This decision signals acceptance of market-based causation to recover compensation for loss arising from a failure to disclose information in accordance with continuous disclosure obligations, without having to prove reliance on the non-disclosure in deciding to invest. As the relevant comments were obiter dicta, the decision does not definitively clarify the current uncertainty, but it does signal potential acceptance of market-based causation into Australian law in the future. We will monitor future cases on this issue.
A group of over 70 investors (Investors) who purchased shares in Babcock & Brown Limited (BBL) between February 2008 and March 2009 alleged that they had paid an inflated price for the BBL shares (and therefore suffered loss) because BBL had failed to disclose certain information in breach of its continuous disclosure obligations.
The Investors claimed that BBL failed to disclose that:
- its final dividends for 2005, 2006 and 2007 had been unlawfully paid out of capital in breach of section 254T of the Corporations Act 2001 (Cth) (Act) (in its then form). Permann J found that while technically the dividends had not been paid out of BBL’s profits and were therefore paid in breach of section 254T, that was “economically irrelevant” to the value of the traded BBL shares;
- its 2005, 2006, and 2007 financial reports did not give a true and fair view of its financial position (because they failed to disclose the above). Permann J found that while the financial reports did not technically give a true and far view, there was no requirement for BBL to disclose information that had “no financial consequence for the value of BBL shares”;
- the 2007 final dividend had been paid out of funds borrowed on the back of asset revaluations. Permann J found that there was insufficient evidence that the dividends were paid out of borrowings from asset revaluations (and, in any case, there was adequate disclosure of this point in the financial reports); and
- by 29 November 2008, it was insolvent. Permann J found that on the evidence, BBL was not aware that it was insolvent on 29 November 2008. Permann J found that to show awareness, the Investors needed to show either that the insolvency was actually known to, or should have become known to, the BBL directors or management, or that an opinion that BBL was insolvent existed and should have become known to the BBL directors or management.
Despite finding against the Investors, Permann J went on to consider (in obiter dicta) the current position of market-based causation in Australia (ie whether an investor could recover when it is alleged that they bought shares at an inflated price caused by a listed company’s failure to disclose information to the market) and noted that:
- the relevant provisions concerning damages resulting from breaches of sections 674 to 677 of the Act (sections 1317HA and 1325) do import a notion of causation and whilst reliance is a sufficient basis for establishing causation, it is not a necessary one;
- section 674 requires disclosure of market-sensitive information where it would be expected to affect price, and as such, the section assumes a price impact on the market in general;
- while a plaintiff may not recover where it knows of the misleading nature of the alleged conduct, there is authority for an assertion, at least in principle, that where A misleads B and B in consequence misleads C, C is not necessarily precluded from recovering from A. The scenario in this case where BBL (A) is alleged to have misled the market (or many Bs) which bid up the price and caused loss to the Investors (C) does not differ relevantly from that assertion; and
- while 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 like this one.