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Asia Pacific
Insurance & Reinsurance
Only the third judgement in a shareholder class action in Australia [1] was handed down on 7 February 2022. The defendant company (Iluka Resources) was successful on all counts and the judgment follows the other recent successes in the WorleyParsons [2] class action (where WorleyParsons was similarly successful on all counts) and the Myer[3] class action (where Myer lost on liability but was successful on causation). The judgment provides firstly, assurance to companies and their D&O insurers that shareholder class actions are not necessarily merely a cheque writing exercise and that robust defences will be accepted by the courts; and secondly it provides useful analysis of the factors that are required for a successful defence of a shareholder class action in Australia, including the importance of limitations and caveats on any forecasts that are made.
Patrick Boardman acted for the lead primary D&O insurer of Iluka and considers the case in further detail. Clyde & Co are very pleased to say that they have now acted for the lead insurer on the only two entirely successful shareholder class actions defences, with Clyde & Co partner, Christopher Smith acting for the primary D&O insurer in WorleyParsons.
Iluka Resources Ltd (Iluka) is a large mining and global supplier of mineral sands products (zircon, rutile and synthetic rutile which are mainly used in the manufacture of ceramic tiles and paint). The proceedings involved four ASX announcements regarding production/sales forecasts:
The proceedings were filed in 2018 and alleged that Iluka had contravened its continuous disclosure obligations under the Corporations Act and the misleading or deceptive conduct provisions of the Corporations Act, ASIC Act and the Australian Consumer Law in relation to its production and sales forecasts. The Applicant effectively alleged that Iluka should have disclosed the ‘true’ sales forecasts earlier or at least announced that the previous forecasts would not be met, which would have caused the share price to fall. This meant that shareholders who purchased in the relevant intervening period purchased at an inflated price.
Two essential issues in the case were:
The Applicant alleged that Iluka knew that it:
An interesting element to the case was whether the representations alleged by the Applicant had actually been made by Iluka. Iluka specifically denied that it had made any forecast representations in their announcements. The statements made were referable to sales, not expected pricing, revenue or profit, and importantly, were heavily caveated with limitations and disclaimers, including that:
(a) they were based on its current knowledge and understanding and in good faith;
(b) they were all expressed to be an indicative guide only;
(c) they should not be relied upon as a predictor of future performance;
(d) they were for the purpose of assisting sophisticated investors with the modelling of the company; and
(e) they wouldn’t be liable for the correctness and/or accuracy of the information nor any differences between the information provided and actual outcomes
The Judge held that the representations alleged by the Applicant were not made by Iluka as the meaning prescribed to them by the Applicant could not be maintained, particularly in light of the stated limitations.
The Judge distinguished Myer which held that “a reasonable person would not regard a standard form disclaimer as gutting the opinion or forecast of meaningful content or that disclaimers could negate the representations made.” In Iluka the disclaimers were not proforma, had been made in the context of identified difficulty in predicting the global economic position on which sales were dependent, were a prominent part of the documents and were said to be directed to sophisticated investors for modelling purposes. Further, the Judge determined that even if the representations were made, the Applicant did not rely on them. Instead, he relied on alternate analysis and research, such that the misleading and deceptive conduct case failed.
Notwithstanding the finding that the representations were not made, the Judge provided useful guidance on the evidence a company will be required to adduce to support a reasonable basis for any representations made[4].
In making an assessment about whether there was a reasonable basis, the Judge rejected Iluka’s proposition that a determination of reasonableness only required the Judge to ask “did Iluka apply a reasonable process, taking into account relevant information, to arrive at the conclusions that it did?” The Judge said that in answering the relevant question of whether or not there were reasonable grounds for the representations, the issue was one of substance, not merely process.
This meant that while the process on which a statement has been formulated is relevant, it is not determinative of the issue and there needs to be additional evidence before the court about how that process was considered and implemented. In Myer, Beach J referred to the directors’ ‘genuine assessment’ which supported the Judge’s finding that there needed to be a question of substance.
In Iluka the Judge held that:
“The evidence has not exposed any issue which Iluka failed to consider in formulating its public statements between February and July 2012. It has not exposed any lack of a genuine assessment of the relevance of the issue having regard to the circumstances as they existed at the time. It has not exposed any material for which in should be inferred that Iluka was unreasonably ignoring information that did not suit it. Rather, the evidence has exposed that the relevant Iluka personnel were highly experienced in the markets in which Iluka operated, and were careful, diligent and continuously exerted themselves to ensure that the information that Iluka gave to the market was accurate and timely.
This is not mere evidence of a “process” … Iluka’s evidence, however, goes well beyond that of a mere robust process (although the evidence does establish that its processes were robust).”
Iluka’s evidenced showed that its witnesses were: (a) all highly experienced in the industry; (b) the key personnel were well informed about all relevant issues and were careful and considered in their approaches; (c) had taken to account all issues of relevance and had the objective of being as accurate as possible in their guidance.
The judge also rejected the Applicant's claim for breach of continuous disclosure obligations on the basis that at the time of making the April and May representations, Iluka had reasonable grounds to make those statements and could not have been aware of contrary information that those forecasts were no longer reliable.
However, the Judge rejected Iluka's submissions that the continuous disclosure requirements "only require an opinion to be disclosed if the opinion is actually held by the directors or if the opinion is held by someone else and should have become known to the directors"
This important limitation on continuous disclosure arose from the previous decision in Myer and has been utilised extensively by Defendants since. However, the Judge considered those comments to be obiter and not binding on her. She held that if an officer had possessed information from which they reasonably ought to have formed a conclusion requiring disclosure, then a failure to disclose that opinion would contravene the continuous disclosure laws.
Her Honour also found that the class members would have failed to establish causation on the basis that the event study the class members relied on was based on faulty expert evidence.
An interesting observation made by the judge was that if a particular stock is being short sold it does not necessarily provide an inference that a company's sales guidance is unreasonable (i.e. it does not support the notion that all information must not have been disclosed).
This successful defence by Iluka, together with the successful defences in the Worley Parsons and Myer class actions provides companies, their directors, and insurers with confidence that shareholder class actions are not merely a cheque book writing exercise and that a court will take account of well prepared and relevant defences, with well-prepared witnesses, even about events 9 years earlier. It also provides an outline of how such cases can be avoided or limited by careful and considered limitations and restrictions on any forecasts provided.
Previously some Judges have been flippant enough to question whether shareholder class actions required directions for service of liability evidence, and whether all that was required was quantum evidence, given that all shareholder class actions had previously settled. Clearly that notion has been dispelled by recent judgments.
The judgment:
The successful defence also highlighted the importance of a good working relationship and involvement between the company, its defence team and its D&O insurers.
[1] Bonham as Trustee for the Aucham Super Fund v Iluka Resources Ltd [2022] FCA 71
[2] Crowley v Worley Limited [2020] FCA 1522
[3]TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747
[4] A sales forecast is a representation about a future matter such that the onus is on the company to establish that it had a reasonable basis for that forecast.
End