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Australia – US-Style ‘Fraud On The Market’ Shareholder Actions: Has Pandora’s Box Been Opened?

19 March, 2015


Legal News & Analysis – Asia Pacific – Australia –  Insolvency & Restructuring


What You Need To Know


  • The Federal Court of Australia has left open the possibility of market-based causation or ‘fraud on the market’ as a way to prove loss in shareholder actions.
  • Market-based causation will also be considered by the Supreme Court of New South Wales later this year when it delivers judgment in shareholder proceedings against the liquidators of the HIH Group.
  • The ASX Listing Rules and the continuous disclosure obligations at times create differing obligations.


What You Need To Do


  • Consider the implications of the Court’s findings in relation to continuous disclosure obligations.
  • Consider further developments in the market-based causation.




The Federal Court of Australia in the decision of Grant-Taylor v Babcock & Brown Limited (in liquidation) [2015] FCA 149 (4 March 2015) has for the first time opened the possibility for an investor in a publicly listed company to prove loss through a market-based causation theory. Although the comments are obiter dictum, Justice Perram has considered it possible, in certain circumstances, for shareholders or investors to claim loss arising from the conduct of the company without any proof of reliance on particular information that misled the investor.




The proceedings were brought by a group of 78 shareholders of Babcock & Brown Ltd (BBL) as an appeal under section 1321 of the Corporations Act 2001 (Cth) (the Act) against the decision of Mr David Lombe of Deloitte, the liquidator of BBL, to reject their proofs of debt. The former shareholders of BBL asserted that they were misled by the failure of BBL to disclose certain information prior to its collapse in 2009 in breach of the ASX Listing Rules and the continuous disclosure provisions of the Act.


The plaintiffs claimed that as a result of nondisclosures they purchased shares in BBL at an inflated price. The plaintiffs all bought shares in BBL between 21 February 2008 and 13 March 2009 at a time when the shares were trading between AUD 16.76 and AUD 0.33.


The four alleged non-disclosures that were said to give rise to an overvaluation of the shares included that:


  • The 2005, 2006 and 2007 final dividends for the financial years were unlawfully paid out of capital contrary to section 254T of the Act;
  • The financial reports for the 2005, 2006 and 2007 financial years did not give a ‘true and fair’ view of BBL’s financial position;
  • The final dividend in 2007 had been paid out of borrowed funds from asset revaluations; and
  • By no later than 29 November 2008 BBL’s directors knew that it was insolvent.


Decision Of Justice Perram


Justice Perram rejected each of the plaintiffs’ allegations finding:


  • In respect of the final dividend claim, the breach was technical and of no economic significance to the shareholders of BBL;
  • Though the financial reports of BBL did not give a ‘true and fair’ view, BBL was not required to disclose the information that had no financial consequences for the value of shares in BBL;
  • The claim that dividends were paid out of borrowings from asset revaluations failed for want of evidence; and in any event, the information was already adequately disclosed in the financial reports; and
  • In respect of the insolvency allegation, the directors of BBL did not know that BBL was insolvent as at 29 November 2008. His Honour found that shareholders had suffered no loss as a result of BBL’s conduct noting [at 218]:


“[T]he plaintiffs have suffered no loss in relation to these non-disclosures. Whilst it is, no doubt, distracting that the plaintiffs lost money because of the collapse of BBL, they did not lose a single cent as a result of the events surrounding the payment of the 2005-2007 final dividends. They lost money because of the global financial crisis in 2008.”


Continuous Disclosure Obligations


Despite rejecting the claims of the plaintiffs, in arriving at its decision the Court considered the tension between the obligations under the ASX Listing Rules and the continuous disclosure provisions of the Act. Relevantly, the Court held that:


  • The ASX Listing Rules require broader disclosure than section 674 of the Act. Even if price sensitive information is already publicly available, the Listing Rules require disclosure;
  • Section 677 of the Act should be read in light of its ordinary language and the term ‘securities’ should be read more narrowly than the definition in section 92(3) of the Act;
  • The phrase ‘commonly invests in securities’ in section 677 should be read as meaning an investor with “a degree of sophistication which might be expected from those who have more than a passing or occasional interest in the activities of securities exchange” but should not be limited to only professionals that derive income from investing activities;
  • Listing Rule 3.1 is not engaged where the directors of a company should have, but did not, realise the implications of information of which they were aware;
  • Sections 674 and 677 work in tandem. However, 674(2) can operate independently of section 677 and additional evidence may be required to establish a breach of section 674(2) independently of section 677;
  • Section 674 assumes the existence of a price effect on the market of the information to be disclosed. In determining whether the information is market sensitive, the underlying context of the alleged infringement is relevant in assessing it’s price effect; and
  • In analysing whether the information has a material effect on price in accordance with section 677, an objective test is applied at the time the alleged disclosure should have occurred. However, the use of subsequent events may be utilised a cross check. Such an approach appears inherently inconsistent and requires further clarification by the Court.


Market Based Causation


Although the plaintiffs were unsuccessful, Justice Perram still considered in obiter whether shareholders could recover loss when it is alleged that they bought shares at an inflated price caused by a company’s failure to disclose information.


His Honour indicated that in cases brought under section 1317HA and 1321 for loss suffered as a result of breaches of sections 674-677 of the Act, direct reliance was not required. In particular he indicated that:


  • Whilst reliance is a sufficient condition for establishing causation, it is not a necessary one;
  • Allegations for loss under sections 674-677 of the Act are not precluded because an individual shareholder may know of the misleading nature of the alleged conduct; and
  • Where an individual shareholder is aware of the undisclosed material, they cannot recover for their loss.

Where To From Here

Justice Perram’s findings, though in obiter, create a significant departure from the established case law in shareholder actions. Though his Honour’s findings are not binding in future cases, they do provide an insight into where the law may be heading in this area.


There are currently a variety of shareholder claims on foot against both insolvent and ASX listed entities. It will be interesting to see whether any of those matters progress to a final hearing, or are resolved prior. In any event, the issue will be considered again when Justice Brereton delivers his judgment in the HIH shareholder actions.


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For further information please contact:


Joseph Scarcella, Partner, Ashurst

[email protected]


Jemaya Barlow, Ashurst

[email protected]


Jakeob Brown, Ashurst

[email protected]


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