In transactions such as capital raisings, there is the potential for shareholders to suffer economic loss when share prices fluctuate. Shareholders who suffer loss might seek compensation from those who coordinated the capital raising, such as the investment banks who acted as lead managers and underwriters, and the company itself. But the courts will only find that a defendant owes a duty of care to a plaintiff who has suffered pure economic loss in limited circumstances – and without a duty of care a negligence action cannot succeed. So when will those involved in a capital raising be exposed to liability in negligence to a shareholder who has sustained a loss?
In RinRim Pty Ltd v Deutsche Bank AG [2017] NSWCA 169 a shareholder brought a claim in negligence against a company and three joint lead managers and underwriters which carried out a capital raising by means of an Accelerated Renouncable Entitlement Offer (AREO). The New South Wales Court of Appeal held that neither the company, nor the joint lead managers and underwriters, owed the shareholder a duty of care in the circumstances.
The question of whether a duty of care arises in a novel situation will always be fact dependant, but one of the key elements in establishing such a duty of care is showing that the plaintiff is vulnerable (in the sense of being unable to take steps to protect itself from any economic loss which might be caused by the defendants' conduct). This was the focus in this case. Here the shareholder "was not vulnerable in the relevant sense" and this presented an "insurmountable barrier to its contention that the defendants owed a duty of care". Among other things, the shareholder was a sophisticated investor and it could have protected itself by examining the available information and obtaining advice from its own financial advisers.
Shareholder excluded from an Institutional Offer of shares under a capital raising
The AREO here involved two tranches: an Institutional Offer and a Retail Offer, both of which were followed by an automatic sale in a bookbuild of any entitlements not taken up. The Retail Offer closed one month after the Institutional Offer, during which time the share price fell sharply, with the result that those who participated in the Institutional Offer and renounced their entitlements made substantially more than those who participated in the Retail Offer.
The shareholder was only offered shares under the Retail Offer but alleged that it was eligible to be offered shares under the Institutional Offer, and the underwriters and joint lead managers had a duty to make reasonable attempts to identify this and contact it. It asserted that, had it been contacted, it would have taken steps to participate in the Institutional Offer, and by being excluded it sustained a loss of more than $4 million.
No duty of care
The shareholder was unsuccessful primarily because, even if the company and the lead managers and underwriters owed a duty of care, the shareholder failed to establish that any breach of duty caused it to suffer a loss (as on the facts the shareholder would not have entered into the Institutional Offer if invited). Nevertheless, the Court of Appeal went on to address whether the defendants owed the shareholder a duty of care, although not comprehensively.
The Court considered the High Court decisions in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 and Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 (2014) 254 CLR 185. These cases establish that where in pure economic loss cases a plaintiff seeks to demonstrate the existence of a duty of care in novel circumstances, the plaintiff’s vulnerability to loss caused by the defendant’s negligence is an extremely important if not determinative consideration. “Vulnerability” in this context refers to the plaintiff’s inability or limited ability to take steps to protect itself from economic loss by reason of the defendant’s conduct. This may be by contractual arrangements or otherwise.
In this case, the shareholder "was not vulnerable in the relevant sense". Among other things, the shareholder knew some months before the capital raising, following an announcement to the ASX, that the company intended to raise capital by means of an AREO and that the AREO would involve an Institutional Offer and a Retail Offer. The shareholder also had ways of obtaining information about what the AREO involved, including internet searches, and could have sought advice from its financial advisers. It was able to protect itself by seeking out participation in the Institutional Offer.
Investment banks will no doubt take comfort from the decision, as well as the decision of the primary judge, both of which demonstrate a reluctance to impose a duty of care in this situation. The primary judge acknowledged that the outcome of the AREO process was "dependent on the vagaries of the market" and observed that to impose a duty of the kind alleged might make underwriting more expensive, or otherwise make AREOs unattractive as a form of capital raising and therefore less obtainable.
At the time of going to print, a special leave application has been filed but not yet listed.
