In the third decision delivered in a shareholder class action in
Background of the matter
Iluka is a large mining company and global supplier of mineral sand products. On
- was misleading or deceptive; and
- breached their continuous disclosure obligations.
The lead applicant purported that reliance on the sales guidance impacted their decision to purchase shares in the company (direct reliance). It is not clear to the authors if the lead applicant or shareholders pleaded that the market as a whole was impacted by the sales guidance (market-based causation).
The
The
Direct reliance and market-based causation
Direct reliance in a shareholder class action requires the claimant to prove they actually relied on the contravening conduct (i.e. statements) when deciding to acquire shares in the defendant company, and that the subsequent decrease in share price was directly related to the contravening conduct, resulting in loss to the shareholder.
Market-based causation is based on establishing that the price that the defendant's shares traded on the market was inflated by the contravening conduct, such that the claimant prima facie suffered loss by paying an increased price for the shares.
The Court has accepted this proposition,3 however, also suggested that it may still be necessary for individual shareholders to give evidence that, but for the contravention by an entity, they would not have purchased the shares (or not at the price paid) in order to establish loss.4
Causation and loss in Iluka
Because the Court found that no representations were made (and therefore they were not capable of being relied upon, either directly or by the market), the judgment was relatively quiet in relation to causation. While there is reference to the failed direct reliance case, in so far as it was held that the lead applicant did not rely on the sales guidance issued by Iluka when deciding to purchase the shares, unusually the judgment is completely silent on market-based causation. In previous cases where market-based causation has been alleged by the plaintiff, the but for test has been discussed by the
In Iluka, this test for market-based causation would be satisfied if the alleged contraventions materially contributed to the shareholders' loss, rather than the more stringent test of whether the contraventions were necessary for the loss.
The a factor test, if adopted, arguably offers a more appropriate test for market-based causation in cases of misleading or deceptive conduct. Firstly, it is more reliable and intuitive.7 For example, the but for test requires counterfactual speculation as to how a market would have responded but for a particular event. This can be a difficult exercise for a plaintiff to speculate and quantify the loss. The a factor test shifts the requirements from necessity to contribution and is not as easily defeated by a claim that it was not the only factor relevant to the plaintiff's loss.
Secondly, the test also avoids duplicative causation, as market-based causation often involves multiple factors that could have affected share prices.8 The court does not need to assess each separate factor and consider its relative relevance to the causal loss overall, as is required when assessing the causal conduct following the but for test.
Finally, the a factor test promotes the deterrence of all misleading or deceptive conduct by providing a broad opportunity for the conduct to be considered misleading or deceptive, regardless of whether it was necessary for the loss.9
Conclusion
By failing to address market-based causation, the Iluka decision has created uncertainty around what causal test the court would be willing to accept for shareholders to succeed with a market-based causation claim. It is only a matter of time before there is a substantial decision on this point, however, until this occurs, the law on market-based causation remains unsettled.
This article was originally published in the
Footnotes
1 Following Crowley v
2 Bonham v
3 In the matter of
4
5 In the matter of
6 Henville v Walker [2001] HCA 52, [61] and [106].
7
8 Ibid.
9 Ibid.
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