The Federal Court of Australia has dismissed the shareholder suit against Babcock & Brown Limited (In Liquidation) (“BBL”) and its liquidator for losses arising from shares purchased in BBL (a publicly listed company on the ASX). The shareholders had purchased the shares between 21 February 2008 when the shares were trading at $16.76 per share and 7 January 2009 when they were $0.33 per share, when trading was suspended. BBL was placed into administration on 13 March 2009.

The judgment in Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149 was given by Justice Perram on 4 March 2015.

Background

The shareholder suit was a more or less a copy of a suit brought in August 2011 by BBL through its liquidator against the former directors of BBL and its auditor. That suit was for breach of directors duties by authorising dividend payments out of capital.[1] The directors and auditor mediated and settled that action on confidential terms and without admission of liability “to avoid the cost and inconvenience of litigation” in September, 2011.[2]

The settlement amount is not known, but the BBL accounts for the period recorded $40 million in ‘other income’, $7.5 million paid to a litigation funder and $5.8 million paid to creditors who had funded the liquidator.[3]

The 78 plaintiff shareholders launched their proceedings as a group action against BBL and the liquidator in 2012, after the liquidator had rejected their proofs of debt. They were armed with the knowledge that the liquidator of BBL had a pool of funds in hand.

The shareholder claims

The shareholders framed their case as the failure by BBL to disclose important information to the market in breach of its obligations under section 674(2)(b) of the Corporations Act 2001 (Cth) (“the Corporations Act”) and rule 3.1 of the ASX Listing Rules, in four respects[4]. One and two were variants of the ‘dividends paid from capital’ claim, three and four were fall-back claims. 

  1. There was a breach of s. 254T of the Corporations Act (since repealed in 2010) that ‘a dividend may only be paid out of profits of the company’. This claim was based on an alleged failure to disclose that the dividends in the 2005-2007 financial years had been partially paid out of capital. The claim failed because the information was of a kind that could have no impact on the share price, and was, in any event, generally available”.[5]
  2. The BBL financial reports for 2005-2007 did not give a true and fair view of its financial position because they failed to show that the dividends had been paid out of capital. The claim failed because this information did not need to be disclosed to the market because it had no financial consequence for the value of BBL shares.[6]
  3. The failure to disclose to the market on 29 November 2008 that BBL was insolvent. The claim failed, even though the liquidator had fixed that date as the date BBL was insolvent, because the directors were not aware BBL was insolvent within the definition in ASX Listing Rule 19.12. The Court said Its directors did not know that it was insolvent on that day ... and there was no opinion to that effect [to make them aware it was insolvent on that day].[7]
  4. The failure to disclose that the 2007 dividend had been paid out of funds borrowed on the back of an asset revaluation. The claim failed because it was not proven.

Loss and Damage (had the claims succeeded)

Justice Perram’s concluding comments on quantum and causation will be of great interest to all involved in shareholder suits for non-disclosure to the market, even though they were obiter.[8]

On quantum, the plaintiffs pressed for compensation because the shares had been purchased at an inflated value of 5% above market value because of the non-disclosure that the dividends were partly paid from capital and because the accounts did not present a true and fair view. The court rejected both of these submissions on quantum because the non-disclosures were economically irrelevant[9].

However, had the claim about insolvency succeeded, and had the plaintiffs contended that BBL [should have] disclosed it was insolvent on 29 November 2008 and that trading in its shares would have been immediately suspended ...then I would have awarded the plaintiffs who purchased their shares after 29 November 2008 damages equal to 74.7% of the purchase price paid.[10]

On causation, the Court found no causation: 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.[11]

The final comments on causation made obiter by Justice Perram are perhaps the most interesting of all. They go to whether a plaintiff must prove their loss had a direct causal link to the non-disclosure. They deserve careful consideration as this is the first judicial comment in Australia on this vexed issue about whether fraud on the market theory applies to shareholder actions in Australia:

whilst I accept that generally a plaintiff must show in a misleading conduct case that they would have acted in a particular way but for the conduct ... it is artificial to speak of reliance in non-disclosure cases such as the present[12]

Justice Perram then outlined this approach to shareholder actions for loss and damage arising from conduct falling under sections 1317HA and 1325 of the Corporations Act:

For those reasons I would accept that a party who acquires shares on a stock exchange can recover compensation for price inflation arising from a failure to disclose material required by s. 674 to be disclosed, so long as they are not themselves aware of the non-disclosed material.[13]

Final comments

In an ironic twist of fate, the liquidator of BBL has successfully defended his decision to reject proofs of debt lodged by the shareholders of BBL, by arguing the complete opposite to the claims he successfully pursued against the directors and auditor of BBL.

Subject to any appeal lodged by the shareholders, the liquidator has his cake and can eat it (too)!

By his concluding comments, Justice Perram has opened to door to the Australian courts adopting the fraud on the market theory which the courts in the USA have developed for shareholder actions for non-disclosure to the market.