The United States has long been the primary home for securities class actions around the world. This trend, however, was curtailed to some degree with the Supreme Court decision in Morrison v. National Australia Bank, 130 S. Ct. 2869, 2886 (U.S. 2010), which made it more difficult for international litigants in securities class actions to sue in the United States. This has paved the way for the growth of Australia’s securities class action regime.
Morrison involved a claim by a foreign investor against a foreign company, listed on a foreign Securities Exchange for alleged misconduct in breach of Rule 10b-5 and Section 10(b) of the Securities Exchange Act (anti-fraud provisions). Although National Australia Bank (NAB) shares did not trade directly in the United States, they were available on the secondary market by way of American Depository Receipts. The plaintiffs were Australian citizens seeking to represent a class of foreign purchasers. They claimed that a mortgage servicing company purchased by NAB and located in Florida had knowingly manipulated the firm’s financials.
The critical legal issue in the case was whether the conduct alleged by the plaintiffs had a sufficient nexus to American law. The decision of the Supreme Court turned on the proper interpretation of a statutory provision that is silent about whether it applies extraterritorially. In ruling that the provision has no extraterritorial application on the basis of a general presumption against extraterritoriality, the Court overturned more then 40 years of lower court authority and established a new transactional test confirming that the anti-fraud provisions apply only to the purchase or sale of securities listed on a U.S. exchange or where the purchase or sale occurred in the U.S. This substantially limits the scope for foreign investors to use the U.S. courts to bring claims against foreign issuers to recover losses from purchases on foreign securities exchanges. As a result, securities claims are now more likely to be brought in non-U.S. jurisdictions. Australia is an attractive jurisdiction to bring such claims.
Australia’s class-action regime is notoriously plaintiff-friendly, and has been described as “one of the most liberal class action regimes in the entire world” (Professor G. Miller, ‘Some Thoughts on Australian Class Actions in light of the American Experience’ in the Hon. Justice K. E. Lindgren (ed), Investor Class Actions, Ross Parsons Centre of Commercial, Corporate and Taxation Law (2009) 2 at 4). In brief, class actions are generally commenced under the Federal Court of Australia’s (FCA) “representative proceeding” regime set out in section 33C of the FCA Act 1976 (Cth), which provides that where: (i) seven or more persons have claims against the same person; and (ii) the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances; and (iii) the claims of all those persons give rise to a substantial common issue of law or fact; a proceeding may be commenced by one or more of those persons as representing some or all of them.
The Australian class action procedure has no certification requirement. Instead, plaintiffs commence the suit as a representative action and define the parameters of the class themselves (so long as they meet the threshold requirements listed above); the onus is on the defendant to show that the case should not proceed as a class action. Australia’s “opt out” provision is one of the cornerstones of its class action system—once the representative plaintiff defines the class, every person who falls within the class definition is a group member unless and until he or she opts-out of the proceedings. If, after receiving notice of the right to “opt out,” a member fails to do so by the specified date, he or she remains a group member in and will be bound by the outcome of the class action. Shareholder class actions in Australia are typically premised on allegations that a company’s disclosure (or non-disclosure) of material information was misleading or deceptive and in breach of its continuous disclosure obligations under Australian law. Australia’s corporate regulations require companies to “immediately” disclose all information that a reasonable person would expect to have a material effect on the price or value of the company. This obligation of continuous disclosure means that a plaintiff is not required to establish that a failure to disclose was intentional (subject to certain exceptions, including confidentiality). Under the ASX Listing Rules, a company is “aware” if a director or executive officer “has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties as director or executive officer of that entity” (Rule 19.12).
Claims based on a failure to comply with disclosure obligations are generally accompanied by a corresponding action for breach of the statutory prohibition of misleading and deceptive conduct. This is a powerful claim: there is no need to demonstrate intention, negligence, fraud, or dishonesty.
Reliance and “Market-Based Causation”
In U.S. law, the “fraud on the market” theory is a rebuttable presumption that shareholders can rely on the integrity of the market price when making investment decisions in open market transactions (Basic v. Levison (1988)). Reliance and causation are presumed: i.e., any misstatement to the market is presumed to affect the price of the stock. Any “showing that severs the link between the alleged misrepresentation and either the price paid or price received or his [or her] decision to trade at a fair market price will rebut the presumption of reliance.” By dispensing with the need for proof of individual reliance, the “fraud on the market” theory also enables security class actions to be certified (Federal Rules of Civil Procedure).
Plaintiffs in Australia have sought to adopt the same approach. Until recently, it was not known whether Australian courts would embrace the “fraud on the market” theory because all previous securities class actions have settled before judgment. The recent first instance decision of HIH Insurance Ltd (In Liquidation) & Ors  NSWSC 482 (HIH Insurance), suggests that Australia is willing to embrace this approach. In that case, Brereton J ruled that direct reliance need not be established where: (i) an entity has overstated its financial results to the market; (ii) the market was deceived into a misapprehension that being the entity was trading more profitably than it really was and had greater net assets than it really had; (iii) that shares traded on the market at an inflated price; and (iv) investors paid that inflated price to acquire their shares, and thereby suffered loss. In such cases, the burden falls upon the defendant to prove that a plaintiff knew the truth about, or was indifferent to the contravening conduct but proceeded to buy the shares nevertheless.
Given the plaintiff-friendly aspects of Australia’s representative proceedings, and the recent developments in other jurisdictions, like the U.S., Australia is now poised to become a forum of choice for plaintiffs seeking redress in the world of securities class actions.