The Federal Court ruled that shareholders in listed companies may be entitled to recover damages for breaches of continuous disclosure obligations, and for misleading and deceptive conduct, upon the basis of “indirect market-based causation”, thereby avoiding the need to establish direct, personal reliance by the affected shareholder upon either the absence of appropriate disclosure or misleading and deceptive conduct.
This is what law firm Baker McKenzie said in a note to clients after the court ruled last month on a class action case against Myer. The shareholder lost but the case may have a big impact on the way shareholder class actions are conducted in future.
Indirect market-based causation is the proposition that the unknowing acquisition of shares, at a prevailing market price, during a period of share price inflation induced by misconduct may be the cause of loss or damage.
A shareholder can prove causation without the need to show that they personally relied upon, or even read, a listed company’s misleading statement.
The concept of indirect market-based causation has been discussed in Australia for a number of year but the Myer case is the first ruling in which it has been held to apply in an Australian securities class action.
The case was brought by TPT Patrol Pty Ltd, as the trustee of Amies Superannuation Fund.
The court ruled that TPT failed to establish recoverable loss or damage, but the acceptance by the court of indirect market-based causation will undoubtedly embolden securities class action plaintiffs.
In September 2014, Myer’s then chief executive Bernie Brookes said during a presentation to equity analysts that it was likely that Myer’s net profit in the 2014/15 financial year would exceed its 2013/14 profit of $98.5 million.
In March the following year the company announced to the ASX that it expected its 2014/15 net profit to be between $75 and $80 million.
Immediately after the announcement, Myer’s share price fell by about 10 per cent.
TPT brought proceedings, claiming damages on its own behalf and on behalf of a class of persons who acquired shares on or after the day Brookes made his comments and were holding the shares in March the following year when the company made its announcement.
TPT did not seek to prove that individual shareholders suffered loss or damage by reason of their reliance on Brookes’ statement.
Instead, TPT relied on indirect or market-based causation, which means the market for Myer shares was been misled by Myer’s conduct, resulting in TPT and class members purchasing their securities at an inflated price.
The court found that Brookes’ statement was not misleading when it was made because there was a reasonable basis for it. But Myer should have disclosed to the market no later than November 2014 that the 2014/15 profit would not be materially above the 2013/14 profit.
And it should have disclosed by December 2014 that the 2014/15 profit would be below than the 2013/14 result.
TPT’s claim was unsuccessful. The court ruled that the scepticism of market analysts had already deflated Brookes’ forecast, so that any corrective statement would not have had a material effect on the market price.
But the important takeaway from the case is that the court accepted the proposition that the unknowing acquisition of shares, at a prevailing market price, during a period of share price inflation induced by misconduct – indirect market-based causation – was available
“A shareholder can prove causation without the need to show that they personally relied upon, or even read, a listed company’s misleading statement.