In Rural Funds Management Limited v Bonitas Research LLC the first Australian case to question the tactics of activist short sellers, the New South Wales Supreme Court shed light on the liability of activists for disseminating “research reports” and related materials, that are found to contain misleading and deceptive information.
The case concerned US-based short seller Bonitas Research LLC (Bonitas) and CEO and founder Matthew Wiechert who, through a series of tweets linking to two research reports, accused Australian company Rural Funds Management (RFM) of (among other things) fabricating its income, inflating financial performance and breaching its constitution. In the tweets, Bonitas called the company “a fraud” and “worthless”, which, together with the accusations in the reports resulted in a “significant drop” in RFM’s trading price on the ASX.
Ruling in favour of RFM, Justice Hammerschlag made three key findings:
- The Court had jurisdiction to determine the matter and short seller activists will be held accountable for statements intended to influence people in Australia. Accordingly, despite Bonitas’ and Mr Wiechert’s offshore position, the Court held that the Corporations Act and the ASIC Act encompassed the conduct alleged by RFM.
- The relevant statements were "false in material particulars and materially misleading” in contravention of the relevant sections of the Corporations Act. Bonitas had claimed that RFM had artificially inflated its income, dishonestly taken income to the detriment of the security holders of the Rural Funds Trust, and breached the Rural Funds Trust’s constitution in relation to the cap on management fees.
- Neither Bonitas nor Mr Wiechert contravened the prohibition against disseminating information about illegal transactions under s 1041D, as RFM’s transactions (about which Bonitas made the misleading claims) did not contravene sections 1041E and 1041F of the Corporations Act, and were accordingly not illegal.
The decision has important implications on the growing prevalence of short seller activism and the use of negative research reports. In particular:
- Courts will expect a greater degree of care from short sellers that publish information or claims.
- Efforts to circumvent Australian laws and / or the Court’s jurisdiction will be unsuccessful where statements are made with an intention to induce persons in Australia. This leaves open the question of subsequent enforcement.
- A corporate body may recover the costs of responding to the short seller campaign, though damages may not compensate for loss suffered by affected shareholders.