12 December 2007
Key Points:
The Dorajay decision could have far-reaching effects on takeovers and buyouts.
Dorajay Pty Ltd v Aristocrat Leisure Limited, also known as the Aristocrat class action, will result in an important judgment on two developing areas of law: continuous disclosure obligations and causation and damages in shareholder class actions.
Background
The Aristocrat class action was commenced in November 2003 and the hearing of stage 1 (liability and the damages claim of the lead plaintiff) by Justice Stone of the Federal Court of Australia concluded on 30 October 2007. Judgment is expected early in the new year.
The class action is on behalf of all shareholders who acquired an interest in shares in Aristocrat Leisure Ltd between 19 February 2002 and 27 May 2003 and who suffered loss as a result of Aristocrat allegedly overstating its profits and failing to disclose that it would not meet earnings forecasts.
The class action alleges contravention of the prohibitions on misleading and deceptive conduct in section 1041H of the Corporations Act 2001 (Cth), section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and section 52 of the Trade Practices Act 1974 (Cth) and that Aristocrat failed to disclose material information to the market in a timely way in contravention of section 674 of the Corporations Act.
Continuous disclosure obligations to be clarified
Aristocrat's defence is likely to require the Court to consider two important aspects of the continuous disclosure regime.
The Corporations Act gives the ASX listing rules legislative backing. Section 674(2) requires notification of information to the ASX when a number of prerequisites are met, including that in section 674(2)(b) which states "the entity has information that those provisions [of the listing rules] require the entity to notify to the market operator". Aristocrat has contended that the expression "the entity has" requires actual knowledge which would lessen the obligation as currently understood.
The operation of the "incomplete proposal or negotiation" exception to the ASX listing rules for continuous disclosure has also been raised. The provision has been extensively relied on in the takeover or buyout context to justify non-disclosure. Clarification of the provision will therefore have potential far-reaching effects.
Relaxing causation requirements
Dorajay has sought to argue that reliance on the impugned conduct by the person harmed is not necessary. Rather it seeks to rely on the existing case law on section 52 of the Trade Practices Act that has found that causation was satisfied when customers were misled by a trader so that they bought more of that trader's product and less of a rival trader's product so that the rival, although not misled, suffered loss or damage as a result of the customers' reliance. The reasoning is sought to be extended to the shareholder class action context by viewing the market as analogous to the customers.
Under this approach causation becomes easier to prove as individual shareholders do not need to demonstrate that they relied on a misrepresentation or omission, rather they need only show that the market relied, which will be presumed if the market is efficient.[1]
Aristocrat's response to this argument was that "third party reliance" was only sufficient to satisfy causation where the entity that suffers loss or damage does so without the need to do anything else, that is, no conduct on the part of that entity forms part of the causal chain. In contrast, if the allegation is that loss or damage is suffered because a transaction was entered into as a result of a misrepresentation, then the entity must prove reliance on that misrepresentation.
Calculation of damages
The methodology for the calculation of damages will affect the attractiveness of future shareholder class actions. Both sides agree that the share price had been inflated but Dorajay's solicitors have estimated damages could be as high as $396 million, while Aristocrat has stated they may be as low as $10 million.
The determination of the appropriate methodology will require the Court to grapple with a number of significant issues, including how the true value of an inflated share price is to be calculated, and distinguishing the effect of the wrongful misrepresentations or omissions from other information released to the market that impacts the share price.
[1] The media has suggested that the above argument means that the US securities class action doctrine, fraud on the market will be adopted in Australia. A more detailed discussion about fraud on the market theory is contained in Michael Legg and Ron Schaffer, "Sons of Gwalia Ltd v Margaretic - Encouraging shareholder claims and the fraud on the market theory" (2007) 35 Australian Business Law Review 390.
For further information, please contact Ron Schaffer and Michael Legg.
