In Re HIH Insurance Ltd (in liq)  NSWSC 482, the claims arose out of the acquisition of shares on the ASX following the publication of financial results by HIH Insurance Limited. Certain shareholders of HIH sought to recover losses against HIH and its subsidiaries for misleading and deceptive conduct, alleging the market was distorted by overstatements of operating profits in the reported financial results. The plaintiffs alleged, and HIH admitted, that the reported financial results were misleading or deceptive, or likely to mislead or deceive. The crucial issue in contention was whether the plaintiffs were entitled to claim damages on the basis of a claim of “indirect causation”, without proving their own direct reliance on the contravening conduct.
Three different groups of claims were identified by reference to three different periods in which HIH shares were purchased. The plaintiffs contended that HIH shares were acquired on the ASX at the then prevailing market price, and that this price was inflated due to the overstated reported financial results – conveying an overly optimistic impression of financial position and prospects to the market. The plaintiffs did not seek to prove that they were induced to purchase the shares by HIH’s misleading conduct.1
His Honour held that the chain of causation was as follows:2
- HIH released overstated financial results to the market;
- the market was deceived into a misapprehension that HIH was trading more profitably than it really was and had greater assets than it really had;
- shares were traded on the market at an inflated price; and
- investors paid the inflated price for shares, and thereby suffered loss.
It was held that this amounted to indirect causation in the present case and that direct reliance does not need to be established. Instead, plaintiff shareholders need only establish that the contravening conduct inflated the market, thus materially contributing to the outcome.
Justice Brereton evaluated the impact of contravening conduct on the share price by determining the difference between:
- the price at which HIH shares actually traded on the market; and
- the hypothetical price achieved by applying the price to book value ratio at which they actually traded to a book adjusted to correct misleading content.3
In this particular case, the plaintiffs were awarded 6.25%, 9.5% and 13% of the price paid for shares during the three respective periods.
Justice Brereton’s decision is the first time an Australian court has fully embraced the US approach of “market-based causation”. It follows the Full Federal Court of Australia determining in 2015, on an interlocutory application in relation to pleadings, that “market-based causation” was reasonably arguable.4
The long-standing uncertainty in Australia to date as to whether the Australian courts would embrace the “market-based causation” theory has been a significant factor in class action lawyers and funders not pursuing any continuous disclosure class actions through to final judgment to date. That has reflected the uncertainty as to whether it would be necessary for class action lawyers to establish that every member of a class action is required to establish reliance on the relevant misleading statements or omissions. Justice Brereton has answered that question in the negative – class action plaintiff shareholders do not need to prove they relied on misleading statements or omissions to establish loss. That significantly reduces the onus of proof on plaintiffs in continuous disclosure class actions, and increases the importance of ensuring that listed companies meet their continuous disclosure obligations.
Subject to any contrary decision from a court of appeal – whether in the HIH case or otherwise – the HIH decision will bolster the appetite of class action lawyers and funders to pursue continuous disclosure class actions through to final judgment.
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4 See link to our previous update on this issue.