What you need to know
- In the earlier decision of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 (20 April 2016), Justice Brereton held that certain shareholders of HIH had suffered damage by reason of the misleading conduct of HIH Insurance Limited (In Liquidation) (HIH). See our earlier publication here.
- In that case his Honour considered whether 'indirect market based' causation or 'fraud on the market' allowed shareholders to prove loss or damage as a result of the conduct of HIH that artificially inflated its' share price. Justice Brereton held that the shareholders were able to prove their claims relying on 'indirect market based' causation and did not need to prove any direct reliance on the misleading conduct of HIH.
- In HIH Insurance (In Liq) [2017] NSWSC 380 (10 March 2017), Justice Brereton provides guidance as to how damages should be assessed for shareholders who purchased shares when the market price was inflated as a result of misrepresentations made by the company (as established in His Honour's earlier decision), then subsequently sold some of those shares within the same inflationary period.
- His Honour did not accept the approach taken in the United States in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (Dura), which would exclude shares bought in an inflated market, but subsequently sold within the same period, for the purpose of quantifying damages.
- Relevantly, Brereton J held that sales must be taken into account for the purpose of quantifying a plaintiff's true loss, and that a shareholder who acquired shares during the inflationary period, and subsequently sold those shares, must give credit against those damages for that portion of the sale price which reflects the inflationary percentage applicable at the time of sale.
- Additionally, his Honour resolved a practical issue facing shareholders who held both shares acquired "pre-period" and shares acquired during the inflated market period, and subsequently sold shares, given that they were fungible shares traded on-market without unique identifiers. Brereton J considered the LIFO approach ("last in, first out") to be more appropriate in the circumstances than the FIFO approach ("first in, first out") or proportionate approach (treating sold shares as being drawn from the pools of pre-period and inflated period shares proportionately).
Background
In the earlier decision of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482 (20 April 2016) Justice Brereton held that the impact of the contravening conduct was represented by the difference between the price at which HIH shares actually traded on the market, and the hypothetical price achieved by applying the price to book value at which they traded to an adjusted book (taking into account the contravening conduct). See our earlier publication here.
In HIH Insurance (In Liq) [2017] NSWSC 380 (10 March 2017), Justice Brereton considered whether sales (in the relevant inflationary period) should be taken into account in assessing plaintiffs' claims, and if so, which approach should be adopted by the court.
Share sales - Quantification and Identification
His Honour found unequivocally that sales must be taken into account in quantifying certain shareholders' loss who purchased shares in particular periods when the misleading and deceptive conduct or contravening conduct impacted the market.
In rejecting the Dura approach, His Honour was of the view that, merely because a shareholder bought and then sold shares during the relevant inflationary period, should not mean a shareholder's damages claim for that sold share is necessarily excluded. In particular, in a falling market a shareholder may not recoup the whole of their damages upon a sale of the affected shares, even if that sale occurs whilst the market remains inflated by the company's misleading conduct.
Instead, his Honour determined that sales are to be taken into account in that a plaintiff who, having acquired shares during the inflationary period, sold those shares during the inflationary period, must give credit against the damages to which it is entitled for that percentage of the selling price which reflects the inflationary factor applicable at the time of the sale.
In resolving the issue as to identifying which shares were sold, the alternate possibilities put before his Honour in submissions were:
- the LIFO approach (which would have the effect of maximising the likelihood of a plaintiff having to account for any inflationary benefit received on a share sale);
- the FIFO approach (which, inversely, would minimise that likelihood); or
- a proportionate approach (which, in effect, took a middle ground).
Ultimately, his Honour determined, for the purpose of segregating and identifying the loss ultimately caused to any plaintiff by the impact of the contravening conduct, that LIFO (which treats shares sold as coming from the latest purchases) was to be the approach adopted. His Honour adopted LIFO on the basis that it was the best methodology to focus attention on the shares acquired and sold (if they were sold) during the period while the misleading conduct was operative.
Justice Brereton recognised that the LIFO approach also appears to be becoming widely accepted in US class action litigation.
LIFO is now an important guide for parties attempting to settle class action litigation.
Authors: Tony Ryan, Partner; John Pavlakis, Partner; Jefferson Wong, Senior Associate; Frank Scisciolo, Lawyer; and Hiroshi Oya, Lawyer
