Latest shareholder class action judgment yet another win for the defendant company
The Federal Court of Australia has recently handed down Australia’s third ever securities class action decision via Bonham as Trustee for the Aucham Super Fund v Iluka Resources Ltd  FCA 71. As with the two shareholder class action judgments that preceded it, the decision was a win for the defending listed entity.
Iluka Resources Limited (Iluka) is an ASX listed mining and resources company. On each of 23 February 2012, 12 April 2012, and 8 May 2012, Iluka published forecasts, which included forecasts as to sales volume (together, the Announcements).
All Announcements suggested soft market conditions, and some included disclaimers and commentary, explaining that the forward-looking statements within them were not guarantees or predictions of future performance. They also indicated that they were “provided to assist sophisticated investors with the modelling of the company, but should not be relied upon as a predictor of future performance”.
None of the Announcements made any representations as to price, meaning that investors would have to make their own assessment of price.
Mr Bonham was retired, but had invested in shares since the early 1990s. Mr Bonham subscribed to an investment information service known as “Stock Doctor”. Mr Bonham was not a sophisticated investor.
On 14 May 2012, Mr Bonham purchased 2,150 shares in Iluka for a total amount of $29,503.17 at a price per share of $13.68 after reading a series of positive reports from Stock Doctor about Iluka, which covered the dates of the Announcements. According to Mr Bonham, he relied on the Announcements to purchase shares in Iluka.
On 9 July 2012, Iluka published a forecast, which suggested significantly reduced sales volume from those set out in the Announcements.
After this, Iluka’s share price fell. Mr Bonham sold his shares at a price of $9.03 per share, for a total $19,384.55.
As the lead applicant to a class action against Iluka, Mr Bonham relevantly alleged that Iluka had engaged in misleading and deceptive conduct, and contravened the continuous disclosure laws by breach of section 674 of the Corporations Act and 3.1 of the ASX Listing Rules.
The misleading and deceptive conduct case rested on allegations that the Announcements contained express representations as to the sales that “Iluka expected to achieve”, and also implied representations that:
- there were reasonable grounds for Iluka to make the representations on forecast sales; and
- Iluka was not aware of any information that created a material risk that the relevant Announcements were inaccurate.
On the continuous disclosure claim, Mr Bonham contended that Iluka was aware of information that it had to disclose, but failed to disclose in the Announcements. According to Mr Bonham, that information was effectively that expected sales were materially lower than that which was set out in the Announcements.
There was also an allegation that IIuka knew that the forecasts in the Announcements were not made with reasonable grounds, and that the information in the announcements was not reliable.
Misleading and Deceptive Conduct
Any plaintiff bringing a cause of action for misleading and deceptive conduct must establish, amongst other things, that a representation was made. Where a claim involves a representation with respect to future matters, it must be shown that the representation was made without reasonable grounds.
Justice Jagot held that Mr Bonham failed to establish that the alleged representations were made and, even if there had been such representations, they were made on reasonable grounds.
Her Honour found that the alleged express representation concerning expected sales figures could not have been express and it was otherwise not implied, because Iluka had published disclaimers, and that “…the dominant message was that Iluka considered it appropriate to provide sophisticated investors with the best guidance it could at the time about sale sales it then expected, recognising that global economic circumstances made reliable predictions difficult.”
As to the reasonableness of the representations (if made), Her Honour assessed that Iluka did have reasonable grounds for making representations, given that the Announcements were based on the work of highly experienced and qualified personnel, who were “careful, diligent and continuously exerted themselves to ensure that the information that Iluka gave to the market was accurate and timely” and in these circumstances, “there needs to be something in the evidence before it would be concluded that those people had all reached conclusions lacking reasonable grounds”.
Mr Bonham also failed on causation. Her Honour observed that, even if the alleged representations had been made, and Iluka had contravened laws as alleged, Mr Bonham had not proved that such conduct was the cause of his loss. This was because, on Mr Bonham’s own evidence, he had relied on the Stock Doctor reports, rather than any of the Announcements.
Her Honour also found that Mr Bonham’s expert evidence did not properly address the impact of significant short-selling of Iluka’s shares, and that he had caused and/or contributed to his own loss by, amongst other matters, failing to take heed of the various warnings and disclaimers in the Announcements.
Justice Jagot also rejected Mr Bonham’s assertion that Iluka had breached its continuous disclosure obligations. Her Honour observed that section 674 of the Corporations Act and ASX Listing Rule 3.1, require that companies disclose information that is not generally available and that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities. Where an entity is aware of such information, it must inform the ASX of that information.
Given that her Honour had found that any alleged representations were made with reasonable grounds, “it follows that Iluka could not have been aware of the alleged contrary information alleged to have been subject to an obligation of disclosure.”
Her Honour commented that the continuous disclosure obligations are enlivened for an entity so long as an officer of an entity possessed information in the form of a conclusion that the officer ought to have formed had the officer acted reasonably.
As only the third shareholder class action to have proceeded to judgment, Bonham v Iluka Resources Ltd will likely be a reference point for many shareholder class actions of the future. Key takeaways are that:
- a careful and diligent analysis that forms the basis of public announcements will, all things remaining equal, act as a shield to allegations of contravention of statutory rules associated with misleading and deceptive conduct and continuous disclosure;
- where announcements are covered by disclaimers and qualifications, those disclaimers and qualifications will have important roles to play in reducing the listed entity’s exposure to loss on the announcements. However, for the disclaimers and qualifications to be effective, they will need to feature prominently, and be prepared for the specific circumstances. General disclaimers and qualifications that might be “reasonably able to be ignored” will not bring a defendant listed entity within the scope of protection;
- this is now the third shareholder class action where proving causation has proved problematic for plaintiffs. Moreover, findings that causation was not established on the basis that reliance on the Announcements was not proven, is not precisely consistent with a market-based approach to proving causation; and
- Courts will take into account a plaintiff’s own conduct. Such conduct includes a failure to take into account appropriate disclaimers, qualifications and warnings.