A recent Federal Court decision means that companies should be aware more than ever before of any public statements which might trigger an action for preliminary discovery. The decision creates a new level of concern for companies that their confidential internal documents may be produced to prospective applicants before commencement of formal legal proceedings.
On 18 May 2018, Gleeson J handed down judgment in McFarlane as Trustee for the S McFarlane Superannuation Fund v IOOF Holdings Limited  FCA 692. The decision enabled McFarlane, a prospective applicant for a shareholder class action, to obtain numerous documents (including board minutes and board papers) from IOOF Holdings Limited (IOOF) in relation to allegations of misconduct following publication of articles in the Sydney Morning Herald (SMH) that alleged corporate misconduct by employees of IOOF to consider whether to commence legal proceedings.
The decision is likely to be of concern to financial institutions in the midst of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services, in which evidence of misconduct being made publicly available (or commented upon in the media) may place companies at risk of extensive preliminary discovery for potential class action claims.
Between 20 - 27 June 2015, a series of articles published in the SMH reported various allegations of corporate misconduct, insider trading and front-running by employees of IOOF dating back to 2009. The articles cited internal reports and emails, as well as a report prepared by PwC which investigated the alleged offences. IOOF was later called before the Senate Economics References Committee, Scrutiny of Financial Advice Inquiry (Senate inquiry) to respond to questions about the alleged corporate misconduct.
McFarlane, who held 2,000 shares in IOOF, proposes to commence an action alleging that, during the period from the publication of the first SMH article until the date of the appearance of the Senate inquiry, IOOF's share price experienced a significant fall as a result of IOOF's misconduct.
McFarlane subsequently filed a preliminary discovery application, in order to decide whether to commence a representative action on behalf of persons who acquired shares in IOOF between 1 March 2014 and 5 July 2015, seeking compensation for losses suffered as a result of IOOF's alleged breaches of continuous disclosure obligations and/or misleading or deceptive conduct.
Outcome and reasons
McFarlane requested preliminary discovery of a wide range of documents. His Honour accepted that McFarlane had a reasonable basis for believing that he may have a right to obtain relief (on the basis of the SMH articles and evidence given at the Senate inquiry), and that the information currently available to McFarlane was insufficient to enable to him to determine whether to commence proceedings.
However, because the documents sought by a prospective applicant must be 'directly relevant' to the question of a right to obtain relief, his Honour limited the documents discoverable by reference to the specific instances of alleged misconduct identified in articles published in the SMH and the evidence before the Senate inquiry, and did not allow for a wider discovery regarding any similar potential misconduct in the relevant period.
Nonetheless, the orders granted preliminary discovery of any documents or communications which concerned the relevant allegations including:
any documents raising the allegations reported in the SMH articles;
reports, communications and any other documents setting out the findings from any investigations by IOOF, PwC, or any other entity as to whether any of the alleged misconduct occurred;
minutes and board papers evidencing any action taken as a result of any of the alleged misconduct; and
notifications to industry regulators, reviews of compliance measures and controls and independent investigations conducted in relation to the issues raised in the SMH articles.
[Source: McFarlane as Trustee for the S McFarlane Superannuation Fund v IOOF Holdings Limited  FCA 692]