Are we there yet? The wait for Australia's first judgment in a shareholder class action may soon be over

Australia has had a class action system since 1992. In that time, over one hundred shareholder class actions have been commenced,^[1] but none have progressed to a judgment. This remarkable state of affairs could leave you wondering:

• is corporate Australia too ready to run up the white flag and allow plaintiffs and their backers to win-by-forfeit?
• are the costs and risks of running a shareholder class action to judgment too great?
• are listed companies really making continuous disclosure errors or misleading statements that frequently?

Whatever the cause, one thing is certain: this state of affairs has led to uncertainty. Given that shareholder class actions have burgeoned into an industry, some clarity would be welcome. And it may not be far off. Clayton Utz represents the respondent in the shareholder class action of TPT Patrol v Myer. A protracted trial in the Federal Court concluded on 21 December 2018 and a judgment is likely to be near. The outcome of the proceeding will be important to:

• the 2,000 plus ASX-listed companies, their boards, managers and advisors;
• shareholders who invest in these companies either directly or indirectly;
• litigation funders and plaintiff law firms; and
• insurers.

But why is it so important? Apart from being a first, it’s likely to clarify the following important questions.

Market-based causation

Does a shareholder need to have been aware of a misrepresentation and acted upon it to recover any loss? Since not every investor reads every ASX release or attends every investor presentation, the ability of most investors to recover loss for a misstatement depends on the answer to this question. This is the much-discussed issue of "market-based causation".

Market-based causation is an example of indirect causation. It's indirect because the plaintiff does not need to rely on any misrepresentation themselves. According to the theory of market-based causation, persons others than the plaintiff rely on the misrepresentation made by the company which in turn causes the price of its shares to be inflated. The plaintiff then purchases the shares in an inflated market, unaware of the misrepresentation, and suffers loss because they pay more than they would have if there had been no misstatement.^[2]The theory of market-based causation is often relied on by plaintiffs in shareholder class actions without direct evidence from anyone that they relied on the alleged misrepresentation.

In some cases, a shareholder class action may not involve a misrepresentation by a company. Instead, the plaintiffs may allege that a company simply failed to disclose information which was material to its share price. In other words, the company said nothing at all rather than saying something misleading. In that case, the theory of market-based causation would dictate that the share price would have been lower had the relevant information been disclosed and as a result of the non-disclosure, the plaintiff should have paid less for their shares than they did. Market-based causation avoids the need for the plaintiff and each group member to prove that they (i) monitored announcements made by the company during the period when the relevant information should have been disclosed and (ii) would not have purchased shares had the information been disclosed.

Currently, there is no authoritative answer to whether market-based causation is available to plaintiffs in Australian shareholder class actions. This uncertainty is likely to be one of the reasons why every shareholder class action to date has settled. The settlement of a shareholder class action must be approved by a court. One of the factors referred to by courts when approving a settlement as a fair and reasonable alternative to proceeding to judgment is the uncertainty around market-based causation.^[3]Justice Murphy summed up the issue when approving a settlement in 2018:

The question of causation also carries risks since it is not settled that market-based causation is available to establish causation of loss and damage for the purposes of the various statutory causes of action pleaded. If market-based causation is not available then class members will need to prove reliance. These matters too point in favour of settlement approval.^[4]

Whether market-based causation is available to plaintiffs is likely to have a significant effect on shareholder class actions. If market-based causation isn't available in Australia, it will significantly reduce the size and number of shareholder class actions, perhaps to the point of largely if not completely eliminating them. A decision of the High Court will be necessary to conclusively rule on market-based causation. In the meantime, the decision in the TPT proceeding will be the most authoritative decision to date on the availability of market-based causation in the context of a shareholder class action.

How much have I lost?

Quantifying loss in a shareholder class action is a complex matter. One has to determine how the market would have responded to information that was never provided to it. Creating a parallel universe isn't easy, but it's particularly difficult when the existing universe is notorious for being unpredictable and sometimes irrational. This is an area for expert economists to ponder what might have been, forensic accountants to crunch numbers and share registries to track the ownership of shares through custodians and nominees who hold shares on behalf of thousands of investors. It's all very complex, but it can't be avoided because it feeds into the one question that matters most: how much is a claim worth? Uncertainty around quantifying loss has been a reason for shareholder class actions settling rather than proceeding to judgment.^[5]The decision in the TPT proceeding is likely to provide some clarity in this area.

^[1] From 1 June 1992 to 31 May 2017, 81 shareholder class actions were filed: see Vince Morabito, 'The First Twenty-Five Years of Class Actions in Australia: An Empirical Study of Australia's Class Action Regimes, Fifth Report' (July 2017), table 7.  Since then, their proliferation has markedly accelerated.  ^{Back to article}

^[2] Caason Investments Pty Ltd v Cao (2015) 236 FCR 322; [2015] FCAFC 94 at [93].  Another description of market-based causation can be found in Re HIH Insurance Limited (in liq) (2016) 335 ALR 320; [2016] NSWSC 482 at [38] where Brereton J refers to it as "indirect causation".^{Back to article}

^[3]For example, see Earglow Pty Ltd v Newcrest Mining Limited [2016] FCA 1433 at [68] and [71] (Murphy J); Newstart 123 Pty Ltd v Billabong International Ltd (2016) 343 ALR 662; [2016] FCA 1194 at [22] and [23] (Beach J); P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029 at [14]-[17] (Finkelstein J); Money Max Int Pty Limited (Trustee) v QBE Insurance Group Limited [2018] FCA 1030 at [129] and [136] (Murphy J); Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527 at [77] and [93] (Murphy J); HFPS Pty Limited (Trustee) v Tamaya Resources Limited (in Liq) (No 3) [2017] FCA 650 at [83] (Wigney J); and Camping Warehouse v Downer EDI [2016] VSC 784 at [74]-[76] (Digby J).^{Back to article}

^[4]Money Max Int Pty Limited (Trustee) v QBE Insurance Group Limited [2018] FCA 1030 at [129].^{Back to article}

^[5]For example, see Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527 at [77] (Murphy J).^{Back to article}