In the following Alert, Partner Nicole Radice, Special Counsel Peter Burge and Law Clerk Rachael Stowasser briefly discuss Caason Investments Pty Limited v Cao (Caason Investments), a decision likely to be of significance to company directors and investors alike.
The recent decision of the Full Court of the Federal Court in Caason Investments marks a significant development in the adoption of market- based causation into Australian law, as a basis for recovery by investors where companies have breached their disclosure obligations. In upholding the appeal, the Federal Court granted leave to the applicants to plead market-based causation for misstatements, omissions and misleading and deceptive conduct claims. The claims allege that the representations made by Arasor, a listed ASX company, misled the market in relation to the company’s financial position, leading the market to overvalue the company’s share capital. Investors seeking to recover against Arasor were not required to prove actual reliance on the statements contained in the prospectuses and financial statements. As investors who purchase share capital rely on the market, reliance on the representations is presumed.
The decision to allow the appeal follows on from the theoretical acceptance of market-based causation in obiter dictum by Perram J in Grant-Taylor v Babcock & Brown Limited (In Liquidation) earlier this year. His Honour concluded that investors 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. In reaching His decision, His Honour reasoned that while reliance is sufficient to establish causation, it is not a necessary condition. Furthermore, as section 674 of the Corporations Act 2001 (Cth) requires disclosure of market sensitive information where it would be expected to affect price, the provision assumes the existence of a price effect on the market in general. His Honour considered it artificial to require reliance to be established in cases of non-disclosure. For those reasons, Perram J accepted 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.”
Market-based causation has been accepted in American jurisprudence since 1988. In Basic Inc. v Levinson, the US Supreme Court established a rebuttable presumption of reliance premised on the economic theory known as the ‘efficient market hypothesis’. The efficient market hypothesis maintains that the market price of shares reflects all publicly available information. Therefore, when an investor buys or sells stock at the market price, his or her reliance on all publicly available information may be presumed. The US Supreme Court recently reaffirmed market-based causation as the theory underpinning securities class actions in Halliburton Co. v Erica P. John Fund, Inc. In Halliburton, the appellant argued that market-based causation was no longer tenable in light of empirical economic evidence ostensibly showing that material, public information often is not quickly incorporated into stock prices. The Court explicitly rejected this argument, stating that the fact that the presumption was rebuttable indicated recognition by the courts that market efficiency was a matter of degree and proof and that the presumption did not rest on a binary notion of market efficiency.
The reasons for the decision in Caason Investments are yet to be published, and market-based causation is yet to be considered by the High Court. However, the decision of the Full Court of the Federal Court in this case may well encourage shareholder class action. Further, as shareholders will no longer be required to establish individual reliance on misrepresentations by companies in order to obtain relief, the decision should be viewed by companies and their Board’s as a salutary reminder of the need to rigorously and diligently consider their disclosure obligations, and in particular the accuracy of all representations and statements that they make to the market.