23 Dec 2020

Shareholder class action update: can foreign residents be group members in Australian class actions?

By Ross McInnes, James Walker, and Aaron Moss

Impiombato (No 2) confirms it is possible for foreign residents to be group members in Australian class actions but leaves open some important questions of principle.

The Federal Court recently handed down its first judgment considering whether foreign residents can be group members of class actions commenced under Part IVA of the Federal Court of Australia Act 1976 (Cth).

In Impiombato v BHP Group Limited (No 2) [2020] FCA 1720, Justice Moshinsky dismissed an application by BHP Group Ltd (BHP Ltd) which sought to exclude foreign resident group members from bringing their claims within the class action. The judgment contains important statements of principle which suggest it is possible for foreign residents to be group members in Australian class actions. However, BHP Ltd's application was also dismissed for discretionary, case-specific reasons.

On 15 December 2020, it was reported that BHP Ltd is seeking to appeal the decision.

Fundão Dam collapse

Impiombato (No 2) relates to the collapse of the Fundão Dam at the Germano iron ore mine complex in Brazil on 5 November 2015. The failure of the Dam was the world’s largest recorded mine disaster, destroying two towns, killing 19 people and injuring many others, and spreading toxic wastewater across almost 700km of watercourses and into the Atlantic Ocean (by way of comparison, the Hume Highway between Sydney and Melbourne is 840km).

The Germano mine was owned by Samarco Minerção SA, which in turn was jointly owned by Vale SA and BHP Ltd (an ASX-listed company registered in Australia) and, possibly, though the Court did not finally determine this, by BHP Group Plc (BHP Plc, a London Stock Exchange (LSE)-listed company registered in England and Wales) through a subsidiary, BHP Brasil. At all relevant times, BHP Ltd and BHP Plc maintained a "dual listed company structure", through which the two companies operated as a single unified economic entity referred to as BHP. Under that structure, BHP Ltd and BHP Plc had identical boards of directors, unified senior management, and shareholders in BHP Ltd or BHP Plc had equivalent economic and voting interests in BHP.

Shortly after 5 November 2015, BHP Ltd made two announcements to the ASX about the Dam collapse. Following these announcements, the price of BHP Ltd shares listed on the ASX, BHP Plc shares on the LSE, and BHP Plc shares (a third BHP entity registered in South Africa, trading on the Johannesburg Stock Exchange (JSE)) declined significantly.

What does Impiombato (No. 2) tell us about non-resident group members?

The Dam collapse led to three class actions being commenced in Australia against BHP Ltd on behalf of shareholders under Part IVA of the Federal Court Act. As we noted last September, following an appeal to the Full Court, those three actions were later consolidated into a single action.

The proceedings allege misleading and deceptive conduct and continuous disclosure failures. The applicants allege BHP Ltd made misleading representations in annual reports and failed to disclose information about problems with the Dam. This conduct, and BHP Ltd’s ASX announcements about the Dam collapse, are alleged to have caused loss to BHP Ltd's Australian shareholders and to shareholders of BHP Plc on the LSE or JSE.

BHP Ltd’s application sought the exclusion of non-resident group members and/or the striking out of their claims on the basis that either the Federal Court Act did not apply to those persons or that the Court ought to exercise its discretionary powers to dismiss their claims. Justice Moshinsky dismissed BHP Ltd's application for three reasons:

  • "[f]rom the perspective of Australian law", Part IVA of the Federal Court Act applies to non-resident group members;
  • it was not in the interests of justice to exclude non-resident group members; and
  • the claims of the BHP Plc shareholders did disclose a reasonable cause of action against BHP Ltd.

"From the perspective of Australian law", Part IVA of the Federal Court Act applies to non-resident group members

Justice Moshinsky held that Part IVA and, in particular, section 33ZB (which provides for orders binding group members to the outcome of a class action) applies to and operates on, “all group members irrespective of their place of residence, unless they opt out of the proceeding.”

BHP Ltd's submissions on this issue relied upon the common law presumption that Commonwealth legislation (including the Federal Court Act) is not intended to apply outside of Australian territory with the result, BHP Ltd suggested, that non-resident group members were excluded from the class action regime.

Justice Moshinsky considered this submission “focuses on the wrong enquiry”. His Honour observed that the provisions of Part IVA contain no territorial limitations and are designed to provide a mechanism for the Court to hear and determine class actions otherwise within its jurisdiction. Where there was no doubt that BHP Ltd – an Australian company – was subject to the Court’s jurisdiction, and group members pleaded claims that the Federal Court could normally determine, it was irrelevant to the operation of Part IVA that some group members were not residents of Australia. Whether or not any future judgment or settlement in the Australian class action could be enforced in the UK or South Africa was a “separate question” of foreign law.

It was not in the interests of justice to exclude non-resident group members

To the extent that non-resident group members were within the scope of the Australian class action regime, BHP Ltd argued that the risk of those persons re-litigating the same issues in other jurisdictions meant the Court should use its discretionary powers in the Federal Court Act to exclude, at minimum, all those non-resident group members who did not register to participate in (and, therefore, agree to be bound by the outcome of) the proceeding.

Justice Moshinsky rejected this submission as inconsistent with the interests of justice in the proceeding, noting that the relief sought by BHP Ltd would "deprive the relevant Group Members", whom his Honour considered to have "arguable claims against BHP Ltd … of the ability to pursue their claims within the framework of [the] representative proceeding". His Honour noted that any benefits of the orders BHP Ltd sought may have proved illusory in any event, as it would remain open to excluded group members to commence separate proceedings in Australia.

Beyond these case-specific factors, Justice Moshinsky referred to BMW v Brewster [2019] HCA 45 where the High Court held that section 33ZF of the Federal Court Act (which enables the Court to “make any order [it] thinks appropriate or necessary to ensure that justice is done in the proceeding”) is an "essentially supplementary or gap-filling power" designed to advance the determination of the issues between the parties and ensure justice is done in the proceeding.

Justice Moshinsky considered that there was a “real question” about whether section 33ZF enabled the Court to make the orders sought by BHP Ltd when its application was not premised on ensuring justice was done in the present proceeding, but rather in relation to possible future proceedings. His Honour considered it was arguable that this was not a purpose which the Court's powers extended to protecting, especially when BHP Plc is not a party to the Impiombato class action.

Lastly, Justice Moshinsky noted that a registration process may be appropriate “(at least) to facilitate settlement discussions between the parties” but – there having been no discovery, no defence filed, and the issues not yet defined – that this would be “premature”.

The claims of the BHP Plc shareholders did disclose a reasonable cause of action against BHP Ltd

Lastly, Justice Moshinsky rejected BHP's submission that the claim made on behalf of the BHP Plc shareholders failed to disclose a reasonable cause of action.

Applying an orthodox analysis, Justice Moshinsky considered the claims made by BHP Plc's shareholders were novel, and so it was inappropriate to determine them at a preliminary stage and without the full factual context. Justice Moshinsky concluded the claims were novel and should be determined at trial as:

  • BHP's dual listing, single economic entity structure is unusual, such that the position of a shareholder of BHP Plc (vis-à-vis BHP Ltd) is arguably quite different from the position of a shareholder of a third party company; and
  • noting the breadth of the relevant statutory provisions, it is “at least arguable” that non-disclosure, or misleading representations, by BHP Ltd to the ASX and shareholders could have caused loss or damage, within the meaning of the relevant statutory provisions, to shareholders of BHP Plc shares listed on the LSE or JSE.

Consequences of the Impiombato (No 2) decision for foreign residents in Australian class actions

Justice Moshinsky’s decision in Impiombato (No 2) means, at least for the purposes of commencing a class action under Part IVA of the Federal Court Act, foreign residents can be group members in an Australian class action. The judgment confirms, again, that the “gateway” requirements to commence a class action in the Federal Court are undemanding.

The decision raises difficult practical questions for companies who may face class action proceedings. Close regard must be paid to group member definitions. There will be additional costs involved. Risk of exposure to litigation involving non-resident group members may need to be reassessed. In this regard, BHP's own circumstances offer a cautionary tale: shareholder register information in evidence before the Court suggested that in 2014 and 2015, for example, only about 46% of the beneficial owners of BHP Ltd shares were based in Australia.

The decision leaves open “arguable” or “real” questions about the scope and application of the Court’s discretionary power under section 33ZF of the Federal Court Act and the misleading and deceptive conduct and continuous disclosure provisions of the Australian Securities and Investments Commission Act 2001 (Cth) and the Corporations Act 2001 (Cth). If the Impiombato class action goes to trial, it will be the first time market-based causation will be applied to alleged losses on a foreign stock market.

The decision is now under appeal. Interestingly, the parties' arguments and Justice Moshinsky’s reasons mirror an earlier decision of the High Court in Mobil Oil Australia Pty Ltd v Victoria (2002) 211 CLR 1. There the High Court held that a class action commenced in Victoria could include claims by residents of NSW. Chief Justice Gleeson noted in Mobil Oil that “[t]he position of group members who may reside outside Australia was not explored”. There is every reason to think – given the recent history of questions about Part IVA ending up in the High Court and what is at stake for BHP Ltd – that Impiombato (No 2) may have a long appellate journey ahead of it.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.