Are “institutional” sample group members necessary in a shareholder class action?

Earglow Pty Ltd v Newcrest Mining Ltd [2015] FCA 328

The Court has rejected an interlocutory application by the respondent in a shareholder class action for the appointment of “institutional” investors as sample group members on the basis that such a move was not necessary to “ensure justice is done” in the proceeding.

In a shareholder class action, the representative party typically is an individual or a small retail investor. One reason for this is that the determination of the representative party’s claim usually will expose to scrutiny that party’s investment decision making process, and for some investors (notably large, “institutional” investors) that process is considered proprietary and highly confidential. Institutional investors tend to prefer to await the determination of common issues before deciding whether to participate in any subsequent determination of loss and damage at the individual group member level.

Newcrest sought orders that the claims of two institutional investors be determined at the first stage trial. In effect, the individual claims of the selected group members would be “accelerated” so as to be determined at the trial of common issues. This would address what was argued to be a lack of suitability of Earglow’s claim as the vehicle through which to determine those issues, given that the vast majority of Newcrest’s issued share capital during the period was held by “institutional” investors who would be expected to employ a very different – and more forensically significant – approach to their investment decisions. The evidence was that around 90% of Newcrest’s share capital was held by just 78 out of Newcrest’s over 80,000 individual shareholders. Earglow is a family trustee company that acquired shares late in the claim period.

Part IVA of the Federal Court of Australia Act provides a variety of mechanisms by which the Court can separate out some or all of the matters to be determined at any particular stage in a representative proceeding, and appoint additional or alternative representative parties. None of those mechanisms expressly is directed toward the appointment of “sample group members”. Instead, Newcrest relied upon the general power of the Court in s 33ZF, which provides that: “In any proceeding (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding.”

Earglow emphasised the philosophy and structure of Part IVA, which contemplates that group members who have not opted out of a representative proceeding ordinarily will play a passive role during the first stage trial. Beach J accepted that that is so, but noted also “it is erroneous to elevate such a notion to an entitlement“. On the other hand, his Honour also held that a group member’s entry into a litigation funding agreement (Newcrest’s application being directed only at funded institutional investors) does not necessarily presuppose or constitute acquiescence to having one’s claim “accelerated”, even if the agreement contains facilitative provisions that compel a funded group member to co-operate with an applicant or its solicitors.

His Honour accepted that evidence of the role and behaviour of institutional investors could be relevant to assessment of the nature, general availability and materiality of information alleged to have been withheld from the market, and was one of a number of potential sources of evidence on those matters. That evidence would not be definitive nor limit the breadth of the statutory language, of course: the tests remain objective. Such evidence might also bear on questions of causation, and specifically whether the impugned conduct impacted on Newcrest’s share price – a matter traditionally tested through the use of “event studies”.

But the potential relevance of evidence from institutional investors did not mean the Court cannot try those matters without it. The Court was satisfied that Earglow’s proposed use of a forensic economist (to provide an event study) and a “materiality expert” would provide a proper basis to test the availability, materiality and impact of the information that Newcrest did and did not disclose to the market.  Indeed, the Court would be assisted by such expert evidence, as opposed to the “necessarily partial and idiosyncratic evidence of one or a number of individual investors“.

His Honour did not accept Newcrest’s arguments to the effect that Earglow was not truly representative of the investor class. Even if Newcrest’s shares were concentrated in a small number of institutional investors, the vast majority of shareholders – and therefore potential claimants – held fewer than 100,000 shares, and most held less than 1,000 shares (Earglow held 4,000 shares). Having a retail investor as the representative party also has not proven to be an impediment in other shareholder class actions.

Ultimately Justice Beach dismissed Newcrest’s application, essentially because in his Honour’s view the proposed orders were not required to “ensure that justice is done”. However broad the language of s 33ZF, that element needs to be satisfied before the Court can exercise the discretion conferred by that section; s 33ZF was “not a licence for me to impose my own expansive case management philosophy”. Nor is it sufficient that evidence from the proposed group members might be convenient, useful or helpful to the Court in some way.

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