Introduction
In circumstances where most cases settle before trial, there have been relatively few shareholder class actions that have proceeded to judgment in Australia.
It is therefore important to scrutinise the available judgments to gain an insight into the likely outcome of other similar shareholder class actions, to assist accurate reserving within the tower of insurance and to appropriately inform any settlement negotiations.
Background
This shareholder class action was initiated on behalf of investors (the Shareholders) who purchased shares in Quintis Ltd (Quintis). Quintis supplied ‘premium, ethical, and sustainable Indian and Australian sandalwood raw materials’.1
The financial success and market value of Quintis was largely contingent on the projected future value of its sandalwood trees. Quintis’ share price dropped 24% in the week following the release of a report by Glaucus Research Group, which claimed the trees were effectively worthless.2
The share price continued to decline, falling another 9.6% before trading was permanently suspended. Quintis subsequently entered voluntary administration and became privately owned, leaving existing shareholders with nothing. The Shareholders brought a claim against the former CEO and managing director and against Ernst & Young (EY), the company’s auditor (together the Respondents).
The Shareholders alleged the Respondents engaged in misleading and deceptive conduct, failing to meet their statutory obligations to shareholders regarding financial reporting and auditing.3 The Shareholders argued that the assumptions made and endorsed by the Respondents were unrealistically optimistic, resulting in inflated financial reports in FY15 and FY16 (Reports). They also alleged those misleading reports misrepresented the company’s financial position, deceiving investors about its true status.4
Allegations
It was alleged the Respondents contravened:
· Section 1041H of the Corporations Act and section 12DA of the ASIC Act relating to misleading and deceptive conduct to a financial product or a financial service.
· Section 1041E of the Corporations Act relating to the dissemination of false or misleading information.
It was additionally alleged EY breached:
· Its common law duty of care when conducting audits and that EY was negligent in failing to conduct its audit in accordance with Australian Auditing Standards.
Submissions
The Shareholders’ primary task was to establish causation, which has proved an insurmountable hurdle in other shareholder class actions that have proceeded to trial.
The Shareholders bore the onus of proving their counterfactual case by demonstrating their financial loss would not have occurred if the Respondents had not engaged in contravening conduct.
There were two primary arguments in relation to causation.
1. Direct Reliance
The first argument advanced by the Shareholders was a ‘direct reliance case’. The Shareholders alleged they purchased the shares in reliance on the alleged misrepresentations by the Respondents and would not have done so had the true financial position of the company been accurately disclosed.5
Specifically, the Shareholders alleged they would not have invested in Quintis had the Reports properly reflected the company’s financial health. The Shareholders pointed to representations that Quintis possessed significant growing net assets, which had been audited by EY and allege they had purchased the shares based on that information.
The Respondents disputed the nature and extent of the reliance on the Reports. The Court found the distinction drawn by the Respondents between reliance on the Reports and reliance on specific representations within the Reports was artificial and accepted the Shareholders had read the Reports.
Nevertheless, even accepting and applying the counterfactual calculations put forward by the Shareholders’ expert, the Court found that Quintis would still have appeared solvent and shown to possess substantial assets.
Consequently, the Shareholders had not sufficiently demonstrated that they would not have acquired shares at all.
2. Indirect market-based causation
The second argument advanced by the Shareholders was an ‘indirect market-based causation case’, which alleged the Respondents’ misrepresentations had artificially inflated the overall market price of Quintis shares.6 The Shareholders alleged that, because of the Respondents’ misrepresentations the market price of the shares traded at a significantly higher price.7
The Court observed the Shareholders conflated key financial terms such as ‘value’, ‘true value’, ‘market price’ and ‘share price’, using them inconsistently and without clear definitions, which undermined the Shareholders’ case.
The Court emphasised that a company’s share price does not necessarily correlate with its net assets or corporate value. It reflects the collective expectations and judgements of market participants at any given time. Given this dynamic, the notion of ‘true value’ becomes meaningless.
The Shareholders submitted expert evidence to support an alternative valuation of Quintis shares, based on the premise that the share price would have been lower had the correct financial information been reported. This evidence was intended to establish a causal link between the value of the Quintis’ net assets and its share price.
However, the Court found that no such relationship had been adequately demonstrated. It held that the ratio calculated between both a company’s net assets and share price involved more than rudimentary mathematical calculations.8 Ultimately, the judge could not positively conclude that the Reports did not represent fair value.
The Shareholders were therefore unable to establish causation and consequently their claim for damages failed, notwithstanding the loss in value of their shares.
Conclusion
In all six of the shareholder class actions that have proceeded to trial so far, the plaintiffs/applicants have failed to establish causation, highlighting the high evidentiary threshold in establishing a recoverable loss.
On the evidence before them, courts have so far been reluctant to accept that misleading financial statements have led to inflated market prices.
Effectively, the ‘true value’ of the shares is what a person is willing to pay at the time. While expert evidence may be persuasive, stronger economic and statistical analysis is needed to demonstrate a link between misstatements and price inflation.
The decision demonstrates the ongoing difficulty for shareholders to receive damages and will likely lead to continued scrutiny of that aspect of all shareholder class actions by respondents’ and their insurers. To date, the defences of the shareholder class actions that have proceeded to trial have been pleasingly successful and may give plaintiff firms and litigation funders pause for thought.
1 Quintis | Proudly Australian | Sustainable Indian Sandalwood Supplier.
2 Glaucus-Research-Short-TFS-Corp-Quintis-ASX-TFC-QIN-March-22-2017.pdf.
3 David v Wilson [2025] [53], [60] (‘Davis’).
4 Davis (n 2) [44] – [47].
5 Ibid [1597].
6 Davis (n 2) [1660].
7 Ibid [1698].
8 Ibid [1708].
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
