Wednesday, 6 May 2015

Continuous disclosure and market based causation

The recent case of Grant-Taylor v Babcock & Brown Ltd [2015] FCA 149 ended years of litigation which followed the high-profile collapse of Babcock & Brown (BBL).  The judgment in the class action brought by 72 different plaintiffs offers some useful insight into whether Australia will follow the US in accepting market-based causation in the context of shareholder actions.


The proceeding was commenced by those plaintiffs who purchased shares in BBL during its final year of trading on the ASX.  At the beginning of February 2008 (when the first of the plaintiffs purchased their shares) the trading price was $16.76.   When the shares were last traded on 7 January 2009 the price had dropped to $0.33.  Following a trading halt, BBL was placed into administration and then subsequently liquidation.

The plaintiffs commenced proceedings alleging that BBL had breached its continuous disclosure obligations under section 674 of the Corporations Act 2001 (Cth) by failing to disclose to the market that:
  • the final dividends for the last three years were paid unlawfully out of capital, not profits, and thus the financial reports for those years did not give a true and fair view of its financial position
  • it was insolvent over a month before it stopped trading and the company was aware, or should have been aware of this, and
  • its final dividend in 2007 was paid out of funds borrowed on the back of an internal asset revaluation.
None of the plaintiffs claimed that these alleged non-disclosures were material in their decision to purchase the shares.  Instead they sought to rely on an extension of the principle in Potts v Miller (1940) 64 CLR 282 that the measure of damages in cases of deceit is the loss or expense of the plaintiff in consequence of the inducement.  The plaintiffs argued that if the alleged misconduct caused the market as a whole to inflate the price of the security, then this fact could be commonly relied upon by all plaintiffs to prove causation.  This concept is known as ‘market-based’ causation. 


The claim ultimately failed as Justice Perram found that the allegations were not sufficiently made out. His Honour also found that had the allegations been made out, none would have had a material effect on the share price.  Notwithstanding, His Honour made some interesting comments regarding the concept of market-based causation.

Considering the case of ABN AMRO Bank AV v Bathurst Regional Council (2014) 309 ALR 445, his Honour found that this decision supported an argument put forward by the plaintiffs, namely that where A misleads B and B in consequence misleads C, it is possible for C to recover from A.

He then extended this logic to circumstances where company A misleads the market (being many B’s) by failing to disclose material information, and these B’s then bid up the price which in turn causes loss to C.  His Honour determined that, as a matter of principle, there is no reason why C should be prevented from recovering from A.

Justice Perram’s comments offer some strong support for a future decision to accept market-based causation. However, although insightful, the concept will need further judicial consideration in order to settle this ongoing debate.

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