Grant-Taylor v Babcock & Brown – causation and proof of loss in shareholder actions

Belinda RandallThe Federal Court has weighed into the debate about causation and proof of loss in shareholder actions in its decision of Grant-Taylor v Babcock & Brown Limited (in liquidation) [2015] FCA 149 (4 March 2015). Significantly, Justice Perram has entertained the possibility that shareholders or investors may be able to claim losses in circumstances where there is no direct reliance on a company’s failure to disclose information to the market that was required to be disclosed pursuant to statute. 

Whilst the comments made by Justice Perram were obiter dictum, they are very plain in their terms:  whilst reliance is a sufficient condition for establishing causation in market non-disclosure cases, it is not a necessary one. Whilst Justice Perram accepted that generally a plaintiff must show in a misleading conduct case that they would have acted in a particular way but for the conduct, he held that it is ‘artificial’ to speak of reliance in market non-disclosure cases. He accepted that a party who acquires shares on a stock exchange can recover compensation for price inflation arising from a failure to disclose material, so long as they are not themselves aware of the non-disclosed material.  This is contrary to the existing Australian law in relation to shareholder actions and lends support to plaintiffs being able rely on ‘indirect causation’ to prove loss.

Justice Perram’s analysis (whilst not binding) would seem to invite further consideration by Australian courts of market-based causation or the doctrine of ‘fraud on the market’, which exists in the USA, to prove loss in shareholder actions.   A close watch will need to be kept on other shareholder claims to see if that invitation is taken up and whether the existing law in securities actions will be subject to change.

Author – Belinda Randall, Special Counsel, DLA Piper