Sign Up for PublicationsAustralian Securities Class Actions: A Shifting Landscape
Historically, securities class actions have constituted at least 20% of all class actions filed in Australia. The attraction of securities class actions to plaintiff law firms and litigation funders alike stems from the inevitable pre-trial settlements in circumstances where respondents were aware of the uncertainties and risks of proceeding to judgment. Some of the perceived uncertainties and risks for respondents stemmed from the potential availability of market-based causation to plaintiffs as a method of establishing causally connected loss – a theory of causation that, until recently, had never been tested by the Australian courts. These conditions cultivated an environment in which Australian companies that were the subject of securities class actions were inclined to pay ‘go‑away’ money to settle the proceedings before trial.
However, the landscape of securities class actions in Australia experienced a significant change in 2019 when the Federal Court of Australia delivered the first securities class action judgment in the landmark case of TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v. Myer Holdings Ltd [2019] FCA 1747 (Myer). Myer found in favor of the respondent, and since then, all five shareholder class actions that have proceeded to trial have had the same result. This series of recent judgments has triggered a sharp decline in the filing of new securities class actions in Australia, as respondents are emboldened to defend the case to trial, plaintiffs await further guidance to navigate the evidentiary hurdles set by the Courts, and litigation funders direct their capital to other types of class actions.
Reasons for Case Losses
The reason each of the securities class actions taken to trial in Australia produced a result favoring the respective respondents is case-specific. However, an overarching theme in at least four of these decisions is plaintiffs’ failure to prove causation, loss, and damages. In circumstances where shareholders did not expect that these elements would be tested at trial, it suggests a potential failure to frame and lead their cases, which commenced during Australia’s ‘happy hunting’ days of securities class actions.
Causation – Failure to Link Misconduct to Share Price Movement
For applicants to secure an award of damages, courts require proof that the alleged non-disclosure of material information to the market and/or misleading or deceptive conduct in fact caused the respondent’s share price to be inflated artificially throughout the relevant period.
One of the overarching reasons why Australian shareholders have failed to secure an award for damages is their failure to establish a direct link between the pleaded breaches of the law and quantifiable economic loss suffered by shareholders as a result of the respondent’s contraventions (Myer).
In circumstances where multiple pieces of information may influence share prices, isolating the impact of one misstatement or non-disclosure through expert evidence has proven challenging. To make matters more difficult, the decision of the Full Court of the Federal Court of Australia in the matter of Zonia Holdings Pty Ltd v. Commonwealth Bank of Australia Limited (No 5) [2024] FCA 477) (CBA) highlights that Courts will not ‘strip out’ the impact of confounding pieces of information so as to pinpoint the market reaction to the disclosure equivalent to the pleaded information. The onus remains on shareholders to do so through expert evidence.
Quantification of Loss – Flawed Expert Evidence
Once causation is established, shareholders must rely on forensic economic evidence to quantify the artificial inflation of the respondent’s shares as a result of its contraventions of the law.
To quantify loss or damage, plaintiffs will typically submit expert evidence in the form of event study or fundamental valuation analyses. However, event study or fundamental valuation analyses are useful to the court only if the correct assumptions are made, the appropriate counterfactual questions are proffered, and if experts isolate the effect of components of alleged material information on a company’s share price. It is fundamental flaws in these areas that have contributed to Australian shareholders’ failure to secure an award for damages at trial in recent securities class actions. Specifically, shareholders have been unable to quantify any damage or loss at trial in circumstance where:
- The counterfactual disclosure in their event study was flawed because it relied on hindsight analysis - that is, an assumption that the respondent ought to have disclosed the exact information that triggered a fall in its share price, despite it not being possible for the respondent to have known that information at the point in time it is alleged that it ought to have made disclosure to the market (Crowley v. Worley Limited(No 2) [2023] FCA 1613) (Worley);
- They have taken an “all or nothing” approach to their event study resulting in a situation where they have introduced insufficient evidence to test alternative counterfactual disclosures the Court has deemed appropriate on the facts of the case (Worley). The recent judgments suggest that shareholders are strictly held to their pleaded case by the courts; and
- They have failed to demonstrate the “economic equivalence” between the information that caused respondents’ share price to decline on one hand (for example, that a regulator was commencing civil penalty proceedings against the respondent), and the information they say ought to have been disclosed at an earlier date on the other hand (for example, that there was a possibility that the regulator would commence civil penalty proceedings against the respondent) (CBA).
The recent case law makes plain that proving causation, loss, and damages in shareholder class actions in Australia is no easy task and requires nuanced expert evidence.
A Roadmap for Success
Despite the current circumstances, plaintiffs may yet rebound. The most recent judgment delivered by the Full Court of the Federal Court of Australia in CBA offers some helpful guidance for shareholders to navigate the complexities associated with proving their cases - particularly in cases where it is difficult to separate the effects on the respondent’s share price of various pieces of bad news released around the same time.
Helpfully, the Full Court in CBA did not accept that it was “impossible to try and discern the contributions to the price drop referrable to the information that was substantially the same as the pleaded information,” and opined that strict precision is not required. Rather, it suggested two types of information on which shareholders can rely to supplement expert evidence: (a) market reactions to the disclosure of qualitatively similar information by other listed companies; and (b) market reactions and commentary from brokers and analysts in response to the relevant disclosure. Although a departure from the mathematic rigor commonly expected in forensic economic analyses, this information would allow shareholders to provide at least a viable estimate of “the extent to which an observed price reaction to publicized ‘bad news’ can sensibly be attributed to the wrongdoing in question.”
With this guidance, the Court provided its clearest indication of the pathway to success for Australian shareholders in securities class actions. Following this guidance, and preparing expert evidence appropriately, will further assist shareholders in future suits.