in light of De Bortoli

Following the Full Court's decision in De Bortoli, it remains unclear whether it is appropriate to begin with a rebuttable inference of reliance in favour of a shareholder for the purpose of a claim against a company.

Even if such an inference is available to be made on the evidence, litigants should assume that the court will weigh up all the evidence bearing on the shareholder's claim in order to determine whether individual reliance has been established on the relevant facts. On this basis, any inference of reliance in favour of a shareholder is rebuttable and does not relieve a shareholder claimant of the burden of adducing evidence to prove reliance.

It should be noted that the Full Court in De Bortoli did not address DBW's indirect causation argument made at first instance; the parties accepted for the purpose of the appeal that the key question for determination was whether the evidence justified Justice Stone finding that Mr De Bortoli did not in fact rely on HIH's misrepresentations. It was, therefore, not necessary for the Full Court to determine whether an indirect approach to causation would be sufficient for a shareholder's claim of misleading and deceptive conduct.

As noted in our Client Update: Securities class actions – where are we up to? , the weight to be attached (if any) to indirect causation evidence in support of shareholder claims is the subject of the current trial of the securities class actions against the Centro Group listed entities. If that trial proceeds to judgment, it can be expected that long-overdue judicial guidance on this point will be forthcoming.

Footnotes
  1. De Bortoli Wines Pty Ltd (ACN 001 146 672) v HIH Insurance Ltd (ACN 008 636 575) (in liq) and Others [2011] FCA 645.
  2. De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) and Others [2012] FCAFC 28.

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