De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liquidation) & Others  FCAFC 28
On 15 March 2012, the Full Federal Court in De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liquidation) handed down its decision holding that actual reliance had to be shown by a shareholder in actions brought for misleading and deceptive conduct in contravention of s52 of the Trade Practices Act 1974 (Cth) (TPA) (which is now s18 of the Australian Consumer Law).
Between August and December 2000, De Bortoli Wines Pty Ltd (DBW) made a series of over 60 acquisitions on the Australian Securities Exchange (ASX) of shares in HIH Insurance Limited (HIH), bringing its shareholding up to approximately 20 million shares at a total cost of $7.1m. HIH was placed into provisional liquidation in March 2001, rendering the shares effectively worthless.
On 9 February 2009, DBW submitted a proof of debt to HIH’s liquidators (the Liquidators) in the amount of $9,213,510.19. DBW alleged that the shares were acquired in reliance on misleading and deceptive information provided by HIH in breach of section 52 of the TPA, whether directly or indirectly. The misrepresentations were said to be contained in:
- HIH financial statements and reports;
- HIH media releases published by the Australian Securities and Investments Commission (ASIC) and the ASX;
- advice given by third-parties such as stockbrokers which had in itself been based on information provided by HIH to the public; and
- representations made by former officers of HIH as to the financial health of the company.
The Liquidators rejected DBW’s claims on the basis that:
- the $2,073,331 claimed for loss of shares purchased by related parties was not a loss to DBW; and
- in any event it had not been established that the shares purchased by DBW were purchased in reliance on the alleged misrepresentations.
DBW brought an action in the Federal Court, seeking to overturn the Liquidators’ decision.
Federal Court Decision
HIH admitted that certain of the documents referred to contained statements which were misleading, or likely to be. However, after consideration of extensive authorities1 Stone J held that, in order for DBW to succeed in its claim it was necessary for it to show that it was induced into each transaction in reliance upon the misrepresentations made or alleged to have been made by HIH.
DBW relied on the fact that the representations had been made, and the fact that it had purchased the shares, allowing (it claimed) an inference that the transactions were made in reliance upon the representations. Stone J accepted that this was possible in principle following a very old authority of Smith v Chadwick2 in which Lord Blackburn stated that:
“...if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such nature as would be likely to induce a person to enter into a contract, and it is proven that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement ...”
This inference is, however, rebuttable by other evidence. Stone J held that, as reliance was a question of fact, it must be weighed in the context of all of the evidence. Should there be evidence to show otherwise, the inference will be rejected.
It was held that there was sufficient evidence to show that DBW had not relied upon the alleged misrepresentations for the following reasons:
- Mr De Bortoli, the managing director of DBW, was unable to recall when he had reviewed the documents in which misleading statements had been made or point to any contemporaneous markings by him on those documents;
- Mr De Bortoli had been informed that a director of HIH was purchasing shares in the company and this was more likely to have prompted his acquisitions; and
- Mr De Bortoli was an experienced investor, and repeatedly asserted that he knew better than the market and relied on his own assessment, ignoring the negative market trend with respect to HIH.
Stone J also rejected a ‘fraud on the market’ argument - that had HIH not engaged in misleading and deceptive conduct, its shares would have ceased to trade and therefore could not have been purchased by DBW. This causation argument has not been accepted in Australia.
Appeal to the Full Federal Court
DBW appealed to the Full Federal Court on the basis that the primary judge had erred in her application of the relevant legal principles in:
- failing to give proper weight to the ‘fair inference of fact’ recognised in Smith v Chadwick; and
- applying an artificial or unrealistic test in determining whether to accept Mr De Bortoli’s evidence.
Neither party contended that the inference of reliance did not arise. Counsel for HIH merely pointed to the weakness of Mr De Bortoli’s evidence and the material which supported the primary judge’s findings. The heart of the matter was therefore whether the primary judge was in error in finding that Mr De Bortoli did not rely on the misleading and deceptive information.
The Full Federal Court held that there were five reasons why this finding was open to the primary judge and supported by evidence:
- Mr De Bortoli conceded that his initial purchase of shares in HIH (prior to any purchases by DBW) was prompted by the information received that Mr Adler was buying shares in HIH, not the documentation which contained the misleading statements;
- the purchases made from September 2010 onward were made in a falling market. Mr De Bortoli insisted that he knew better than the market, which was inconsistent with his claim to have relied upon the misleading statements;
- Mr De Bortoli maintained that he was unaware of the “considerable negative media coverage about HIH from mid September onward” despite stating that he looked at the Australian Financial Review ‘specifically’ which had contained a highly pertinent article. This called into question the credibility of Mr De Bortoli’s evidence;
- Mr De Bortoli was unable to provide any specifics of the alleged misleading representations made by HIH, his evidence of reliance was at a very high level, and the ‘thrust’ of his evidence was that his decisions were made on the basis of his own strategy as opposed to any reliance on the misleading statements; and
- although Mr De Bortoli asserted that he relied on statements made by Mr Clarke (General Manager, Public Affairs of HIH), these statements were bland and general in nature, a fact which Mr De Bortoli effectively conceded.
The Full Federal Court held that it was necessary for the shareholder to establish reliance on the misleading and/or deceptive conduct in order to establish that its loss was caused by such conduct. Although the Full Federal Court did not feel it necessary to consider whether the ‘fair inference’ of reliance arose, it notably did not reject it, but rather held that, on the facts, it was rebutted by the evidence presented.
In any case, it is clear that each shareholder must prove their reliance on misleading and deceptive conduct, and indirect causation by a class will not be sufficient to discharge that onus. This ‘fraud on the market’ theory raised at first instance is commonly found in shareholder class actions in the USA, and is increasingly prevalent in shareholder class actions being brought in Australia. Whilst the Full Federal Court did not address the theory, it has been discussed in previous decisions3 and the authority to date suggests it is not available in Australia.